Samsung Main Building
250 2-ka Taepyung-ro
Incorporated: January, 1952 as the Samsung Company,
Sales: W 12.23 trillion (US$ 13.73 billion)
Market Value: W 1.652 trillion (US$ 1.944 billion)
Stock Index: Seoul
The Samsung Group is one of four South Korean trading firms. It has been described as the Korean equivalent to Japanese general trading firms such as Mitsui, Mitsubishi, and Sumitomo. Like these companies, Samsung has been chosen as an instrument of national development by the government.
The Samsung Commercial Company was founded by a young Korean entrepreneur named Byung-Chull Lee. Lee was born in 1910, the second son of a wealthy landlord. He gained his early education in a traditional Confucianist school. Although he never graduated from middle school, he enrolled at Waseda University in Japan where he studied political science and economics. Lee dropped out after a few semesters due to poor health and returned to Korea. He spent the next several years in Seoul, “doing nothing in particular.”
In 1936 Byung-Chull Lee moved to Taegu, a city in southeastern Korea, and with an inheritance established a local rice mill. Over the next two years Lee began trading in a wider variety of products, including wool and textiles. In 1938 the company was officially incorporated as the Samsung Commercial Company (Samsung is Korean for “three stars”). The company employed 40 people, continued to expand, and later opened offices in Manchuria, northern China, and the Beijing area.
Korea, however, had been annexed by Japan in 1910 and thereafter was administered as a Japanese colony called Chosen. Manchuria and much of northern China were occupied by Japanese armies. All of these areas were under the authority of a Japanese military administration which limited the activities of Korean companies such as Samsung, and protected larger markets for Japanese firms.
During World War II Korea was spared much of the destruction inflicted upon Japan, but was subjected to acute shortages of food and other products. When the war ended in 1945, Soviet troops occupied the northern half of Korea while American troops occupied southern Korea and Japan. Samsung’s operations north of the 38th parallel were subsequently terminated by Soviet authorities, who were transforming nothern Korea into a Marxist state. South Korea, meanwhile, was working to establish its independence and in 1948 declared itself a separate state. Samsung experienced strong growth during the war and by 1945 had expanded into transportation, real estate, milling, noodle making, brewing, and general domestic trading. Lee moved his company from Taegu to Seoul in 1947, and in November of 1948 established an international trading firm called the Samsung Mulsan Company. The new company was created specifically to import goods for which demand was rapidly increasing in Korea. By 1950 Samsung had grown to become one of Korea’s top ten firms.
On June 25, 1950 North Korean armed forces launched a full-scale invasion of South Korea and by August had overrun all but a 4000 square mile area around Pusan. Samsung was devastated; most of the company’s operations were either destroyed or behind enemy lines. United Nations forces entered the battle on September 15, and by late October had driven the communist forces north to the Chinese border. At that time several hundred thousand communist Chinese troops attacked the U.N. forces and advanced southward to the 38th parallel, where the war became stalemated. An armistice was concluded on July 27, 1953.
Lee’s company was re-established in Pusan in January of 1951 as the Samsung Trading Company. Samsung benefitted significantly from its role as a supplier to the U.N. forces in Korea; during its first year in Pusan the company grew 1700%. Lee recognized that the large-scale importation of foreign goods had a negative effect on the economy, and that several commodities could be produced domestically. In order to reduce the country’s dependence on imports, Lee created the Cheil Sugar Company in 1953.
When it was established Cheil Sugar was the only manufacturer of sugar in South Korea. Strong demand for sugar generated large profits and further enhanced the company’s monopolist position. By 1954 Cheil Sugar had accumulated enough capital to establish a second company called the Cheil Wool Textile Company.
Cheil Sugar and Cheil Wool Textile were intimately associated with Samsung. All three companies performed so well that by the late 1950’s Samsung started to acquire smaller firms and purchase large quantities of commercial bank shares. In 1957 Samsung created Samsung Construction and the Dongbang Life Insurance Company. By the end of the decade Samsung controlled a number of financial intermediaries and had become known as a chaebŏl, or international conglomerate much like the Japanese zaibatsu.
Lee considered entering the fertilizer business, but became discouraged when he was targeted in student protests as a symbol of opportunism. Lee’s wealth and close association with the government had become a serious public relations liability.
In 1960 rising political tension in South Korea forced President Syngman Rhee to resign. The social order continued to deteriorate. The following year, in an effort to restore order, General Park Chung Hee seized power and imposed martial law. The military government initiated an official investigation into the illicit accumulation of wealth by certain individuals during the Rhee regime. Byung-Chull Lee, who was in Japan at the time of the coup, was implicated and accused of tax evasion, illegal campaign contributions, and profiteering.
Lee returned to Korea to meet with General Park. The two men reached a compromise which largely absolved Lee of wrongdoing, and enabled him to emerge later as an important leader and representative of South Korean industry. As part of his compromise with General Park, however, Lee was obliged to construct a fertilizer plant for the government. When the government reversed its decision in December of 1963, Lee was forced to pay the government a large fine instead. In August of 1964 Lee finally established his own fertilizer plant at Ulsan called the Han Kook (Korea) Fertilizer Company. It was one of the largest industrial projects at the time and took three years to complete.
In 1966 it was discovered that officials of Han Kook, including one of Lee’s own sons, were involved in the illegal smuggling of Japanese saccharin into Korea. Lee’s activities were subjected to another investigation, but again he reached a compromise wherein he surrendered 51% ownership of Han Kook to the government. The scandal greatly damaged the public image of both Samsung and Byung-Chull Lee. This did not, however, slow the company’s growth. By 1970 Samsung was a large industrial group which had extended into a number of new fields, including department stores, universities, paper, securities, and a newspaper named the Joong-ang Daily News.
Samsung forecasted and then prepared for strong growth in the demand for electronic goods. In 1969 the company, in association with Sanyo, established Samsung Electronics in the city of Suwon. An international network was established to improve the company’s export and intelligence gathering capabilities. The partnership with Sanyo was discontinued in 1972, although the two companies continued jointly to manufacture electronic components. Samsung Electronics originally manufactured products for U.S. retailers such as Sears, J.C. Penney, and K-Mart.
In May of 1975 the government introduced a new strategy for export promotion. It designated 13 large trading firms as General Trading Companies, or GTCs. The GTCs are actively supported by the South Korean government (much the same way that Japan’s Ministry for International Trade and Industry supports the large Japanese trading companies) which offers advice on international market conditions and helps to strengthen tender offers in international competitions. Samsung was designated as the “number one” GTC.
As part of the development of industry emphasized in the government’s fourth Five Year Economic Plan, Samsung created two new major operating companies in the chemical and heavy manufacturing industries. Samsung Petrochemical was established in 1977 as joint venture with Amoco and Mitsui Petrochemical. Its primary product is purified terephthalic acid (PTA), an essential ingredient in the manufacture of synthetic fibres.
Samsung Shipbuilding was established in 1974 as a major producer of large ships and offshore structures. The division has since been merged with Samsung Heavy Industries and Daesung Heavy Industries, both manufacturers of large equipment and machinery. The new company was renamed Samsung Shipbuilding and Heavy Industries.
Samsung Precision Industries was created in 1977 to overhaul and maintain aircraft engines for the South Korean air force. Its operations have since broadened to include the manufacture of jet engines, industrial robots, and military equipment. The Samsung Group entered the microelectronics industry in 1980 when it purchased the Korea Telecommunications Company. Renamed Samsung Semiconductor and Telecommunications in 1982, this division has grown strongly in the last ten years and is now a major producer of semiconductors and microchips.
With a broad base of manufacturing industries established, Samsung was in excellent shape to begin a more aggressive export campaign. Utilizing Japanese technologies and taking advantage of lower labor costs (75% to 80% lower than in Japan), Samsung started to market its electronic products under its own name in the United States. Samsung entered the “low” end of the market, with an inexpensive and less sophisticated line of products. The company was so successful that several Japanese manufacturers were forced to concede considerable market shares. Once established, Samsung gradually began to introduce higher quality (and therefore more expensive) electronic equipment. The success of this strategy has proven Samsung’s ability to react quickly and compete effectively in the international market.
One area where South Korea holds a considerable comparative advantage over Japan is in automobile production. The near collapse of the South Korean auto industry in 1980, however, forced the government to enact legislation in 1982 which limited automobile production to Samsung’s rival GTCs, Hyundai and Daewoo. Samsung attempted to circumvent the legislation by proposing a joint venture with the Chrysler Corporation, but that too was ruled unacceptable in 1984.
Unlike other international conglomerates, Samsung is not headed by a holding company. The Samsung Group consists of 26 profit-making institutions (12 publicly traded) each of which hold substantial minority interests in the other Samsung companies. The activities of these companies are coordinated through an advisory board consisting of the various company chairmen.
With 61 offices in 40 countries the Samsung Group is the largest GTC in Korea today. Byung-Chull Lee, however, before his death in 1987, gradually relinquished control of the company to his third son, Kun-Hee Lee. This is highly unusual in Korea, where strong preferences are given to a family’s eldest son, but it has been suggested that Lee simply felt his third son was most capable of operating the company. Samsung’s success under Kun Lee, however, may not be guaranteed. The company still faces considerable competition in the world market and may sooner or later lose its advantage in labor costs.
Samsung Shipbuilding and Heavy Industries Co., Ltd.; Samsung Precision Industries Co., Ltd.; Samsung Electronics Co., Ltd.; Samsung Electronic Parts Co., Ltd.; Samsung Electron Devices Co., Ltd.; Samsung Watch Co., Ltd.; Samsung Semiconductor and Telecommunications Co., Ltd.; Korea Engineering Co., Ltd.; Samsung Corning Co., Ltd.; Cheil Sugar & Co., Ltd.; Cheil Wool Textile Co., Ltd.; Cheil Synthetic Textiles Co., Ltd.; Samsung Construction Co., Ltd.; Joong-ang Development Co., Ltd.; Samsung Petrochemical Co., Ltd.; Chonju Paper Manufacturing Co., Ltd.; Hotel Shilla Co., Ltd.; Chosun Hotel Co., Ltd.; Shinsegae Department Store Co., Ltd.; Dongbang Life Insurance Co., Ltd.; Ankuk Fire & Marine Insurance Co., Ltd.; Yong-in Farmland.
Government, Business, and Entrepreneurship in Economic Development: The Korean Case by Leroy P. Jones and II Sakong, Cambridge, Massachusetts, Harvard University Press, 1980.