After Prelude, Samsung’s Heir Faces Trust Issues in 2016

SEOUL, Dec. 24 (Korea Bizwire) – This year has been a busy period for the top family-controlled conglomerate in South Korea, the Samsung Group, especially due to its struggle to pave the way for the coronation of a new generation. The head of the Samsung Group was hospitalized in early 2014.

With the absence of Lee Kun-hee being the new normal for the Samsung Group, the market has been watching Lee Jae-yong prepare for his debut as the new symbolic leader for the business group that exercises a significant impact on the country’s economy throughout 2015.

Luckily, unlike Kun-hee, who faced disputes with his brother Maeng-hee, Jae-yong has not been involved in any disputes with his family members so far, including his two sisters, Boo-jin and Seo-hyun, who head Hotel Shilla and Samsung C&T’s fashion business, respectively.

Being free from typical South Korean conglomerate family disputes and scandals, Jae-yong was able to focus on the reorganization of the business group, which included a series of mergers and sales of affiliates.’

The birth of the new Samsung C&T, which plays as the new de facto holding company of the Samsung empire, can be cited as one of the key achievements of Jae-yong in 2015, as it paved way for him to exercise stronger management over the conglomerate.

The company came out of a merger between then-Samsung C&T and then-Cheil Industries despite strong opposition by overseas investors led by U.S.-based fund Elliott Associates.

Jae-yong became the largest shareholder of Samsung C&T with 16.54 percent, high above the 2.86 percent held by his father. Boo-jin and Seo-hyun hold a 5.51 percent share each.

In addition to the main goal to put Jae-yong at the peak of Samsung’s governance structure, the business group said that the new Samsung C&T’s vast business portfolio — covering trade, construction, fashion, and resorts — will generate new business opportunities and foster new growth engines amid the lackluster returns from traditional mainstay businesses.

Samsung also struggled to streamline its business portfolio in 2015, a continuation of its sales of four of its defense and chemical units to the Hanwha Group in 2014.

In October, Samsung said that it will also offload the remaining chemical businesses to the Lotte Group, selling Samsung SDI Co.’s chemical arm, along with Samsung Fine Chemicals Co. and Samsung BP Chemicals Co.

The move focused on narrowing the group’s portfolio into two major pillars, namely electronics and financial businesses.

Samsung also made more progress in tapping the biopharmaceutical segment as a new growth engine, investing 850 billion won (US$723 million) to build the third production facility of Samsung BioLogics Co. in Songdo, west of Seoul, which will make the firm the world’s top contract manufacturing organization (CMO).

But the performance of Jae-yong’s version of Samsung has mostly failed to meet market expectations throughout 2015. Some industry watchers even reminded the young leader of his earlier failure that has been framing him as the lucky heir rather than the skillful businessman.

Shortly after joining Samsung Electronics at the age of 33 in 2001, Jae-yong had ambitiously rolled out an e-Samsung venture, but it ended up inflicting the company with 20 billion won in losses.

During the third quarter alone, Samsung Engineering logged an operating loss of 1.5 trillion won amid slumping plant orders.

Samsung Electronics also posted poor performance in its smartphone business, although its chip division fared well. The IT and mobile businesses posted an operating profit of 2.4 trillion won, slightly lower than the previous quarter’s 2.7 trillion won. Its operating profits had reached 6.7 trillion won in the July-September period of 2013.

Samsung Heavy Industries Co., a major South Korean shipyard, also saw its third-quarter net profits plunge 71 percent from a year earlier, due mainly to a delay in the construction of offshore facilities and an industry-wide slump.

While the newborn Samsung C&T did not open on-year or on-quarter comparisons, citing changes in its structure, it did say that it has posted a net profit of 2.8 trillion won. However, it is presumed to have posted an operating loss when it flatly combined the performances of the two units.

Going further, market watchers said that Jae-yong should take more practical responsibilities throughout the Samsung empire to become a trusted leader.

“Clearly, young Jae-yong proved himself a decisive manager by rolling out large-scale moves, including the launch of the new Samsung C&T,” said Kwun Seog-kyeun, a business professor at Hankuk University of Foreign Studies. “But earning legitimacy is another issue.”

“Although the merger was legal by the book, Jae-yong emerged to the top of the Samsung’s management structure without an expansion of his shares,” Kwun said. “At least upcoming ones should be done in more legitimate manner.”

Following the birth of Samsung C&T, the market has also been eyeing the potential moves to be made by the group to expand Jae-yong’s dominance over Samsung Electronics, the main source of profit for the group.

Rumors include a plan to divide Samsung Electronics into two pillars, holding and business segments, and then merge the holding arm with Samsung C&T to solidify Jae-yong’s influence over the mainstay affiliate.

The rumored scenario sticks out when considered beside Jae-yong’s share in Samsung Electronics, which currently stands at only 0.57 percent. Samsung denied such a plan.

Other possible scenarios also include a plan to reduce Samsung’s complex cross-shareholding structure. With the launch of the new Samsung C&T, the group’s cross-shareholding linkages were reduced to seven from the previous 10. Despite the reduction, Samsung’s cobweb-like structure has been criticized by the public as it allows the owning family to control the entire group with only a few shares.

Industry watchers said that whatever Samsung’s next step in restructuring may be, the conglomerate must find ways to bring more responsibilities to the owning family, rather than just patching together its affiliates.

“South Korea’s business community is still dominated by unofficial powers. This must change. Business owners often have too much power compared to their responsibilities,” Kwon added. “It is time for Jae-yong to take more responsibility in the conglomerate.”

(Yonhap)