Doing Business : An End to the Cheers? : Samsung chairman warns that South Korean companies are headed for trouble if they don’t improve quality.
South Korea’s Samsung Group may be the biggest non-Japanese conglomerate in Asia, but it is “second-rate” by international standards. And if it doesn’t shape up, it will soon be unqualified even “to run a street-corner shop.”
Harsh words. Especially when they come not from some corporate gadfly, but from Samsung Chairman Lee Kun Hee.
But isn’t this the same Lee, son of Samsung’s founder, who just three years ago was saying that the conglomerate aimed to become one of the world’s 10 largest enterprises? That its electronics wing would rank among the global Big Five?
It’s the same person, all right, but it’s certainly not the same message.
Since February, the man once known as a shy, low-profile “philosopher-leader” has been forging a campaign of public self-criticism aimed, he says, at curing ills that threaten the future not only of his company, but of South Korea as a whole.
The problem, he says, is that his management, which most analysts consider the best in South Korea, is fixated on high-volume production of relatively low-grade--and too often, low-quality--products.
“Six thousand Samsung men repair 20,000 products a day produced by 30,000 workers,” the 51-year-old magnate complained in an interview with the Dong-A newspaper. “You can find no comparison of such inefficiency in the world. If we don’t correct this, we won’t be qualified to run a street-corner shop.”
Other major South Korean conglomerates are stuck in the same pattern, he charges, seemingly unable to switch into production of the kind of higher-grade products the international market increasingly demands. The government doesn’t help, he adds, since it fails to provide the financing, infrastructure, education or even the land that business needs to compete.
Since his campaign began, he has led 1,800 Samsung executives on overseas trips, taking them to visit factories and inspect markets in Japan, Britain and Germany. He has conducted brainstorming sessions with groups of those executives on what is going wrong--many of which Samsung has recorded.
And since July, Samsung has been making public some of those recordings. One videotape, in which Lee criticized the South Korean government role, was aired on national television.
“Samsung must change to change other business groups; then the government will change,” Lee told the Dong-A newspaper.
Focusing on volume production of second-echelon goods, Samsung succeeded in developing a reputation for making products that were a good value for the money, and sales rose. Today, the conglomerate includes about 40 companies, 200,000 employees and $49 billion in annual sales.
But Southeast Asia and China are now catching up, and Japanese companies like Sony and Matsushita have started producing products in Indonesia that sell for the same price as South Korean-made Samsung goods. Samsung, meanwhile, is not raising the quality of its products, Lee argues.
“We hold a small portion of the (global) market share for products with which we are relatively competitive, such as semiconductors, cellular phones and facsimiles,” says Lee, who took over as chairman in 1988 after his father died. “But if we neglect quality, our advantage in even these products will be gone in three to five years and we will become a second- or third-rate business. “In advanced countries, the trend is toward producing many products in small quantity, variety and high functions. But we still remain at the quantity stage,” he complains.
Lee’s transformation occurred during a visit to Los Angeles electronics shops last winter, says Hwang Young Key, executive director and treasurer for the Samsung Group. Some shops didn’t handle Samsung products. Others had them displayed in back corners.
“One shopkeeper told him, ‘We haven’t sold any of those for the last six months,’ ” Hwang recalls.
The emerging weakness, however, wasn’t showing up in Samsung sales figures. The company was losing out in the United States and Europe, “and we knew we weren’t competitive in Japan,” Hwang says. But sales were growing to the Middle East, China and Southeast Asia, and as a result, overall growth continued.
“If the United States wouldn’t take our products, our attitude was ‘sell them in Southeast Asia or China.’ No serious effort was made to upgrade our products,” Hwang says.
Lee has not been alone in his perception of the problem.
Cho Dong Sung, professor of strategy and international business at Seoul National University, blames the authoritarian governments of the past for creating the volume mind-set of South Korean businessmen. Because their chief claim to political legitimacy rested on their ability to produce economic growth, South Korea’s up-from-the-army presidents made gains in export volume their chief target. Subsidies and incentives focused on growth, not quality, he says.
“The mentality became deeply embedded,” Cho says.
The strategy worked, but only until the authoritarian leadership collapsed in 1987 and government controls over unions and wages ended.
“Our source of international competitiveness had to be changed from (low) wages to quality. But entrenched behavior toward volume did not change,” the professor says.
Initially, as wages exploded and South Korea lost markets in the United States and Europe, the nation’s trade fell from a peak surplus of $11.4 billion in 1988 to a $7.1-billion deficit just three years later. Exporters have since found new markets in Southeast Asia and China, and South Korea promises to have a surplus again this year. But problems remain in the U.S. market.
In 1988, South Korea sold 39% of all its exports to the United States. But by last year, the figure had fallen to 23%.
After Hyundai’s Excel reached the top of the auto import field in 1988, its U.S. sales collapsed. American consumers discovered, as Kim Noe Myong, Hyundai export manager, puts it, “that all Asian cars were not Japanese cars.”
Consumer Reports magazine started rating Hyundai quality on a par with the infamous Yugo. From exports of 300,000 cars to the United States in 1988, Hyundai’s sales in the American market tumbled to 75,000 last year. The company expects to ship about 90,000 cars to the United States this year, Kim says, but the emphasis is no longer on growth. It’s on “customer satisfaction,” he says.
At Samsung, Lee has also set aside talk about entering the ranks of the world’s largest enterprises to focus on quality. “Lee has told his executives to forget about sales and profits for next year and the year after, and concentrate on quality,” says Hwang.
Underlining his dedication to change on the human level, Lee has also ordered what amounts in the South Korean context to a revolutionary switch in working hours for Samsung office employees. Instead of working a 9 a.m.-to-6 p.m. shift and then putting in hours of overtime as has been customary, they are now expected to work from 7 a.m. to 4 p.m., and then go home.
The off-rush-hour schedule saves most workers 60 to 90 minutes a day in commuting time--”time that can (now) be used for self-development,” he says.
“You can make appointments with friends, see a movie, take language lessons or read a book. . . ,” Hwang says. “Or, if you go home early, you can teach your kids. Before, I never had dinner with my family.”
