source from：financial times 2016-10-03

Telecoms. Phone recall

Samsung calls scion to put it back on track

Lee Jae-yong grapples with exploding battery storm as he streamlines the 202bn dollars group

SONG JUNG-A — SEOUL


A woman walks past an advert for the Samsung Galaxy Note 7. About 2.5m of the phones were recalled after concerns over exploding batteries

Luke MacGregor/Reuters

Samsung is facing its biggest crisis in years as the unprecedented recall of its flagship smartphone threatens to damage its hard-won reputation as a quality device maker.

The lapse in quality control has caught the South Korean company’s next leader, Lee Jae-yong, off guard. The 48-year-old scion of the founding family was preparing for succession at the technology powerhouse, relieved by a turnround in its mobile earnings after a two-year slide.

With the battery problems of the Galaxy Note 7 phones, the relatively unproven heir apparent, who has slowly taken charge since his father was hospitalised after a heart attack in 2014, is facing a leadership test as he scrambles to contain the damage from the tech industry’s biggest recall.

The restrained executive has stepped towards the limelight after two years of low-key management. Samsung nominated him to join the board amid the recall fiasco to take a bigger role in strategic decision-making. Investors are watching if he can set the 202bn dollars company back on track.

“It is a nice timing for him to step forward, when a sense of crisis prevails,” says Daniel Kim of Macquarie. “As a more engaged owner than his father, the younger Lee faces a daunting challenge: how to sustain growth in a gigantic company like Samsung.”

Samsung’s quality issues have gone further, with the group saying last week that it was in talks with a US watchdog to address potential safety problems related to some of its washing machines after media reports they had exploded.

Analysts say the junior Lee, regardless of his title, already holds great sway over key management decisions as the group’s de facto leader. The vice-chairman has reacted decisively to the quality lapse, recalling 2.5m Note 7 phones, although the process has been complicated with complaints over replacement batteries at home. Credit Suisse estimates the recall would shave up to Won1.5tn (about 1.36bn dollars) off Samsung’s estimated earnings in the second half.

Although the recall is a setback for the next leader, analysts say it is unlikely to derail Mr Lee’s efforts to take Samsung in a new direction. He has already streamlined Samsung Group and made it more acquisitive, albeit on a small scale relative to its size, they say.

“We are seeing a more practical leader,” says CW Chung of Nomura. “Samsung’s colour will be quite different under the new leader.”

Simplifying a complex corporate structure has been one of the Mr Lee’s top priorities as he controls Samsung’s 60-odd affiliates — spanning electronics to fashion and construction — through a complex chain of ownership. But the group has disposed of stakes in chemicals and defence businesses, while Samsung Electronics has sold its printer business for 1bn dollars and divested holdings in several foreign peers including ASML.

This marks a departure from the past expansion of big South Korean conglomerates, known as chaebol. Samsung has been derided for turning South Korea into the “Republic of Samsung”, as its various businesses meant there are few corners of Korean life where the conglomerate’s tentacles do not reach.

“The era of reckless expansion is now over as one company cannot do every business well,” says Mr Kim at Macquarie. “Now, it is time for Samsung to narrow its focus.”

While Samsung under the younger Mr Lee has disposed of non-core assets, the company — with a 23bn dollars net cash pile — has taken over several foreign software developers. These include the purchase of SmartThings in 2014, to cater to the “internet of things” (or IoT) market, while it bought mobile payment start-up LoopPay for 250m dollars last year.

This year Samsung acquired the US cloud provider Joyent to build its own platform to support mobile, IoT and cloud services.

“In the past, Samsung tried to build everything in-house. But now it is more open to acquiring expertise and knows what to buy and when,” says Peter Yu at BNP Paribas.

The acquisitions reflect Mr Lee’s efforts to cut the company’s reliance on commoditised hardware, as it seeks growth beyond smartphones and microchips. Many of the company’s big moneymakers are already maturing and its managers are aware it cannot sustain growth with a focus on hardware devices when industry growth is driven more by software and services.

Mr Lee has shown keen interest in developing biopharmaceuticals and auto electronics parts as his next revenue streams, although they have yet to contribute to Samsung’s earnings.

“The battle is no longer about making better hardware but offering differentiated services,” says Mr Yu. “Samsung is in a position to lead, with fewer companies to benchmark. But there has always been a question mark on Samsung as a true innovator.”

One of the main factors fuelling such doubts has been its rigid corporate culture. Mr Lee, more globally minded than his father, is keen to adopt a start-up culture to foster creativity. But analysts say it will be difficult to change Samsung’s top-down, militaristic working culture overnight, although a gradual change is expected with the generational transition.

“There is a limit in growth with just hardware. Samsung faces the growing need of integrating hardware with software and services, which Samsung is not good at,” says Chang Sea-jin, a business professor at the National University of Singapore. “A new management style with a soft, rational and flexible way of thinking is needed. Jay Lee has his work cut out for him.”

As a more engaged owner than his father, the younger Lee faces a daunting challenge’