Buying the best quality and most up to date smartphone can be a hard choice.
But why?
Because there are really only two options: Apple’s iPhone or Samsung’s Galaxy.
The renowned Samsung Group (KRX: 005930) is Korea’s largest ‘chaebol’ (conglomerate).
To people outside Korea, Samsung is purely a technology company. However this family-controlled business operates in a wide spectrum of fields, from engineering to chemicals.
The diagram below illustrates the complexity of the Samsung Empire.
In fact, an average Korean could be brought into the world by Samsung at a Samsung owned medical center, work at a factory owned by Samsung and leave the world by Samsung funeral undertakers.
This is the reason why experts believe that the Korean economy could collapse if Samsung was to falter.
Samsung’s historic ploy
Lee Byung Chul, a pioneering co-founder of Samsung led the way for the companies’ growth. In the 1960’s an authoritarian leader, Park Jung Hee, ruled Korea. However Lee Byung Chul convinced him to give lenient tax breaks to companies.
Park’s pioneering spirit ultimately influenced the president. In-turn a lot more companies began investing in new business.
Samsung, formally a mere sugar and flour producer expanded rapidly, diversifying its business more and more.
Samsung cheaply acquired rival properties that were confiscated by the government. Expanding quickly into numerous unrelated sectors such as: real estate, banking, insurance, retail and lastly electronics.
During the 1970s and 80s, development in heavy and chemical industries was prioritized by the government.
A strict licensing arrangement was put in place by the government. Leaving only selected companies, like Samsung, able to operate in these “key” sectors.
This lead to the creation of Samsung Petrochemical, Samsung Semiconductor, Samsung Heavy Industry and more.
Korea’s rags to riches story
Throughout the post-war construction era, many chaebols kept a close relationship with the government, as did Samsung.
Samsung, a key player in helping to rebuild Korea’s economy, was rewarded as the government enabled them to grow stronger and more profitable.
The reward was in the form of tax breaks, cheap bank loans, reduced export-interest rates, allocation of foreign aid materials and government contracts. Growing Samsung’s corporate power significantly.
Korea was one of the fastest growing economies globally during a 30-year spell from the 1960s to 1990s, Conglomerate like Samsung, LG and Hyundai all spearheaded this growth.
Samsung’s revenue and Korea’s economy have seemingly been intertwined ever since, illustrated by the Kospi index below.
It’s obvious an ‘I’ll help you, you help me’ relationship has occurred over the years.
How did the governments favoritism pay off for Samsung?
Throughout the 1960’s through to 1990’s, the government drastically reduced export credit interest rates. This gave Samsung a huge Launchpad to export and grow in turn.
The “chaebols” of Korea, like Samsung, used these cheap loans to record huge profits supplying materials to the Middle East during their construction boom.
1987 marks an important year in Samsung’s history, the power was handed from father to son. In the 1990s and 2000s, Samsung’s new leader forcefully began investing in exporting and electronics, paving the way for Samsung Electronics.
The Asian financial crisis of 1997 even failed to halter Samsung’s growth.
Shortly after the crisis, the GDP of Korea had tripled, the intertwined nature of Korea’s GDP and Samsung’s growth was again noticeable as it surged to become the biggest Korean conglomerate, as shown below.
Samsung has been the knight in shining armor, first pulling the country out of post war devastation, to saving it from the chaos of the financial crisis 60 years after.
The modern tech giant
As of 2016, Samsung controlled 20 domestic subsidiaries as well as 149 overseas subsidiaries operating in manufacturing, sales and R&D sectors.
Today, Samsung is a massively diversified and powerful company accounting for approximately 15% of Korea’s total GDP.
Samsung has helped put Korea on the world stage and made it a prosperous economy as demonstrated below.
How does Samsung stay ahead of its competition?
In this day and age, you have to innovate to survive, more so than ever in the tech industry.
For Samsung to stay ahead of competition, it spends an awful lot of money. Its R&D budget is one of the biggest in the world.
This illustrates Samsung’s ambition to innovate in order to gain sustainable growth.
Samsung’s commitment to R&D is certainly being rewarded. The chart below illustrates the positive correlation between Samsung’s R&D spending and revenue.
US$18 billion has been earmarked by Samsung to invest in its chip business whilst also developing new projects such as international R&D hubs focusing on developing future convergence technologies, artificial intelligence and security technologies.
Samsung’s stock price is continuing to rise, even when incurring huge debt in striving to achieve its ambitious goals.
In our coming daily we’ll take a trip to paradise and take a peek at the Philippines’ leading conglomerate, Ayala.
