SPECIAL REPORT-Can Samsung change with the tech times?

Thu Jan 27, 2011 7:06am EST

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(Changes attribution of Samsung statement to Samsung Group in paragraph 13)

By Miyoung Kim

SEOUL Jan 27 (Reuters) - Only a handful of reporters were at Samsung's booth at the Consumer Electronics Show in Las Vegas earlier this month when Jay Y. Lee dropped by.

They had been tipped that the sheltered heir to the Samsung business empire was about to make his first public appearance since his father named him one of the new presidents of the conglomerate's flagship, Samsung Electronics , in December.

Most of the Korean media contingent eagerly awaiting his appearance at the show had been diverted to another news conference. They didn't miss much. Jay Lee's remarks were brief and bland. He mainly wanted to make it clear his ambition was to be a chip off the old (and equally aloof) block.

"I'm trying very hard to learn his challenging attitude and personalise it," said Jay Lee, 42, the only son of Samsung Group Chairman Lee Kun-hee. "The chairman has this DNA that just won't let him be seen being beaten," said the boyish-looking Lee, wearing rimless spectacles and a business suit with an open collar.

His father's formula has helped turn Samsung into a top global brand over the past decade or so, boasting a market value of $143 billion, bigger than Intel and Hewlett Packard and equal to the combined value of Sony Corp , Nokia , Toshiba and Panasonic Corp .

Yet that's still less than half of Apple's $320 billion market value.

Samsung, which has had better net earnings than any other global tech firm except Microsoft and IBM over the past decade, is set to report its lowest profit in six quarters when it issues December quarter corporate results on Friday, although 2010 will be another record profit year.

The outlook for this year and beyond is unclear as global technology firms grapple with weak demand and falling prices for memory chips and flat screens, and new players enter the market for smartphones and tablets.

Successful business leaders are very good storytellers, it is often said, and the industry is looking for a new narrative from Samsung, as it passes the generational torch while trying to evolve into a more innovative and content-driven company.

Jay Lee, who graduated from the Seoul National University with a degree in East Asian history, has an MBA from Japan's Keio University and studied for a doctorate at Harvard, is deferring to his elders for now. But eventually Samsung will be his story to tell.

He is taking over at a pivotal point for Samsung Electronics, the world's biggest maker of flat screens and memory chips, the second-biggest mobile phone maker behind Nokia and a core holding in any emerging market portfolio.

His company faces the challenge of moving beyond being a hardware company, clever at copying ideas, to becoming more creative, better adept at software, at a time when consumer gadgets are getting smarter all the time. In short, it faces a management challenge.

In a statement to Reuters, Samsung Group said its strong performance during the aftermath of the global financial crisis has proved the value of its management model.

"Samsung's management is based on a complementary relationship between the founding family and professional managers. On the one hand, Chairman Lee Kun-hee provides long-term business visions and the basis for sustainability. On the other, professional managers bring to bear their day-to-day management skills without being unduly pressured by short-term and quarterly results."

Samsung had the biggest booth, the thinnest products, and by some accounts, the best buzz at the annual Las Vegas show. But the stars of this Las Vegas extravaganza, which drew a record 140,000 technology enthusiasts, were the tablet computers. More than 30 tablets were announced over the two-day show, and while Samsung's Galaxy Tab was one of the precious few actually in stores, all the new players pointed to Apple's iPad as the one to chase.

To catch up, Samsung has vowed to inject some Silicon Valley culture into the ranks of its salarymen.

"Does Samsung want to be Apple? Probably not," says Lee Seung-woo, an analyst at Shinyoung Securities in Seoul. "I think they'll continue to pursue their strategy of being the fast executioner. They'll be the first you'll see in the market with a copycat product when there's a new opportunity, like a tablet market. Being an innovator and creating a new market requires lots of risk and I don't think Samsung is ready yet to take that level of risk."

And yet big business is fraught with risk in South Korea, where the public seems to have a love/hate relationship with the family conglomerates or chaebol that have long dominated the economy.

REWARDING INNOVATION

Lee Kun-hee's visit to Samsung's new headquarters in Seoul on Dec. 1 was his first since he reinstated himself as chairman last March, and two weeks after elevating his son to a president's position.

He had stepped down after receiving a three-year suspended jail sentence for tax evasion and breach of trust in 2008. South Korean President Lee Myung-bak later pardoned him, saying he was too important to the nation to be behind bars.

What's good for Samsung is good for South Korea, Kun-hee might well argue. His conglomerate after all accounts for around 20 percent of the country's exports and a big chunk of its GDP. Yet he is constantly exhorting his employees to act as if the company was on the verge of extinction, warning them Samsung products could all be obsolete in 10 years if they don't keep up with the times. "Change everything but your wife and children," he is fond of saying.

The elder Lee had come to Samsung Group's new headquarters -- three office towers housing 10,000 employees in Seoul -- to bestow year-end promotions and awards, including to Galaxy S smartphone designer, Lee Sung-sik.

Sung-sik, in fact, epitomized the qualities Samsung has long been known for -- a "fast executioner" who gets something quickly to market. Samsung sold 10 million Galaxy S units in just six months after a June launch, tripling its share of the smartphone market to almost 10 percent, though still trailing Nokia, Apple and RIM's Blackberry.

But Sung-sik's story also illustrates Samsung's essential challenge -- it only developed the Galaxy after Apple took the market by storm with its latest iPhone early last year.

"Thanks to iPhone, we've been to hell," said a senior executive at Samsung who did not want to be identified because he is not authorised to speak to the media. "We had more than 1 trillion won of (telecoms) profit in the first quarter (of 2010), but saw it halved the following quarter simply because we didn't have attractive smartphone lineups. We couldn't give anything to our distributors when they were asking for models to stop iPhone."

Samsung's TV business has unveiled a new business slogan,"Samsung creates and others follow" but it's the other way around for other products. The Galaxy S is an imitation iPhone that runs on Google's Android operating system. And the Galaxy Tab is basically just a bigger version of its smartphone.

Samsung has yet to come up with the kind of original, iconic, market-leading products that powered rival brands such as Apple's i-series or Sony's Walkman. Nor has it taken the kind of initiatives in software that Google and Apple did to thwart Microsoft.

"If they want to pursue an innovation strategy then they can master the connected home as they already are in almost every household," said Francisco Jeronimo of market intelligence firm IDC. "They need to create services that connect and explore the different products. That's what Apple is trying to do with a service like Apple TV."

Samsung Group plans to spend 12.1 trillion won ($10.7 billion) this year on research and development, up from 10.6 trillion won last year and 8.8 trillion the year before.

The new investment is targeted at ac

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