South Koreans live in 'the Republic of Samsung,' where the Galaxy Note 7 crisis feels personal

South Koreans sometimes call their country the Republic of Samsung, and they’re only half-joking. Samsung accounts for 20% of the country’s gross domestic product, and its footprint is everywhere. South Koreans can grab a drink from their Samsung refrigerator while watching a Samsung television in their Samsung-made apartment, then use their Samsung credit card while out running errands.

So it is with some jitters that people in Samsung Electronics Co.’s home country have watched the crisis surrounding the company’s Galaxy Note 7 smartphone. The world’s most popular phone brand on Tuesday announced it would permanently cease production of the device after replacement phones, issued to customers who had heeded a consumer safety recall, were still found to be vulnerable to battery explosions. 

Extinguishing the Note 7, the newest model in one of Samsung’s two premium smartphone lines, could lead to more than $15 billion in losses and forgone sales, analysts estimate. The company had already sold about 3 million Note 7 devices, with as many as 5 million already made and plans to produce about 10 million more. 

The stumble has left many in South Korea wondering whether the national economy would feel the effects as well. A Tuesday editorial in the Dong-a Ilbo, a high-circulation daily newspaper, said  “It’s not an exaggeration to say that when Samsung falters, the South Korean economy is weakened.”

Many South Koreans feel their own fortunes are tied up in the company’s fate. “South Koreans are embarrassed by this crisis, because they see Samsung as representative of Korea,” said Kim Sang-jo, a professor of economics at Hansung University in Seoul.

Samsung’s crisis comes at a time when many in South Korea are getting fed up with the chaebol, the large family-owned conglomerates that control huge swaths of the country’s economy across various industries.

The businesses have helped South Korea punch above its weight relative to population, as the world’s fifth-biggest exporter. But they’re under threat from internal and external forces. Increasing manufacturing competition from elsewhere in Asia has edged at some. Questionable business moves and internal family feuds have troubled others. And a slowdown in global trade brought Hanjin Shipping to bankruptcy this summer.

Developing cutting-edge consumer technology has put Samsung in a standout position. It has become the largest South Korean chaebol over the last century, expanding from selling food to home appliances to personal gadgets and their batteries, screens and parts. Separate divisions of the Samsung enterprise are in shipping, insurance and construction. But as doubts about the chaebol model have emerged, even the tech giant has been called on to foster more entrepreneurship in a country of corporate lifers.

Although the Galaxy Note 7 crisis is bad press for Samsung, the issue of defective phones is distinct from the larger conversation over whether it is wise to have so much economic clout concentrated in a few big companies, said Lee Ji-soo, an attorney at the Law & Business Research Center in Seoul.

“What’s happening with Samsung now is a matter of electronics. Public discontent with the chaebol system is related to structural issues, things like corporate tax evasion and inheritance of top positions,” Lee said.

Still, strong mobile phone sales have driven more than half the operating profit this year at Samsung Electronics, which has a higher market value than the next three major businesses tied to chaebols — Hyundai Motor, LG Electronics and SK Group — combined. Last year, Samsung generated about $166 billion in revenue and operating profit of about $22 billion.

Along with the concern for economic fallout, the saga of shiny, expensive smartphones catching fire has also been met with lurid fascination by South Koreans. Stories of Galaxy Note 7 phones burning up while left charging at user’s homes or in public places have been widely viewed and shared online. One video, viewed more than a million times, appears to show a Burger King worker in oversized oven mitts fumbling with a burning Galaxy Note 7 as she tries to dispose of it.

The most concerned South Koreans have been users of the Galaxy Note 7, who have had to worry that the phone in their pocket or handbag could at any time become a smoking, smoldering ember. Most have taken advantage of Samsung’s recall. According to data compiled by the Korean Agency for Technology and Standards, a government body, Samsung has replaced or provided refunds for 389,000 of the 456,000 Galaxy Note 7 phones sold in South Korea. The government has been hounding Samsung to round up as many of the phones as possible, to reduce the risk of fires. In the U.S., nearly 100 people reported overheating Note 7 phones, which sold for almost $900.

In South Korea, Samsung epitomizes both success and excess. Though South Koreans admire how the conglomerate has grown into a global business titan, many also resent the generous government support the company has received, and shake their heads at stories of top executives’ malfeasance — convictions include dodging taxes and bribing politicians.

In part because of this complicated mix of feelings, there usually isn’t much critical coverage of Samsung in South Korean media. Samsung is also a major advertiser, and media outlets may fear losing revenue if they fall out of favor with the company. Also, with Samsung responsible for so much of the national economy, journalists sometimes see boosting the company’s fortunes with enthusiastic, positive coverage as a kind of patriotic duty.

Yet in a Tuesday post titled “How Korean media companies are defending Samsung,” the Huffington Post’s Korean-language version compiled dozens of online articles that it says are, in effect, damage control for Samsung. The post catalogs stories that it says are intended to downplay the crisis with the Galaxy Note 7, accusing some of using euphemisms to avoid the word “explosion,” while accusing others of seeking to lessen the burden on Samsung by running stories attributing the problem to batteries produced in China.

Samsung’s long-term fortunes will be determined in part on Oct. 27 at the annual shareholders’ meeting, where Samsung Electronics Vice Chairman Lee Jae-yong is expected to be appointed executive director, formally taking the company’s top position.

Shares of Samsung Electronics reached a record high last week after an activist investor called for changes in management and splitting up the company. But the gains have been wiped away by a 6% tumble this week. 

Samsung has used global advertising blitzes to zoom past Nokia, BlackBerry, HTC and LG as the world’s top phone seller in the last five years. It is expected to fight to maintain its prominence, analysts said. Many would-be Note 7 buyers already are opting for Samsung’s Galaxy S7 model instead.

Apple, Samsung’s closest rival, could see a sales boost if it can lure a few million Note 7 buyers to the iPhone. But the two competitors’ sales are separated by tens of millions of smartphones and different operating systems, which can make the prospect of switching scary to users.

Kim, the economics professor, added that Samsung can recover domestically if it moves forward transparently. That hasn't been the case so far. Short statements from Samsung have shed little light on the scope of the problem, and the bungled recall has led to questions about whether the company knows what's causing the malfunction. Greater certainty could reap rewards.

“Koreans,” Kim said, “have always been very sympathetic when it comes to Samsung’s mistakes.”

Shin Sun-ho, a 40-year-old delivery driver who uses a Samsung Galaxy S6 smartphone, said consumers face a bigger predicament than Samsung.

"I'm not worried about Samsung; they're rich and can handle any problem,” he said. “It's more of a burden for all the people who now have to go to a store and get their phone replaced.”

paresh.dave@latimes.com

Special correspondent Borowiec reported from Seoul. Times staff writer Dave reported from Los Angeles.

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UPDATES:

2:20 p.m.: This article was updated to add details about the way the crisis will affect Samsung’s business.

This article was originally published at 10:05 a.m.

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