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Korea’s Chaebol System a Boon to Samsung

When news broke yesterday that {complink 4751|Samsung Electronics Co. Ltd.} and {complink 3426|Microsoft Corp.} had put away their knives and negotiated an end to a nasty patent fight over the Android operating system, many Asia-watchers took it as another example of South Korea's enviable position in the Pacific supply network.

While Japan has seen its major markets in the US falter, and China makes a rocky transition from low-cost labor market to middle-class consumer market, Korea finds itself relatively unscathed and appears to be moving toward the center of the supply lines of the future.

Electronics, along with cars and construction equipment, are a large part of the reason the peninsular nation has the third-largest GDP in east Asia, despite having a much smaller population than leaders China and Japan. The difference in South Korea is that the country's massive OEMs, which include LG and Daewoo, aren't as closely tied to regional manufacturing chains as those of their international competitors.

Samsung's a good example of Korea's distinct economic system. If the world's second-largest mobile device manufacturer was located in any other country, you'd figure it would act more like {complink 379|Apple Inc.} does, locking its whole supply network down as tightly as possible, and fighting to control the sector.

What did Samsung do? It went to find other supply chains. While it is still fighting competitors like Apple — which explains the peace treaty with Microsoft — it's a temporary dispute and not an extended one. In the future, when Apple is still working to corner the next quarter's market for panel display glass, Samsung will be long gone, having pivoted its entire chain of suppliers toward new businesses in green energy and healthcare. Can you imagine Apple doing that? Or even {complink 3847|Nokia Corp.}?

For suppliers, the result of a move like that could be a constant threat of fatal disruption. But so far, Asia's suppliers working with Korean firms have seemed willing to adapt to the curiosities of the country's chaebol system of conglomerates. For all its oft-discussed faults, the chaebol system, which is unique to Korea, appears to have offered suppliers in low-wage partners like Vietnam and Thailand a means to diversification.

Where a company like {complink 4644|Research In Motion Ltd. (RIM)} can have one bad year and affect an entire supply line, a company like {complink 3074|LG Electronics Inc.} will just retool, not collapse. That's not just because the Korean firms are larger; it's because they have broader goals and wider identities associated with their brands than most of their competitors in other countries.

It's easy to define a product coming from Sony (devices) or Microsoft (software). You can't say Daewoo makes one thing — televisions, or phones, or, more broadly, electronics (it also makes cargo ships, for example). To a marketing professional, that would seem vague and hard to sell. But for an electronics assembly firm in a place like Manila or Bangkok, that sounds like a guarantee.

Whatever sector is up, the Korean manufacturers are probably in it and can pivot quickly. What they lack in innovation — that's Japan's strength — they make up for in scope. What Korean success seems to be demonstrating to Asia's suppliers is that there's a reason they call it the electronics supply chain, rather than the computer or telephone or tablet supply chain.

When an American firm like Apple moves from PCs into devices (with companies like Amazon), it's considered radical. Manufacturers and assemblers across Asia don't expect it, and each time it happens, no one knows whether it will work (Xbox did, but Zune didn't, and that meant some suppliers got hurt, and others didn't). Korean firms don't cause that kind of uncertainty, because they've built capacity for those shifts into the foundations of their supply systems, to an extent the cultures of other national electronics industries haven't.

So where an assembler for Japan's {complink 934|Canon Inc.} has to watch the market for imaging equipment — because Canon's never going to build desktop computers, or smart domestic appliances — suppliers working with Korean firms have the luxury of knowing that the phone is almost always going to ring. You may be retooling the whole place by the time you've hung up. But you'll always have work.

21 comments on “Korea’s Chaebol System a Boon to Samsung

  1. Ashu001
    September 30, 2011

    Marc,

    A most fascinating post and point of view you have expressed here.

    The line I liked the best was this-

    You may be retooling the whole place by the time you've hung up. But you'll always have work.

    To what extent do you think this has to do with the fact that these companies are still run largely(more or less entirely) by their founders(or their families)?

    The Chaebol culture is fascinating for sure and not without its various complications.

    But this is a well known concept which is known throughout Asia,when you go into business its not just about you-Its about your team and collaborators as well.We are all in this together.

    Regards

    Ashish.

     

  2. Nemos
    September 30, 2011

    I liked very much your article , but could you please clear the following phrase. “Can you imagine Apple doing that? Or even Nokia” I could not realize why this move it is a strategic move and will help Samsung and Korea and it would be a disaster for them if Nokia and Apple have done the same. 

  3. Marc Herman
    September 30, 2011

    Thanks for the question. I meant that it was hard to imagine, to me at least, Apple announcing tomorrow that it had decided cell phones were yesterday's news and they were going into solar panels ( the iSun?)and health care now. Which is what Samsung, the world's #2 maker of cell phones, appears to be doing. 

  4. Ashu001
    September 30, 2011

    Nemos,

    Basically the ability of the Korean mega-companies to change gears across the board so quickly is an extremely critical(&not very well known) aspect.

    That is what Marc was talking primarily about here.

    Regards

    Ashish.

  5. Taimoor Zubar
    September 30, 2011

    It's interesting to see that companies like Samsung are doing well even with radical changes in their scope. When a company makes these kind of changes, how much do you think is the role of internal factors within the company? This could include change in it's strengths, weaknesses etc. And, how much is the role of the external factors such as shift in consumer demand, new opportunities because of other companies etc?

  6. Ms. Daisy
    September 30, 2011

    Great post! We seem not to give Korea enough credit.

  7. t.alex
    October 1, 2011

    Samsung is in every household in Asia i believe.

  8. _hm
    October 1, 2011

    Perhaps in near future, Chinese manufacturere may occupy the current place of Korean manufacturers. This may be cyclic phenomena and it travels from one country to another country.

     

  9. Adeniji Kayode
    October 1, 2011

    @_tm you are right,if China can improve more on their finishing or standard of quality on all goods.

  10. mfbertozzi
    October 1, 2011

    TaimoorZ, I agree with you, they are doing well even they have made radical changes. To do that previous management was replaced and new executives arrived were really aligned, all together, on targets to achieve. Maybe is one of key reasons to achieve success.

  11. Wale Bakare
    October 2, 2011

    Yes, i agree with you all guys on China to improve on its quality of manufacturing products. This in the same vein, highly dependant on foreign business men and women transacting with local chinese manufacturers. 

  12. Anand
    October 3, 2011

    Samsung is in every household in Asia i believe.

    @t.alex I agree with you. Samsung products like mobile, Television are very popular in India. Earlier Nokia handsets were very popular in India. But after Samsung released its Galaxy series which was android compatible, it literally snatched mobile market from Nokia.

  13. Anand
    October 3, 2011

    Chinese manufacturere may occupy the current place of Korean manufacturers.

    @_hm I dont think its appropriate to compare Chinese manufacturers with Korean manufacturers. Korean brands like Samsung are considered very good brands because they offer high quality products to the consumers. Whereas chinese captures more of low end/low quality products. I really dont think china can occupty Koreas place in manufacturing.

  14. FLYINGSCOT
    October 3, 2011

    I am continually amazed at how a very small country like South Korea maintains such a world presence in many product sectors.  The products are of decent to high quality and innovations are coming fast and furious.  The workforce is young, highly motivated and dedicated to its employers.  The large companies produce a mind boggling range of products.  I wonder what the secret recipe is for South Korea?

     

     

  15. Adeniji Kayode
    October 3, 2011

    @FlyingScot, You are right but I feel the reason is because the rest of the World are flying into SouthKorea to manufacture their products and then bring it back to the rest of the world.

  16. Adeniji Kayode
    October 3, 2011

    @anandvy,. well i think that sound like a challenge to China. I feel China just intentionally what to circulate low quality products at a cheaper price to create competition for other manufacturers with a more expensive prices.With so much of china,s products around and their experiences- i feel they should be able to make a more quality products if they choose to.

  17. t.alex
    October 3, 2011

    Yes and i think LCD TV and LED TV is on show every where.

  18. Ashu001
    October 3, 2011

    Taimur,

    The No.1 reason is because the Founding families have such a strong amount of hold and influence on these companies.

    Also because the Founders have a stake in the company's well-being they focus on the Long-term (and especially sustainable business models) and on diversifying their income streams as much as possible.

    This is what its all about here.

    Regards

    Ashish.

  19. _hm
    October 3, 2011

    I thought iPADs and iPhones are made in China. So many other reputed products are manufactured in China.

     

  20. t.alex
    October 7, 2011

    tech4people, you make a good point. Having a major stake in the company does drive the founders to move forward for success. The Korean people also plays an important role, with their determination and spirit.

  21. Ashu001
    October 10, 2011

    Alex,

    I don't mean to say anything against (or in any way demean) the achievements of the Korean People especially after the Korean War;but the fact of the matter is people everywhere are hard-working and industrious(provided you get out of their way by providing less bueracracy and less red-tape).

    We can get this very level of innovation in America as well-If we just let Entreprenuers be;instead of overloading businesses with all manner of unneccesary Rules and Regulations.

    Regards

    Ashish.

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