SEOUL, South Korea--The next major technology brand in the home may belong to a company here once known for the kind of consumer electronics sold behind the counter at drugstore chains.
In just the last four years, Samsung has transformed itself into one of the top names in the industry by marrying its component manufacturing expertise to strong branding, marketing and design. Many industry analysts believe the company can become a leader in the rapidly converging businesses of computing and electronics.
The numbers seem to support that theory. Samsung is No. 1 worldwide in TV sets, video recorders, flat-panel screens, computer monitors, PC memory, and flash memory used extensively in digital cameras, according to various industry estimates.
In cell phones, the company has climbed from sixth place in 2000 to third with a global market share of 10.8 percent. Samsung shipped 20 million phones in the first quarter of 2004 alone. At that rate, it could reach 15.1 percent market share by the end of the year, surpassing No. 2 Motorola.
"Five years ago, we were nobody. We were down at the commodity level," said Eric Kim, executive vice president in charge of Samsung global marketing, who is considered one of the instrumental figures in the turnaround. "Five years ago in North America, we sold low-end TVs. We are now out of the low end. That was a very conscious effort on our part. In cell phones, we are now mentioned in the same breath as Nokia and Motorola."
Eric Kim, executive vice president, Samsung global marketing
Samsung's rapid ascent is a direct reflection of South Korea's recovery from economic crisis only a few years ago, when the 1997 Asian recession brought the country to the brink of financial disaster. The company was forced to slash roughly 34 percent of its work force, dropping from 83,800 employees to 55,000 worldwide. It also had to sell, dissolve or restructure 100 business groups.
To navigate its way back, Samsung took some advice regularly doled out by analysts and American chief executives: go upscale.
While abandoning its traditional lines of cheap electronic devices and household appliances, for example, the company began selling more stylish, high-end phones with novel features. The strategy apparently worked. Despite selling fewer phones than Motorola, Samsung pulled in more revenue--$11 billion in 2003 compared with Motorola's $10.9 billion.
This year, Samsung will release such luxury products as an 80-inch plasma TV set, a 52-inch projection television that hides its electronics guts in a stand to reduce the bulk of the screen, a phone that works as a portable satellite television, and another with a 2-megapixel camera. Even more ambitious are new "digital home" technologies being developed to meet government initiatives.
"The government's goal is to have 10 million households with home networking by 2007," Yong Duk Yoon, a vice president at Samsung's Advanced Institute of Technology, said in a recent interview.
Because of its size and influence, Samsung often seems like a quasi-official institution. As the country's leading growth engine, the conglomerate has vowed to hire 17,000 employees this year and invest $59.7 billion to shore up the nation's sagging economy. Daeje Chin, former president of Samsung Electronics, now reports to the country's president as minister of information and communication.
Daeje Chin, minister of information and communication
At the same time, the company can draw the type of public criticism usually reserved for government bodies. Some politicians and citizen groups have complained about the comparatively low taxes paid by Samsung and other conglomerates, called chaebols, and have called for reforms.
"No one underestimates them," said Richard Doherty, president of research firm The Envisioneering Group. "They combine what we used to consider Japanese innovation with labor rates that are close to China's."
Samsung owes its success as much to aggressive marketing as it does to technical prowess. Interbrand, a London-based firm that tracks advertising and branding, said Samsung's "brand value" rose from $8.3 billion to $10.8 billion from 2002 to 2003--a 31 percent increase.
Founded by Byung-Chull Lee in 1938, the company first specialized in exporting vegetables and dried fish to Manchuria and Japan before soon moving into flour milling and confections. In 1951, the corporate Samsung--which translates to "three stars" in Korean--was born.
The electronics division was formed in 1969 and initially specialized in black-and-white TV sets. Chipmaking began in 1974.
Although its various companies are run independently, Samsung remains closely allied to the Lee family. Chairman and CEO Kun Hee Lee is a direct descendant of the founder, and his Harvard-educated son is his heir apparent.
The vast conglomerate has spawned other companies in industries well beyond consumer electronics: a car manufacturer, hospitals, apartment developers, insurance providers, a sugar refinery, department stores, textile producers, a construction company, a chemical manufacturer, luxury hotels and a shipbuilding firm, among others. The company can also document its expansion in its own newspapers, which are supplied with paper from Samsung mills.
Not everything named Samsung came out of the conglomerate, however. The garish Samsung Wedding Chapel in Seoul's Kangnam district, for instance, is independent, the result of weak trademark laws.
The company does not have the name recognition of a Sony, Dell or Hewlett-Packard, but it is quickly closing the gap.
"Samsung is coming into its own. The biggest challenge they face in North America is brand, but I think they are beginning to overcome that," said Van Baker, an analyst at Gartner. "Brand is what it is all about in the consumer market."
Samsung posted overall revenue of $54.1 billion with a net profit of $5 billion in 2003, and both categories are growing quickly this year. By contrast, Sony--the anointed king of branding in electronics--saw its net income drop by 23 percent to $851 million in the 2003 fiscal year ending in March and has laid off thousands of employees.
"In the consumer electronics category, the effective market price difference between a product with a brand and one without a brand is sometimes as high as 50 percent to 60 percent," Samsung's Kim said.
The equation has become a mantra that Kim has undoubtedly repeated many times in his career as a marketing specialist at such diverse organizations as Spencer Trask Software, Dun & Bradstreet and Lotus. Samsung lured him to help remake the company's image.
Not surprisingly, many company veterans were threatened by the changes, and Kim personified their worst fears. On his first day on the job, Kim--who is Korean but was raised and educated in the United States--delivered a lengthy presentation to the vice presidents and other executives of Samsung's several divisions along with a detailed report several hundred pages long.
A bust of Samsung founder Byung-Chull Lee graces the halls of the company's Suwon facility.
Photo: Michael Kanellos
Those who attended the meeting say the performance was greeted with sullen silence. Jong Yong Yun, CEO of Samsung Electronics, sensed the hostility and issued an admonition that left no room for interpretation.
"I know what you are thinking," he told the crowd. "But touch him, and you're dead."
What followed was a relentless, Western-style marketing blitz. Samsung consolidated all of its advertising with Foote Cone & Belding in 2000 and steadily began to build an advertising and branding campaign through films like "The Matrix Reloaded," Olympic sponsorships and heavy buys in print and online media.
In the United States alone last November, the company served up 1 billion ads on 330 Web sites, according to Peter Weedfald, senior vice president of strategic marketing for Samsung Electronics North America. A boutique for displaying Samsung's cutting-edge products will open in New York this fall.
"Branding to Samsung is still fairly new. It wasn't until 1999 that we started to look at brand as a strategic asset," said Catherine Cole, senior brand manager at Samsung. "There was a perception of Samsung as a cheap, low-cost manufacturer."
The company's path to the high end has made for some unlikely bedfellows. Samsung's unusual structure, which focuses on finished goods and components, has made it both a competitor and ally to nearly every other major player in the market.Case in point: The company works closely with Intel. S.K. Lee, the director of Intel's new Seoul research center, came from Samsung three months ago to help the two companies work together on digital home technology. Yet Samsung passed Intel in the flash memory market last year and snatched away chip deals with Nokia and HP for handheld devices.
A Samsung spokeswoman compares the company's first cell phone with a modern model.
Photo: Michael Kanellos
Intel, for its part, is planning to enter the market for chips used in projection televisions. But Samsung, which is aligned with Texas Instruments, is nonplussed.
"It seems like the technology and business case for (Intel's) LCOS (liquid crystal on silicon technology) is still not there," said David Steel, vice president of Samsung's Digital Media Business.
In a similarly complicated partnership, Sony and Samsung are building an LCD (liquid-crystal display) plant that will be capable of producing 60,000 sheets of silicon-coated glass large enough to produce 360,000 46-inch televisions a month. But Sony is still considered its rival for dominance in this market.
Microsoft too is an ally, but the South Korean government is promoting Windows rival Linux for computer operating systems, and Samsung is experimenting with other open-source technologies.
Another factor that sets Samsung apart is its in-house operations. Unlike most hardware makers, the company produces its own devices and many of their components. If high volumes can be achieved, executives say, local manufacturing is typically cheaper than outsourcing.
Samsung maintains 18 production subsidiaries on four continents and nine research centers. Many of the manufacturing facilities in Asia come complete with dorms to house the workers, who generally are straight out of high school. At its factory in the industrial city of Gumi on the east side of the country, a new cell phone comes off the line every seven seconds, said Ike Chung, vice president of mobile sales and marketing.
In-house manufacturing also allows Samsung to give discounts on parts to various product groups within the conglomerate's empire, sources say. Although the company denies that its components and products favor one another, a number of industry sources in South Korea have said that advantageous internal trades within the chaebols remain commonplace despite stated government efforts to reform corporate practices.
Moreover, close collaboration allows research and design developments to be shared across wider groups and product lines--relationships that are crucial to the company's goal of creating some sort of standout product each year. Through this process, Samsung was the first to market a phone with an external screen that displays who is calling without opening the clamshell. New combination products, such as MP3 players with heart monitors and voice recorders, come out at a regular clip.
Samsung's operation at both the production and retail ends of the business has given it some unique opportunities: It serves as a brand-name manufacturer when it can and contractor manufacturer when it can't. For instance, the company periodically has been the primary supplier of flat-panel monitors to Dell and others. And while it flopped in selling PCs in North America, Samsung makes lightweight, wireless notebooks sold under U.S. brands.
The Samsung Wedding Chapel in Seoul's Kangnam district is independent from the conglomerate but takes advantage of the popular name.
Photo: Sungah Kim
"LG and Samsung do very innovative designs," said Anand Chandrasekher, vice president of the Mobile Platforms Group at Intel. LG and Samsung are part of a group of seven Asian manufacturers that will account for about 80 percent of all notebook production by the end of the year.
Samsung's emphasis on design began with a pronouncement on the subject from Kun Hee Lee, chairman of the sprawling conglomerate, at a time when the company employed 180 designers. Today, it employs 441 designers in London, Seoul, San Francisco and other locations.
The CEOs of Samsung's electronics divisions and other executives meet regularly as part of a design committee. Along the way, the company has accumulated several design awards.
"Displays are kind of like electronic furniture," said Sangyeon Lee, the company's principal designer. "You have to adapt to the living room."
The next major challenge for the company is becoming the preferred brand with consumers. Kim wouldn't disclose any underlying tactics but acknowledged that the company is evaluating a new branding campaign.
Twinned with the branding push will be the company's emphasis on the wired home. To date, roughly 6,000 of these so-called digital homes have been sold in South Korea, and Samsung is working on trials in the United States, Spain, Canada and Australia.
Analysts say the fate of that concept will depend on the company's ability to improve interoperability and ease of use. Still, as with other emerging technologies, Samsung's early lead will be tough to overtake.
"If there were such a thing as a space race in consumer electronics," The Envisioneering Group's Doherty said, "they would be ahead."
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