Wired has a four-pager on Samsung’s dramatic rise as an electronics superpower. A MUST READ in every sense of the word. Here’s just a sample:
Even today, people talk about the “voluntary incineration” at Gumi. A drab factory town in south-central Korea, Gumi is home to one of Samsung’s biggest plants. A decade ago, the company was best known for budget air conditioners and low-end TVs. Its leader, Kun-hee Lee, had grander ambitions, but when he sent out Samsung’s new wireless phones as his 1995 New Year’s gift, word came back that they didn’t work. So that March he paid a visit to Gumi.
At Lee’s command, the factory’s 2,000 employees donned headbands labeled Quality First and assembled in a courtyard. There they found their entire inventory piled in a heap - cell phones, fax machines, nearly $50 million worth of equipment. A banner before them read Quality Is My Pride. Beneath it sat Lee and his board of directors. Ten workers took the products one by one, smashed them with hammers, and threw them into a bonfire. Before it was over, employees were weeping.
Ritual purification at the command of a heroic leader is an ancient and powerful tradition in this part of the world. With a few superficial changes, this whole scene could have played in a Zhang Yimou costume epic. Certainly it had the desired effect: After Lee’s visit to Gumi, shoddiness was not an option. Ki-tae Lee, then the Gumi factory manager and now head of Samsung’s mobile telecom division, personally tests new models by hurling them against a wall or dropping them from a second-story window. Once he even ran over a handset with his car. It still worked.
Kun-hee Lee’s ambition was straightforward: He wanted to transform his company into the world’s top consumer electronics brand - the place that makes the coolest stuff. A decade later, he’s just about done it. Samsung is ranked number 21 among the world’s top brands by the consulting outfit Interbrand, just one notch below Sony. In sales, Samsung has shot to number three behind Matsushita and Sony in consumer electronics and is fighting Motorola for the number two spot behind Nokia in cell phones. Samsung is also the world’s leading manufacturer of flash memory and flat-panel screens, two of the core technologies of the digital era. And it’s the most profitable tech enterprise on the planet, with a cool $10 billion in earnings last year - more even than Microsoft.
Read the rest on your own pronto.
47 Comments
Can the “intensity” demonstrated by the “incineration” incident be assumed to be a “national” characteristic? I think so, it’s why I (having never been to Korea with no personal connection to anyone there, or indeed to anywhere else in Asia) visit this blog.
If the standard reports in the media are accurate, both North Korea and Iran started serious nuclear bomb programs in the late 80’s (1987 for Iran, I think around the same time for NorK?). 18 years later (and with infinitely more available resources, to include money and population) Iran still doesn’t have one working, but NorK is assumed to have several ready to go and is probably getting ready to brew up another lot. I await the hoped-for test with interest, as further proof of my point.
For that matter, I can remember reading in the newpapers the first Chinese bomb test — it was 1964. Only 15 years after the Communist takeover there.
In the 20th century all the various Asian infantries proved themselves to be far more adept at killing American soldiers than any Mideastern ones were or ever will be. (Credit: an author, a former Canadian Army officer if I remember correctly; as I recall he made this observation in his book ON INFANTRY http://www.amazon.com/gp/produ.....155s=books).
So in a very real sense Noolji is correct about a point he is always trying to make (though perhaps he wouldn’t put it quite the way I have here). And that is — Korea is a place to which attention simply must be paid.
Preferably from a safe distance.
A lot of those earnings came from an unusual boom in DRAM prices. They will now feel the effects of the bust. DRAM prices are down 50%, with no end in sight. Chinese subsidies will undoubtedly make the trough even more painful. Samsung will discover, as the Japanese manufacturers did, that DRAM is possibly even a worse destroyer of capital than the disk drive industry, and that’s saying something.
Yes, it looks like Samsung has peaked. Time to sell. It’s still a 19th century model - manufacturing. Mismanagement at the Chaebol pretty much guarantees a steady decline.
Huh? Manufacturing is a 19th century model? Cyberspace and intangible stuff are becoming more important, but that does not reduce the importance of “hard” stuff. How do you think the Internet that you’re blogging through is set up? Through routers and optical cables and servers and etc, that were all MANUFACTURED. Yeah, the hard stuff is indeed becoming more intelligent or “soft” but as long we live in the real world manufacturing will be important. (Look at the food industry. It has been around since when? Yet it is still one of the most profitable industries when managed right. Albeit unsexy because its not the newest 21st century fad.)
Also hastily judging Samsungs decline due to the “mismanagement” of the Chaebol is a strange statement. If the chaebol mismanaged, how did Samsung get into the enviable position it is in right now? I’ve written a few papers on the Chaebol and the Zaibatsu system. That does not make me an expert but it did give me a chance to look into it deeper. It has its weak points but it also has its strong points and Chaebols have done a lot to clean up their acts.
Of course they are not perfect. Samsung messed up in a major way when the owner family tried to evade taxes through loop holes. Samsung is still too tied in with the owner family and many unethical acts that goes along with keeping it that way. Shareholders are often ignored to keep The Family in a better position.
But, overall, Samsung seems to be in a strong position. Just look at their cash reserves. Also their debt ration is one of the lowest in the world for a manufacturing company. What about cash flow? They just rake it in. Their first quarter profit has dropped, but it was due to the weak dollar. Samsung deserves to be priced higher when you look at its track record and future prospects. The problem? The country discount.
*This info is in no way provided to give you investment info. on Samsung. So the profit and losses are all yours not mine.
Anyways… just got a bit annoyed at the oversimplified, misinformed generalization.
Actually it’s not a bad ideal to just stick with hardware. Look at Sony, they dabbled in the software and look what happened - they’ve been unperched from the top (at least they still have the best image and reputation in North America).
It’s quite an interesting article from the point of view of people’s perceptions of South Korea. Interesting how that image of the 40,000 “who turned in athletic medals, family heirlooms, even wedding rings” has become so emblematic.
I agree with Alex. Very interesting article indeed.
Curiously though, i don’t have a single Samsung product in my house…LG though, that’s another story. Their DVD and CD equipment is top notch (and much better then the Sony crap. Don’t ever even think of buying a Sony DVD burner).
bit too melodramatic - “Wired” is that kind of rag, though.
two bits i found resonant about Korean people:
But Koreans are rarely afraid to mix it up - this is a country where Buddhist monks have been known to attack rival cliques with baseball bats
…
Koreans have always struck their neighbors as country bumpkins, and some of the Samsung execs, for all their state-of-the-art gadgets, looked a little out of place amid the lingering colonial decadence and burgeoning capitalist glitter of Shanghai
i think these captured something interesting.
It’s an interesting article and I learned some things I didn’t know, but the last paragraph (the one excerpted from above by troll) is a ridiculously wild generalization.
Even if some other Asians have a somewhat unenamoured view of Koreans, the characterization “country bumpkins” seems rather wide of the mark. And saying such a view has “always” been held by Korea’s neighbours (umodified by a qualifier like “some” or “many”) is itself an unfair generalization.
As for the last bit, I guess on the trip between the airport and Namdaemun, his taxi bypassed the “burgeoning capitalist glitter” of Gangnam. And I’m so sure that in Shanghai, Mr. Flown-Over-To-Asia-To-Do-2-Days-Of-Article-Research didn’t look “a little out of place” himself….
I don’t mind critical journalism, but spare me the sloppiness and the lazy generalizations!
Per the “country bumpkins” label, in Korea, Hyundai chaebol management that are labeled such, rather than Samsung, which in the past was compared more to being “army-saram”. I do know that, since 1998, Samsung Semiconductor has had some of the best senior management around.
I wonder if the “army-saram” characterization has anything to do with Samseong’s North Gyeongsang (Gumi, etc.) connections, Daegu being where Park Chung-hee and a number of successors came from…. Hmmm, now I’m drawing speculative conclusions!
This is a propos of nothing, but I did learn recently that Lee Gun-hee or someone else in the Samsung family was the one made the suggestion to the head of Kyobo Insurance of building a big bookstore smack-dab in the middle of downtown Seoul. (Whenever I visit Seoul, pretty much the first thing I do is make a pilgrimage to Kyobo Bookworld.)
…Actually, R. Elgin, you may be on to something, because I recall that in the recent drama Yeongung Sidae (which dramatized the rise of Hyundai and Samsung), the founder of Hyundai (”Segi Group”) was characterized as hands-on, hard-working, and all practical, while the founder of Samsung was portrayed as being more urbane and sophisticated. I don’t know how much of this represents actual corporate cultures, or the dispositions of the founders, or just a screenwriter’s characterizations, though….
I would say the TV character portrayals were pretty much spot on (minus the usual ficticious parts). Hyundai’s Chung Ju Yung was known to be a strong, high tempo/tempered, hands on guy.. a tiger.
Hey, Kimbob: did you see the show, too? My better half and I greatly enjoyed it, and were disappointed that it was cut short…. Although the sudden age jump from the “young” to the “old” versions of Chung Ju Yung was a bit implausible!
Anyways?€? just got a bit annoyed at the oversimplified, misinformed generalization.
Juan, that’s quote an “oversimplified, misinformed generalization”. First of all, I’m not knocking “the hard stuff.” I am merely pointing out the hard fact that korean chaebol do not have a model for the next century.
As for mismanagement sounding strange, I wonder if you have ever worked for Samsung. I could write a book. Corporate governance is just one aspect of it, but don’t trust the books. Lack of diversification, dependence on thin margins, lack of incentive-based compensation, short-term profit-driven top-heavy management, lack of true innovation, non-global thinking and a complex corporate structure with numerous subsidiaries to manage - these are some pretty hard issues. Samsung companies other than Electronics are losing domestic market share due to a pervasive sense of complascency.
Yes, Samsung is currently in a good position. As I say, they have peaked. But to judge how forward-thinking Samsung’s line management is are requires more than just the superficial tire-kicking fundamental analysis you bring to the table. You need to really look under the hood.
“Today, three-quarters of South Korea’s households boast a high-speed Internet connection. All this bandwidth has yielded not just PC baangs - computer parlors where young people gather to play online games - but services like SK Telecom’s Cyworld, whose 6 million users create avatars known as “mini-me’s” and spend real money buying them everything from virtual sports cars to plastic surgery.”
6 MILLION CYWORLD USERS? Wow… that’s 1/8 of the population of whom are all users of that dinky little blog. Every Korean girl I know has one, go figure.
Marmot thanks for the article, I stopped reading Wired years ago, it’s always been a magazine I’ve loved to hate
, although this story is actually really informative, kind of a sexed-up Business Week article. I also learned that I live “at the butt end of Manchuria”–an appropriate image on many levels 
:) 
I seriously doubt many of these Korean success stories. Many Korean reporters are fiction writers who can make a hero out of anyone. With much money from Samsung PR department, why not?
Samsung and Hundai are getting nearly all of their parts from Japan. Why is that? Are they just fronts for Japanese corporations?
When I look at the import statistics from Japan, I must wonder if Korea is making any money at all! I suspect, especially, that Samsung has strong ties with Japan. I wonder what percentage of its stockholders are the Japanese.
Well, I was glad to see such a positive article in a wide-distribution, western publication about a Korean company. The problem is that last paragraph, which got me hung up on the lazy generalizations he made, which leads me to wonder how much of the rest of the article is hastily researched crap that he made up in the back of the taxi on the way from the Westin Chosun back to the airport.
Kimbob:
Yeah, the head of Segi Group sure aged a lot for 7 years, as did all of his brothers and everyone else! It must have been too much hard work. As you may know, there are rumours that some people thought that Park Chung-hee was being portrayed in too sympathetic a light.
Do you get satellite TV? We rented it on video.
“Park Chung-hee was being portrayed in too sympathetic a light.”
Maybe. Some of the scenes on that show are accurate, like the scene of Park’s visit to Germany and where he meets Korean guest labourers to Germany. The meeting place where he made his speech, were full of tears. That event is true.
I don’t think it was “too” sympathetic. But given the current climate in South Korea (and the fact that his daughter is the head of the opposition GNP now), some people there might have though so.
Baduk wrote:
I seriously doubt many of these Korean success stories. Many Korean reporters are fiction writers who can make a hero out of anyone. With much money from Samsung PR department, why not?Actually, Samsung is a very robust company. They have a very creditable record as an OEM supplier and their division that manufactures cellphone parts is very good, despite the incompetence of some of their middle management when arranging for PR or advertising. I’ve spent some years and much time going over Samsung and own stock in them. They are for real.
Juan, you defended the chaebol and zaibatsu structures but didn’t provide any explanation. I am wholly unconvinced and am interested to hear what you have to say given your extensive research.
What did this chaebol system offer to Samsung Electronics shareholders in 1Q05? A tasty 700bn equity method loss on Samsung Card that reduced net earnings by 8%.
What did it do for SK Corp shareholders in March 2003? Thanks to accounting fraud at affiliate SK Global totalling 4.4 TRILLION WON. SK Corp shareholders saw the value of their stake HALVE in one week. The chaebol structure allowed a public company to use affiliate assets for private purposes.
Not only does the chaebol system screw shareholders in the short-to-mid term. The whole country loses too. Sure, history has shown us that these systems are great for a while as they allow for the seeding of companies in embryonic stages. But history shows us that chaebol/zaibatsu systems sustain these companies indefinitely regardless of the future commercial merits of those businesses. The system provides inevitable conduits for cheap loans and accounting shenanigans. And the effects of any corporate governance issue or illegal mismanagement are magnified due to the massive impact each chaebol has on the economy.
So what is the ultimate effect of the chaebol structure? Sustained misallocation of capital. That’s it. I invite you to prove me wrong.
You then go on to blame the country discount for Samsung’s depressed share price. What, in your opinion, causes the country discount? Do you think foreign shareholders are more worried that Kim Jong Il will drop a nuke on Seoul? Or do you think they’re worried that ongoing chaebol hi-jinks and creative accounting will drop their share prices 50% and drop a nuke on the KOSPI? Both are factors, but the latter is a more likely risk that is a DIRECT RESULT of the chaebol structure.
So you can blame SEC’s share price on the Korean discount, but the chaebol structure is to blame for the Korean discount!
I agree with you that SEC is undervalued. But you can’t argue that cash reserves is a reason to like the company. What they do with it is more important. Do they really need to tie up a stake in Samsung Card? Do they really need a stake in Samsung Heavy, a shipbuilding company? No. Drop the investments and either use the cash to grow the business or return it to shareholders.
It remains to be seen whether SEC can innovate. Once Chinese manufacturers catch up to Korean companies in terms of technology - let’s be conservative and say that’s a decade away - what’s Samsung’s place in the world? Korean manufacturers are great at delivering Japanese technology at prices 10-15% cheaper. But Korea has to get innovative before China eats its lunch.
libertine, what do you mean by “Japanese technology?”
libertine, what do you mean by ?€œJapanese technology??€?
Korean products’ technology and value are roughly on par with competing Japanese products. Consumer electronics, displays, ships, heavy machinery.
Libertine,
At one moment your flag says Japan, and then it says Korea. Are you commuting between Dokdo and Okido?
And do you know that “Liancourt Rocks!” is copyrighted? I need the royalties to pay for my geriatric treatments.
I can attest to the honourable Admiral’s claim on the expression “Liancourt Rocks!” Admiral, it’s possible that the island-hopping Libertine was at the same party on the good ship HMS Liancourt that you were.
yeah, pay up. the admiral owes me for the 1/4 bag of “geriatric treatment.”
Curious concocted:
I can attest to the honourable Admiral?€™s claim on the expression ?€œLiancourt Rocks!?€?
For the Doubting Thomases among you, the evidence is in comment #231 here. I expect payment by midday within a fortnight.
Admiral, it?€™s possible that the island-hopping Libertine was at the same party on the good ship HMS Liancourt that you were.
A convivial shindig that was. We partied like it was 1599.
troll travailed:
yeah, pay up. the admiral owes me for the 1/4 bag of ?€œgeriatric treatment.?€?
I suppose I should respond with some jocularity about “the high seas.”
It’s for my glaucoma, honest.
The Admiral has token…. spoken.
Damn these workplace computers and their saved user data! It would appear I’ve been confounded by this new-fangled but incredibly dim-witted browser innovation known as “Autofill.”
Why anyone would want to use a machine named after a piece of fruit is beyond my comprehension.
No one speaks for the Admiral except the Admiral.
The Admiral has spoken.
Well, the cat’s out of the bag! I would never in a gazillion years have guessed that the illustrious Admiral and the esteemed Kushibo are one and the same. We’ll just pretend this never happened. I rather enjoy the great Admiral’s postings.
Libertine, how dare you tell the truth? Don’t you realize truth is anathema in our nation?
Did you hear today’s news about fake kalbi (short rib)? Odd strips of meat are being glued together, wrapped around a bone fragment and sold as kalbi. Well today a court ruled that so long as the meat is at least 50% short rib, it is perfectly legal to represent and sell it as kalbi! How’s that for integrity?
During the Park Chung Hee era, we called our form of government “Korean democracy”. Well, if you think that is an oxymoron, consider the types of “laws”, “education” and “reporting” we have today. They may well be called “Korean integrity.”
Investment in overseas securities was just reported to have increased 65% last year. 10 people a day are renouncing citizenship rather than invest 2 years of their lives in the security of their nation. Why don’t we invest in our nation?
Beause we don’t trust one another any further than we can throw one another. We tolerate these abuses because we are resigned to them - we’ve never known anything better and we have accepted an extraordinarily low level of standards as compared to any of the advanced nations. And there is always the hope that we too may become rich and successful and also benefit from corruption someday - the Korean dream.
Just as the capital rich Japanese corporate structure is declining today, The Korean chaebol will inevitably fail. They are not nearly so stable or cash rich as their Japanese counterparts and as the so-called “IMF crisis” demonstrates, our economic structure is a house of cards.
I know, I’m overly critical. It’s so much nicer to be maintain a fiction that all is well than to attempt an honest and ingenuous solution.
Ouch!
Well, our dialogue has stretched over two blogs and three threads now!
Is finding your comments sometimes somewhat too critical equivalent to “maintain[ing] a fiction that all is well”?
As you should have gleaned by now, I am fairly (small-c) conservative, too. I see a lot of room for improvement over the current situation in South Korea, but I understand the reasons for the sea change in public opinion that has occurred there since 1997. Does that mean I agree with everything that’s happening in Korea these days, or that I think everything is rainbows and, er, sunshine? No, not at all. But how is automatically rejecting out of hand everything to do with Korea any different than uncritically embracing it?
Criticism is good, we all need good doses of it… But when you go overboard, it’s just pessimism…
as you can see, my shit is GOOD. trust “troll” brand - you’ll defitely regret it.
LOL. Now you’re just being a troll!
Hello Libertine! Sorry for the late reply, was quite busy doing nothing important
First, as I’ve mentioned I’m not an expert on corporate governance but here’s my two cents on the questions you raised.
Okay to make things clear, I did indeed defend the chaebol system but not the zaibatsu system. I merely mentioned the zaibatsu system because the chaebol system was originally modeled after the zaibatsu system. Since zaibatsu in its original form does not exist in Japan anymore (it exists in the altered form of keiretsu) and I’ve done no research on keiretsus, I will leave them alone.
)
Also by defending the chaebol system, I was trying to show that it has its merits despite many shortfallings. By no means am I implying that it is the perfect business system or a model corporate governance structure to strive after.
I also agree with all your criticism on the chaebol (specifically on Samsung), I myself pointed some out in my post above. Yet I still wish to defend the chaebol system further (including Samsung) and will do so here to the best of my abilities (which is not much
The basis for my argument in defending the chaebol is in that it is evolving and will continue to do so. The chaebol of now is unlike the chaebol of 5years ago (it really no longer resembles the zaibatsu much either)and I hope that 5 years down the road they will have evolved again. It still has a long way to go of course, but in my opinion they are striving to become better.
Okay the two main problem of the chaebol corporate governance structure:
1. Affiliates (?³???´???) diversified beyond rational business decision making, sharing of capital between affiliates and unethical (unfair) internal transactions. All of these lead to affiliates (or specifically individual business projects) that have no independence from the holding company (?§€??¼??Œ???).
2. Weak governance structure that has no effective checks and balances against the owner or the major shareholder.
There are many more problems, but most of them are in some way related to the two above problems.
Government and chaebol shared the same bed in a rather intimate way throughout the ?€?70s, ?€?80s, and the early ?€?90s. Many argue that this major government involvement with chaebols (quite unethical by today?€™s business practice standards) was beneficial. Whether it was or not is not the important issue. I myself am more inclined to the open market with minimum government involvement but there are many papers out there that support the benefits of the government involvement in the early stages of the economy of developing countries. (One good one: Stiglitz?€™s ?€œGlobalization and its Discontents)
Anyway by the ?€?90s, experts mostly agree that the Korean corporate system (namely the chaebol) that worked for the Korean economy before was no longer a healthy option. Many Korean and foreign experts started to warn Korea that the government should minimize its involvement with micromanagement (with chaebol) and start opening the market more. Also they raised the need for a better business practice regulations in order for a fair playing ground. They warned the chaebols also on their dependence on the government, and their corporate governance structure (for the above two main reasons). Lo and behold the Asian Financial Crisis hit Korea during the late ?€?90s (Koreans call it the IMF Crisis). Most experts shouted ?€œAha! I told you so!?€? Of course there are some experts who disagree that the Korean government or the chaebol were the main reasons (or should we say the initiators) of the crisis. Whoever started it or was the most responsible, majority of the experts agree that the crisis was aggravated because of the outdated, faulty process of the K. government and the chaebol system.
The chaebol system with the help of the government and thanks to some of its merits (yes they do exist) was able to tow the Korean economy with surprising speed, but times change, and the playing field changes along with it. The Asian Financial Crisis was the watershed. It was a harsh wakeup call for the K. government and the chaebol that things weren?€™t as rosy as they once thought. They realized they had to change and the changing process has been going on at a rapid pace since. Still a long ways to go in order to reach global standards but they have come far. Also please remember that there is NO perfect corporate governance structure. They are relative in strength to each other in different aspects, and all try to become better. Remember ENRON, Worldcom? Unethical person in charge will mess up a company whatever the checks and balances (though it may be more difficult to do so compared to chaebols).
Okay now Libertine said:
?€œWhat did this chaebol system offer to Samsung Electronics shareholders in 1Q05? A tasty 700bn equity method loss on Samsung Card that reduced net earnings by 8%.?€?
Absolutely true! And since I?€™ve been a Samsung Electronics shareholder since 1992, I was also quite displeased. Not only that, just last year Korean news was full of stories of how the chaebols evade having to pay inheritance tax? The owner families of Samsung and SK were on the news quite often, also to my displeasure. But I am still holding on to Samsung Elec. and will continue to do so, because I believe that there are more positive points then negative points.
#1. Small shareholders are gathering clout. Many new regulations are actually beginning to help minor shareholders to be heard. (Yes it does still go back and forth. Especially in that no good ????Πof Yeoido. But it has been going forward more often then backward.)
#2. Midsize and large shareholders are no longer as silent as they once were. Governments are no longer the ones that tell ?€?em to lend someone money and stay quite about it even if the loan/investment goes bad and ends up as NPL. They are becoming more involved with the business they are investing in, even if they are chaebol. I?€™m not talking about the affiliate being a shareholder here, more on that later.
#3. Foreign investment in chaebols has risen to the point that they now have to be heard. Of course there are still some regulations that impede foreigners but overall the situation has much improved. SK had big trouble with Sovereign. They somehow managed to hold on to the management, but believe me Sovereign will strike again.
Side note: There was a new regulations introduced a few months ago. The FT was really critical about it stating that Korea was closing up the market again. Let me clear it up for you. Hello FT, the US and Japan and many other developed nations with ?€œopen markets?€? have the same regulation and it is a lot stricter! For goodness sakes, please do your research before writing such articles. (BTW I heard that the reporter heard about this ?€œoutrageous?€? regulation from some foreign investors in Korea. i.e. more like speculators.) Yes, though still difficult foreign investors do indeed have more clout now, and the clout will only increase as time goes by. As I said that regulation is in place to protect the market against speculators, and all smart nations have ?€?em (yes the US!).
#4. ?€œScrewing shareholders?€? as Libertine puts it is succinct descriptions of what chaebols often do as the above case Libertine shows.
Anyway, so does every other corporate governance structure when they are managed by unethical or untalented management. Of course, overall chaebols are more likely to commit this booboo because (read main prob 1 2). Korea has introduced many regulations to restrict this from getting out of hand. Also many chaebols are learning (the hard way, its always the hard way ??Œ ) that they have to lookout for shareholder value. Yes some are learning a tad bit too slow, and some are still making mistakes even after learning it. But let?€™s look at Samsung. Lovely dividends, (I would love it if it was higher) they are also buying back (retiring) shares and thereby increasing shareholder value in a major way. Also Libertine points out that ?€œyou can?€™t argue that cash reserve is a reason to like the company.?€? It shouldn?€™t be the only reason but it may be one of the many important reasons. Yes they have misallocated a lot of funds in Samsung Card, etc. etc. but overall the past records show that SEC has reinvested much of the cash reserve in to a positive NPV projects. Expecting misallocations to decrease (due to improving checks and balances, ethics, minimal required regulation) is not wishful thinking
Libertine wanted me to prove him wrong that the chaebol structure?€™s ultimate effect is sustained misallocation of capital. I?€™m not going to deny that this may happen again (and quite often for that matter) in the future. But chaebol = misallocation of capital is not set in stone. Many regulations and business practices are continuously improving. They may not have reached the minimal threshold that Libertine wants, but nevertheless they are improving and hopefully one day is able to change some negative (but accurate) perspective of Libertine?€™s.
Accurate as many points made by Libertine made are, I can?€™t help but think that Libertine is still looking at chaebol with past data. Overall many experts (Korean and foreign) has exclaimed that chaebols have come a long way. As for the accounting shenanigans Libertine talked about, yes they were true, and still are, but to a lot lesser extent. Many types of corporate decision making and accounting ambiguity are being improved both by the government and chaebol.
For further readings on SPECIFIC efforts made by the Korean government to improve the regulation for a fair playing ground (including chaebols) visit http://www.kdi.re.kr
There is too much data for me to summarize here. (and I?€™m getting tired writing all this)
Libertine said:
?€œYou then go on to blame the country discount for Samsung?€™s depressed share price. What, in your opinion, causes the country discount? Do you think foreign shareholders are more worried that Kim Jong Il will drop a nuke on Seoul? Or do you think they?€™re worried that ongoing chaebol hi-jinks and creative accounting will drop their share prices 50% and drop a nuke on the KOSPI? Both are factors, but the latter is a more likely risk that is a DIRECT RESULT of the chaebol structure.?€?
You are mistake here. 1. Foreign shareholders are indeed worried about N.K. to a large extent. No they aren?€™t necessarily worried about the nuke, but they are worried about the negative impact that N.K. has on S.K. Also there are other discount factors such as, the Korean market is still relatively unfamiliar to foreign investors. (Yes lack of brand value). Also despite many improvements made during the last few years it takes a lot of time for the results to be visible so investors can recognize them. The chaebol hi-jinks and creative accounting you mentioned still do exist but it is increasingly becoming a minor issue. If you keep up with the financial news, you will realize that many such practices have decreased thanks to better regulations and changing perspectives within the chaebol. Yes, booboos still happen, but they do also in other developed markets. As I said let?€™s not forget ENRON, Worldcom, and that accounting consuting firm (forgot the name, I?€™m getting tired). The chaebol structure may be responsible for some discount factor in the KSE, but that structure is also responsible for many premium factors in the KSE. As the discount part decreases the attractiveness goes up. Look at the average PER of the Korean chaebols. Look at the debt ratio! They have improved to amazing levels. Samsung barely has any debt if you take their cash reserve to account. That is indeed amazing. (This is the kind of company Warren Buffet would like ???)
Libertine stated:
?€œI agree with you that SEC is undervalued. But you can?€™t argue that cash reserves is a reason to like the company. What they do with it is more important. Do they really need to tie up a stake in Samsung Card? Do they really need a stake in Samsung Heavy, a shipbuilding company? No. Drop the investments and either use the cash to grow the business or return it to shareholders.?€?
Thank you! You agree that SEC is undervalued. It is a major part of my portfolio. Cash reserve I answered some part of it up there. Yes, cross stake holding is indeed not necessary. As I mentioned up there such business practice is frowned upon by the global investors. Korean government has been trying to make it difficult for affiliates hugging each other. Of course people find creative ways around the loop holes. But as I said up there as the shareholder?€™s collective voice gains clout, many of the business practices such as these will decrease. Also what you just stated up there is a cut and dried textbook answer from a corporate finance course. You probably realize that the real world is not as cut and dried as that ???
Libertine state:
?€œIt remains to be seen whether SEC can innovate. Once Chinese manufacturers catch up to Korean companies in terms of technology - let?€™s be conservative and say that?€™s a decade away - what?€™s Samsung?€™s place in the world? Korean manufacturers are great at delivering Japanese technology at prices 10-15% cheaper. But Korea has to get innovative before China eats its lunch.?€?
Let?€™s forget general chaebols here and focus on SEC. What you say is absolutely right but not really enlightening. It is a clich??. Innovate; innovate before the competitor catches up. That?€™s what the Korean newspapers sing every time. But hey, that is the name of the game. The way I see it, a truly great company will manage to survive and succeed. As long as there is a good infrastructure of regulations, laws and other necessities, with minimal government involvement, and the chaebols continue to evolve to keep the innovative fire alive, backed up with pro-social, environmental and ethical practices, I believe that maybe, just maybe, that tge chaebol (Samsung) will be chugging along the economic railroads of the future with much respect. (earned this time)
sorry for the typos, grammar mistakes and etc. that was way too long… wonder if anyone’s going to read it
And since I wrote it in one sitting… the logics horrible, the data’s insufficient and you can tell I was getting tired…
Juan:
Great post. I just learned a heck of a lot more than I ever knew about chaebols post-1997. If there’s more that you’d like to share with us, I for one would like to read it. (Just don’t post too much: somebody might take all your stuff and write a book out of it!)
“and that accounting consuting firm (forgot the name, I?€™m getting tired)”: Arthur Anderson.
“will be chugging along the economic railroads of the future”: cute metaphor.
I’m sure you’ll agree with me Mizar5 that Korea is capable of drastic change if its back is against the wall. Exhibit A is Daewoo. After the group bankruptcy, spinoffs got SPANKED by the creditors that took them over. As per the terms of the rescue, Daewoo companies were told to get their shit together big time. Either get rid of non-performing assets, kill unnecessary departments, clean up the balance sheet, and get profitable… or get liquidated.
Fast forward to today. Not only do Daewoo spinoffs lead Korea in corporate governance and transparency but also THE STOCKS HAVE RE-RATED. Everyone wins - Korea, the economy, and shareholders domestic and foreign.
Meanwhile valuations on the chaebol companies suck. SK Corp trades at lower valuations than any other refinery in the region. The company points to the recent earnings turnaround as if their genius management was to thank for global oil price trends. LG affiliates trade low thanks to the LG Card bailout, Hyundai affiliates trade low thanks to Hynix, ad infinitum.
One area of honest self-criticism in which Koreans excel is that of physical appearances. Many consider Korean women to be the prettiest women in Asia. 30% of women polled in Korea were satisfied with their physical appearance - vs 74% in Thailand, 62% in Malaysia, and 40-50% in China Singapore and Japan. This makes perfect sense: the inherent beauty of Korean women aside, those who are most critical of themselves, and who feel they have a deficit on which to improve will work harder to improve than those who are content and constantly patting themselves on the back. (I’m not condoning plastic surgery - I’m just trying to illustrate a point)
Riddle me this Mizar5 (and anyone else trying to raise the signal to noise ratio). Do you think it’s possible for Korea to get past the unbending navel-gazing, the fatuous and permissive ??¼?¡±??? ????¡´??? cheerleading, the face-saving, and the inferiority and persecution complexes? What has to happen if Korean culture is ever to make room for and benefit from constructive criticism?
Criticism is good, we all need good doses of it?€? But when you go overboard, it?€™s just pessimism?€?
But the (apparently) elusive key point is that in Korea, all criticism is considered pessimism. All critics and dissenting opinions are villified. This does not benefit the country nor the political system nor the economy.
Juan thanks for the excellent response! Many great points. Look forward to debating more tomorrow.
libertine wrote:
this is what’s wrong with you koreans…
(more/less)
do you know what’s wrong with you? why don’t you tell us. snr my ass.
After arguing against the chaelbol system I attempt to start an discussion on what it would take for Korea to engage in constructive criticism without ignoring all suggestions and whinging about the damage to the national pride.
How fitting that the first response I get is from someone who reads my post, but rather than discussing, sums everything up as “HE THINKS KOREANS ARE BAD. HE’S MEAN. THE END.”
Hilarious - but I’m not sure whether I should be thanking him for an inspired and well-placed bit of irony, or thanking him for proving my point.
Juan -
Accurate as many points made by Libertine made are, I can?€™t help but think that Libertine is still looking at chaebol with past data. Overall many experts (Korean and foreign) has exclaimed that chaebols have come a long way.
Experts have said many times that companies have come a long way because these companies are slowly doing away with the chaebol structure. Not that chaebols have improved.
You bring up Enron and at Arthur Anderson. Yes, of course - accounting fraud is possible under any system, But this is not a defense of the chaebol structure. It’s also possible that a brand new BMW 5-series would break down a week after you bought it - but this is no argument in favor of buying a 1975 Pony instead.
So you started off by saying you wanted to defend the chaebol structure. Then you agreed with the points I made against it.
More than once you go on to say that chaebols are evolving and making improvements. Yet I can’t find a single example throughout your entire post to backs up your claims. Can you provide any specific examples? Examples that effectively weaken ties amongst affiliates do not count - this signals a company becoming less involved with the chaebol rather than an actual improvement or evolution of the chaebol structure itself.
Finally you say that cross-shareholdings are not necessary, and that ethical practices will help SEC. But once cross-shareholdings are gone, how does a company continue to be a chaebol company, exactly?
Rather than defending the chaebol structure, it seems you’re championing companies that are transitioning AWAY from being chaebol affiliates. If I am misunderstanding you, let me know, otherwise it doesn’t sound at all that you can name any merits to the chaebol structure.
As for hanging on to your SEC stake - I’m 100% behind you on that one, not arguing with that. And good work owning for over a decade… don’t know if there have been splits but even without that’s at least a 6x return.
I still disagree with your praise of cash reserves. It’s the use of cash, not the presence of cash, that affects valuations. SEC would seem to agree with me - they’ve reduced cash equivalents by 40% in the past 4 quarters. Dividends are ok but I wouldn?€™t call them lovely. LG Electronics paid out 22% of free cash flow last year. SK Corp paid out 32%. SEC paid out 13% - disappointing even amongst peers not known for payouts.
When I say that SEC needs to prove its ability to innovate, you say
What you say is absolutely right but not really enlightening. It is a clich??. Innovate; innovate before the competitor catches up. That?€™s what the Korean newspapers sing every time.
Good to see the newspapers are getting something right. If the clich?? bores you, remember: the right answer isn?€™t always the most novel.
Two questions:
1) You suggested I take a look at PE ratios for the chaebol companies. Why? What does this prove? Do you mean I should take a look at the trend of historical PEs as evidence that they?€™ve improved, or what?
2) How can you argue that the Korean market is relatively unfamiliar to foreign investors? I don?€™t understand how you could possibly argue this given that 40% of the Korean market is foreign-held ?€“ one of the highest percentages of any market in the world and on par with Japan (where valuations are far above those for similar Korean companies).
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