In S. Korea, Samsung's Recall Troubles Come At An Already Crucial Moment

Oct 18, 2016
Originally published on October 18, 2016 11:47 am

It's the most pressing problem, but fire-prone phones aren't the only challenge facing the world's leading seller of mobile phones. In Samsung's home country of South Korea, the conglomerate was already feeling the heat from investors, who want to streamline its complicated corporate structure, and from critics, who say it's not changing from its previously top-down, "militaristic" ways.

In South Korea, Samsung's next moves matter. That South Koreans call their country the "Republic of Samsung" is no exaggeration. The conglomerate's electronics are known around the world, but in Seoul, Samsung is also behind everything from baked goods to ship-building to life insurance.

"You can live your entire life here from cradle to the grave on Samsung products," says Geoffrey Cain, a journalist and author with a forthcoming book about the company and its many businesses. "You can die [and] go to the Samsung morgue when you're dead. You can get married at the Samsung wedding hall in the company."

When Samsung had to pull the plug on its overheating Galaxy Note 7 for good, it was unprecedented for the company, which across all units makes up nearly 20 percent of Korea's gross domestic product. But it went beyond a business concern. It sparked some national soul-searching, because Samsung's name is so synonymous with South Korea.

"It's very important for me to spread my affection of my Korea, of my country," Samsung customer Elena Yang says. "And Samsung is the best brand in Korea. So all the time I have the pride of using Samsung phones."

Even a user like Yang — whose patriotism is tied up with Samsung — says she's frustrated by the company's response.

"They haven't [told] us what the complete problem is or how they solve this problem step by step. They didn't tell us very concretely," Yang says.

Samsung said by email it "will get to the bottom of the issue and find the cause. We will do everything in our power to make what's wrong, right." The cause of the overheating phones — originally blamed on the batteries — is still under investigation.

The stakes are high. Samsung already adjusted its latest quarterly earnings down by a third to account for losses from the Galaxy Note 7 recall, which was already the biggest mobile phone recall in history. While the company has other businesses to lean on, the phone unit's important. Electronics make up about 70 percent of the conglomerate's profit. But the biggest hit may be to the company's reputation.

"This isn't a product problem as much as it's a brand problem," says Avi Greengart of the tech consulting firm Current Analysis. "If you don't trust Samsung, you aren't going to buy their products and that spreads far beyond the Note."

In South Korea, the company was already in the midst of other difficult changes when this crisis hit. It's been trying to reform a culture steeped in Korean corporate tradition. Critics call it intolerant of dissent.

"Samsung was a train wreck waiting to happen," says Michael Kim, who formerly worked at Samsung's South Korea headquarters in a senior management position. He describes a top-down organization that he says might be responsible for the Galaxy Note 7 fiasco.

"They never expected any of their juniors to ever refuse any request asked of them. So it's basically an order. Anything that your supervisor or boss at Samsung says to you should be taken as a direct order from your commanding officer," Kim says.

A Samsung executive, speaking only on background, says the company will have many opportunities to reflect on the handling of this recall later. For now the company's focus is getting all its faulty phones back. The executive didn't specify how many were still in the hands of consumers.

"Just the fact that people have to rely on rumors and hearsay even within the company to figure out what's going on just speaks to the level of secrecy and unusual secrecy that has come to typify Samsung," Cain says.

Kim says there are aspects that made him think of South Korea's neighbor.

"It seems a bit reminiscent of North Korea," Kim says.

He recalls how the company so revered its founder and chairman, Lee Kun-hee that at new employee orientation, he and others were handed a book of quotes by Chairman Lee.

"There are internal jokes of Lee Kun-hee being the 'Dear Leader,' because he's definitely seen as such and treated as such within the company," Kim says.

Clear leadership is perhaps what's most obviously lacking during this crisis. Since 2014, Lee Kun-hee has been hospitalized. Samsung tells NPR Lee remains in stable condition. But following the dynastic tradition of many Korean conglomerates, it's beginning to navigate a transition of power to his son. All this is happening while Samsung is pushed by investors challenging its complicated cross-shareholding structure.

"There's no clear separation between the ownership and management, so there's a lot of loopholes that these family members can take advantage of," says Yongsun Paik, who is professor of management at Loyola Marymount University.

Samsung investor Elliott Associates, a U.S. hedge fund, wants Samsung to untangle its shareholdings and simplify the conglomerate's structure — specifically, splitting off Samsung Electronics. It would force the company to comply with international standards on corporate governance and be more transparent.

For its part, Samsung says it's already pushed cultural reforms, and the executive says it's "moving in the right direction" toward a more open overall culture of internal communications. Samsung won't say whether it supports restructuring. But the phone debacle gives the investor — Elliott — a better chance.

"So lots of things happening all at once right now and the Galaxy explosions are just at the forefront," says Cain. He says having to confront so many growing pains at once may help the company speed up much needed changes.

"I's just a very long term change that's been in the making and finally now it looks like things might be getting a little better," says Cain.

A baptism by phone fire.

Alina Selyukh contributed reporting from Washington. Haeryun Kang contributed from Seoul.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

STEVE INSKEEP, HOST:

And let's talk next about Samsung, the maker of the Galaxy Note 7 phone, which has been catching fire. And that's not the only way Samsung has been feeling the heat. NPR's Elise Hu reports from Seoul.

ELISE HU, BYLINE: That South Koreans call their country the Republic of Samsung is no exaggeration. The conglomerate's electronics are known around the world, but here in Seoul, Samsung is also behind everything from baked goods to shipbuilding to life insurance.

GEOFFREY CAIN: You can live your entire life here from cradle to the grave on Samsung products.

HU: Geoffrey Cain is a journalist and author with a forthcoming book about the company.

CAIN: So you can die, you know, go to the Samsun morgue when you're dead. You can get married at the Samsung wedding hall in the company.

HU: Samsung has never had to kill off a product in the way it did the overheating Galaxy Note 7. Because the sprawling conglomerate makes up nearly 20 percent of Korea's GDP, the crisis went beyond a business concern. It sparked some national soul-searching because Samsung's name is so synonymous with South Korea. Samsung customer Elena Yang explains.

ELENA YANG: It's very important for me to spread my, like, affection of my country. So all the time I have the pride of using Samsung phone.

HU: Even a user like Yang, whose patriotism is tied up with Samsung, says she's frustrated by the company's response.

YANG: They haven't tell us what the problems or how they solve this problem step by step. They didn't tell us very concretely.

HU: Samsung tells NPR by email that it, quote, "will get to the bottom of the issue and find the cause. We will do everything in our power to make what's wrong right." The stakes are high as it investigates what exactly went wrong with its hardware. Samsung already adjusted its latest quarterly earnings down by a third to account for losses from the Galaxy Note 7 recall - the biggest mobile phone recall in history. And the hardest hit may be to the company's reputation.

AVI GREENGART: You know, this isn't a product problem as much as it's a brand problem.

HU: That's Avi Greengart of tech industry consultancy Current Analysis.

GREENGART: If you don't trust Samsung, you aren't going to buy their products, and that spreads far beyond the Note.

HU: In South Korea, the company was already in the midst of other difficult changes when the crisis hit. It's been trying to reform a culture steeped in Korean corporate tradition. Critics call it militaristic and intolerant of dissent.

MICHAEL KIM: Samsung was a train wreck waiting to happen.

HU: Michael Kim used to work at Samsung's South Korea headquarters in a senior management position. He describes a top-down style that he says might be responsible for the Galaxy Note 7 fiasco.

KIM: They never expected any of their juniors to ever refuse any requests asked of them, so it's basically an order. Anything that your supervisor or boss at Samsung says to you should be taken as a direct order from your commanding officer.

HU: A Samsung executive speaking only on background says the company will have many opportunities to reflect on the handling of this recall later. For now, the focus is getting the faulty phones back. It didn't specify how many were still in the hands of consumers. Cain says this lack of clarity is signiture Samsung.

CAIN: Just the fact that, you know, people have to rely on rumors and hearsay even within the company to figure out what's going on just speaks to the level of secrecy and unusual secrecy that has come to typify Samsung.

KIM: And it seems a bit reminiscent of North Korea.

HU: Michael Kim recalls that at new employee orientation, he and other employees were handed a book of quotes by founder and chairman Lee Kun-hee.

KIM: There are internal jokes about Lee Kun-hee being the dear leader, you know, and - because he's definitely seen as such and treated as such within the company.

HU: But since suffering a heart attack two years ago, Lee Kun-hee he has been hospitalized - in a Samsung hospital, by the way. Samsung tells NPR he remains in stable condition, but the lack of leadership has been obvious during the crisis. Following the dynastic tradition of many Korean conglomerates, Samsung is beginning to navigate a transition of power to Chairman Lee's son, which is both opaque and messy. Yongsun Paik is professor of management at Loyola Marymount University.

YOUNGSUN PAIK: There is no clear separation between the ownership and management. So there's a lot of loopholes that these family members can take advantage of.

HU: Samsung investor Elliott Associates, a U.S. hedge fund, is pressing Samsung to simplify the conglomerate structure and split off Samsung Electronics. That would force the company to comply with international standards on corporate governance and be more transparent. A Samsung executive says, quote, "we're moving in the right direction on cultural changes" but won't say whether the company supports restructuring. But the phone debacle makes it harder for Samsung to ignore investor pressure, says Geoffrey Cain.

CAIN: So lots of, you know, things happening all at once right now, and the Galaxy explosions are just the one at the forefront.

HU: He says having to confront so many growing pains at once may help the company speed up much needed changes.

CAIN: It's just been a very long term change that's been in the making, and finally, you know, now it looks like things might be getting a little better.

HU: A kind of baptism by phone fire. Elise Hu, NPR News, Seoul. Transcript provided by NPR, Copyright NPR.