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Samsung’s Heir Is Sentenced To Five Years In Prison And The Group Plunges Into Uncertainty

Accused of political corruption, Jae-yong Lee, heir and effective leader of Samsung, receives 5 years in prison in first instance. An issue that plunges the first Korean industrial conglomerate into a state of lethargy. The threats are especially on his flagship Samsung Electronics.

After six months in jail on charges of political corruption, embezzlement or abuse of corporate property, Jae-yong Lee, vice president and heir to the Samsung conglomerate, has been sentenced to five years in prison. This is less than the 12 years of imprisonment claimed by the Seoul Procuratorate. But if this decision is confirmed on appeal, it risks amplifying the state of lethargy in which the first industrial conglomerate of South Korea has plunged for two years.

Measured stock market reaction

Officially, it is Kun-hee Lee, second generation of the Lee family founder of Samsung, who leads the group with the title of president. But since his heart attack in 2014, it is his only son and heir Jae-yong Lee who is actually in charge even if he only wears the title of vice president. His imprisonment deprives his leader of a group that, with 500,000 employees and a turnover of $ 300 billion, represents nearly 20% of the country’s GDP.

The Seoul Stock Exchange does not seem to worry too much. It reacted with a decline of only 1% share of Samsung Electronics, the chaebol’s flagship with 325,000 employees and a turnover of $ 175 billion in 2016. Nevertheless, this episode creates a leadership vacuum that is detrimental to the group’s long-term future.

Very centralized operation

Consisting of a galaxy of companies specialized each on a sector (electronics, energy, construction, shipbuilding, hotels …), Samsung is pointed fingers as having a rigid operating structure with an extremely hierarchical and centralized, almost military. All important decisions, such as long-term investments, diversification or strategic acquisitions, are at the top. Deprived of his patriarch, the group risks being frozen in its current state and plunged into a long period of sleep. A threat that weighs particularly on Samsung Electronics.

Admittedly, this flagship company, in charge of consumer electronics, mobiles, semiconductors or flat screens, appears today to the best of its shape with a record revenue and earnings expected in 2017 As the world’s number one in memory chips, Oled displays, smartphones and television, it is preparing to wrest from Intel the crown in semiconductors.

No structural reforms in sight

But this apparent good health hides dangerous vulnerabilities for its long-term future. The Galaxy Note 7 fiasco, its flagship big-screen smartphone pulled off the market in October 2016 due to a battery fire problem, is attributed in part to its rigid, hierarchical operating structures. Management refuses to turn the company into a holding company. A reform called for loudly by investors to improve governance and transparency.

More worryingly, Samsung Electronics is struggling to become a provider of software and services, like Apple. The company clings to its model of manufacturer of high quality hardware products but doomed to become commodities, the field of predilection tomorrow of Chinese manufacturers. It appears today as a fortress besieged by the Chinese. All want his skin: TCL, Skyworth or Hisense in television, Haier, Changhong or Konka in home appliances, Huawei, Xiaomi or Oppo in mobiles, BOE Technoloy, CSOT or EverDisplay Optronics in flat screens and even Yangtze River Storage Technology , Fujian Jinhua Integrated Circuit or Hefei Chang Xin in the memory chips. A threat taken very seriously by its General Manager and Vice President Kwon Oh-Hyun before the last general meeting of shareholders of the company in March 2017.


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