The Samsung Empire: Government Backed, Cutting Edge Tech
When you’re buying a new smartphone, if you want the latest and greatest, you really only have two options:
Apple’s iPhone or Samsung’s Galaxy.
The notorious Samsung Group (KRX: 005930) is Korea’s largest “chaebol” (conglomerate).
And this family-controlled mega company does a lot more than phone technology. It’s got its hands in a wide range of industries, from chemicals to engineering.
Below you can see the large business complexities spread out over the Samsung Empire.
In fact, the average Korean’s life is completely intertwined with Samsung from cradle to casket.
They could be born in a Samsung-owned medical center, work in a Samsung factory and be put to rest in a Samsung funeral parlor.
For that reason, many believe Korea’s economy may simply collapse if this giant was to fall.
Samsung’s sly business ploy
The genius of Samsung started with one of its founders, Lee Byung Chul. In the 1960s, he persuaded Korea’s authoritarian ruler, Park Jung Hee, for lax taxes on companies.
He swayed the president. Instead of paying high taxes, Park encouraged companies to invest in new business.
During the reconstruction period, Samsung – once a simple sugar and flour producer – started acquiring more and more diverse businesses.
This was done mostly through the cheap acquisition of confiscated enemy properties. They expanded into banking, insurances, department stores, real estate and finally electronics.
But in the 1970s and 1980s, the government prioritized development in heavy and chemical industries.
The government maintained a strict licensing system. Only selected companies, like Samsung, could operate in their “key” sectors.
Soon Samsung Petrochemical, Samsung Heavy Industry, Samsung Semiconductor, and many more were born.
Transforming Korea’s economy from ruins to riches
Like most chaebols, Samsung secured a tight relationship with the government during the post-war reconstruction era.
Samsung helped rebuild the economy. And in return, the government helped Samsung grow strong and profitable.
Through a series of tax breaks, exclusive allocation of foreign aid materials, cheap banks loans, low export-interest rates and government contracts, Samsung’s corporate prowess rose triumphantly.
From the 1960s to the 1990s, Korea was one of the fastest growing economies in the world. This growth was led by conglomerates like Samsung, Hyundai and LG.
Since then, the economy and Samsung’s revenues have been closely tied, as seen on the Kospi index below.
It’s clearly a “I scratch your back, you scratch mine” kind of relationship.
What impact did this government favoritism have on Samsung?
Well, from the 1960s to the 1990s, the government significantly reduced the interest rates of export credit. This gave Samsung a major advantage to grow and export.
Many of Korea’s “chaebols”, like Samsung, took advantage of these cheap loans. They supplied materials to the Middle East’s construction boom, making record profits.
In 1987, the company’s throne was passed from father to son. During the 1990s and 2000s the new company leader invested heavily in electronics and exporting. This is when Samsung Electronics came into play.
Not even the 1997 Asian financial crisis could damage this growing giant.
In fact, after the crisis, Korea’s GDP managed to triple. During that time, Samsung took the economy’s lead and became the biggest Korean conglomerate, as you can see below.
So, Samsung first pulled Korea out of the war’s rubble. Then nearly sixty years later the company lifted the nation out of financial chaos.
The modern technology mammoth
As of 2016, Samsung had 20 consolidated domestic subsidiaries under its belt and 149 overseas subsidiaries used for product manufacturing, sales, and R&D.
These days, Samsung is a distinctly varied and powerful company. It accounts for roughly 15 percent of Korea’s total GDP.
As you can see below, Samsung has helped put South Korea on the world map as a major money-maker.
So how does Samsung manage to stay on top?
The harsh reality of the always-advancing tech industry is the need to produce the most cutting edge designs.
(The evolution of phone design. Photo: Shutterstock)
In order to achieve this, Samsung spends a lot. In fact, Samsung is one of the most aggressive research and development (R&D) investors in the entire world.
This is a testament to Samsung’s prioritization of innovation in order to sustain future growth.
And Samsung’s commitment is certainly paying off. As you can see in the chart below, Samsung’s revenue and R&D expenditure are positively correlated.
The company plans on investing US$18 billion in its chip business and is also constructing new international R&D hubs, focused on developing future convergence technologies, artificial intelligence, and security technologies.
Essentially, Samsung has taken on an enormous debt burden to make its dreams come true. And yet, Samsung’s stock price continues to rise.
In our coming daily we’ll take a trip to paradise and take a peek at the Philippines’ leading conglomerate, Ayala.