Putting out the Fire: Samsung’s Future After the Galaxy Note 7 Crisis

By Pranam Dey


[dropcap]T[/dropcap]ransitions are always hard, but some are harder than others. For Lee Jae-yong, Vice-Chairman of Samsung Electronics, the continuing catastrophe of exploding Galaxy Note 7 smartphones has proved a brutal trial by fire. The only son of Samsung Electronics Chairman Lee Kun-hee, Lee Jae-yong was elevated to the company’s board in late October, with his father having left day-to-day management in 2014 after hospitalization for a heart attack. Since then, the 48-year-old heir apparent has further cemented his position as the de facto leader and public face of South Korea’s biggest corporation. How well he manages this crisis will shape not only his company, but also the global smartphone market and the economy of South Korea as a whole.

Despite recent challenges, the overall Samsung group, which makes everything from ships to washing machines to cellphones, remains the greatest of the chaebols, the family-controlled conglomerates that dominate corporate South Korea. The market capitalization of Samsung Electronics alone accounts for more than 15% of South Korea’s Kospi stock index, and the firm continues to be world’s largest smartphone manufacturer by volume.

The Note 7 crisis, however, has only exposed the cracks already present in the firm’s strategy. In China, the world’s largest smartphone market, Samsung faces the seemingly insurmountable challenge of local rivals like Oppo, Huawei, and Xiaomi, whose lower prices have enabled them to dominate the low and mid-tier ranges and led to three years of declining sales in China for the Korean behemoth. Chinese brands are now beginning to challenge Samsung’s traditionally dominant position in other low-cost markets like India, even as the Note 7 crisis pushed Apple’s stock to year-long highs in expectation of weaker competition in the high-end market.

Lee Jae-yong began his response to the crisis by ending sales of the Note 7 and has signaled his intention to restructure the firm in order to clarify its opaque ownership structure. Given a growth slowdown in the smartphone market, which generates half of the firm’s revenues but less than 40% of its profits, Lee Jae-yong will have to find new sources of profitability. The construction of a 1.1 million square foot semiconductor R&D facility in Silicon Valley in 2015 should help the firm double down on its already strong and highly profitable semiconductor business, potentially offsetting falling smartphone sales growth in the long run.

Samsung’s sales abroad account for roughly a fifth of South Korea’s exports and its annual revenues a fifth of GDP, and thus Samsung’s struggles become South Korea’s. Only time will tell if Lee Jae-yong will be able to repair the cracks in his family’s firm. South Koreans can only hope he does.


Pranam Dey ‘18 is an Economics and Molecular, Cellular, & Developmental Biology major in Ezra Stiles College. Contact him at pranammya.dey@yale.edu.