Why did Samsung Securities’ attempt to be Asia’s leader fall through?

By Kim Jae-kyoung

Early this year, there were two incidents in the securities industry that have attracted market attention. One is that Samsung Securities, the nation’s largest brokerage by market cap, withdrew its attempt to become Asia’s leader by downsizing its operation in Hong Kong.

The other is that Mirae Asset Financial Group received approval for its joint asset management company in China, Mirae Asset Hua Chen Fund Management, from China’s regulator. The approval came two years after it filed an application in China.

It may not be relevant to compare the two cases because one is a securities firm while the other is an asset management company. It is like comparing an apple with an orange. However, the two different cases offer the same message “no pain, no gain,” dropping a hint to local financial firms gearing up to expand overseas presence.

Samsung’s retreat from the Asia’s biggest financial market implies that it still has a long way for Korean financial firms to become a global player, demonstrating that they are lacking scale beyond Korea in many aspects, including strategies and talent management.

On the other hand, Mirae’s successful foray into the Chinese asset management market suggests that if you experience trials and errors but keep tapping overseas markets with a proper strategy, such efforts will finally pay off.

What went wrong with Samsung Securities?

In February, Samsung Securities, the brokerage arm of Samsung Group, announced a plan to restructure its Hong Kong operation after suffering huge losses. It reduced its workforce by 50 percent and shut equity sales and research operations there. It said that it will focus on brokering Korean equities for international buyers. It also withdrew from Singapore where it had five employees.

The case means much more than just the nation’s leading brokerage’s retreat from the Asia’s financial center due to poor performance. The incident, a move seen to dampen the global expansion by Korean securities firms, once again demonstrates obvious limits of Korean financial firms when it comes to globalization.

The affiliate of Samsung Electronics opened a branch in Hong Kong in 2001. It raised equity capital to $100 million in 2009 and turned it into a corporate entity with the aim of becoming a leading regional player in Asia by 2015 and one of the top 10 financial players worldwide by 2020.

To that end, it recruited professionals from global investment banks and increased the workforce of the Hong Kong unit to 130 in a bid to build a strong sales and research team. However, the unit reported losses of 16 billion won in 2009 and 44 billion won in 2010. For the first six months of 2011, the firm performed the worst among 93 foreign operations of 19 Korean brokerages with losses of $25.4 million.

The incident must have come as a big disappointment to Samsung Group, which has sought to support financial units as next-generation cash cow. Samsung Electronics Chairman Lee Kun-hee has called for group executives to step up efforts to transform financial subsidiaries into global players like Samsung Electronics.

The key culprit behind the Samsung Securities’ failure was unrealistic planning and overconfidence in Samsung brand, as well as unfavorable market environment. They were too aggressive in hiring high-paid talents and expanding research teams. The market downturn caused by the eurozone crisis worsened the situation.

“In practical case of Samsung, I think they must have built up too much team with high overhead cost before they catch enough real business to support that cost. That is a simple management failure of unrealistic planning,” said Ken Chad, managing director of Keilor Fields, a Hong Kong-based independent investment company primarily involved in arranging equity and debt finance for private companies.

He points out that in a highlycompetitive game in a market with a shrinking pipeline of chunky deals, the big bulge players like Goldman Sachs can afford to “go cheap” and undercut second and third tier limited distribution players.

An executive from a local securities firm points out that Samsung expanded its investment too rashly without fully understanding the market.

“They went to Hong Kong with a strategy not effective to win there both in terms of timing and execution. Besides, it appears that they were overconfident in the global brand power of Samsung,” he said, asking not to be named.

However, there are mixed views over Samsung Securities’ setback in globalization efforts. Some claim that it was meaningful lessons that will help Samsung increase a chance of success in its future attempt.

Although it came to no fruition this time, it was the first serious attempt by a local brokerage to compete with global players in one of the major financial markets, moving away from the traditional practice “flag planting” — just setting up shop in various geographies.

“In order to become a real global player, it is inevitable that you go through some failures. What is important is that you can take lessons from them and try to make it next time,” a partner at a global consulting firm’s Seoul office said on condition of anonymity.

“Due to unfavorable market environments, even global players were struggling to stay the course. I believe that Samsung’s efforts will pay off later,” he added.

In fact, Samsung Securities stresses that scaling down its Hong Kong unit does not necessarily mean that Samsung has given up its ambition to become a leader in the region.

“From the risk management perspective, it is natural that a financial firm controls the pace of a business when the market is not in favor,” said Kim Beom-seong, a senior vice president of the securities firm.

“It was painful but we decided to downsize the Hong Kong unit as the IB sector was in trouble. However, we will resume our IB business once the market situation turns for the better,” he added.

Mirae Asset’s strategic approach

Mirae Asset’s inroad into China’s asset management market was the first among Korean asset managers and the third among Asian financial firms, just behind the Development Bank of Singapore and Japan’s Mitsubishi Bank. The approval came eight years and three months after it opened its Hong Kong subsidiary.

Although Mirae is still generating only a small portion of revenue from overseas operations, its strategy are seen as the right approach as the firm came up with a long-term roadmap and has stuck to it despite many challenges.

Following the global financial crisis in 2008, Mirae was criticized for the group’s aggressive investment in emerging markets, which were hit hard by the unprecedented turmoil. But the group did not pull back and continued investing in emerging markets while most other players balked at investing abroad.

Although Mirae experienced ups and downs in its globalization move, the strategic efforts are now paying off. Together with its entrance in the Chinese asset management market, the firm’s takeover of Titlist, the No. 1 golf ball brand, in 2011, was a good example showing how Mirae’s consistent efforts turn into results.

“No pain, no gain. We got an approval from China’s regulator 10 years after we first planned it. If you want to succeed in globalization, you have to overcome many challenges until you bear fruit,” Im Myoung-jae, an executive director of Mirae, said.

Samsung Electronics in finance sector?

In order to create Samsung Electronics in the financial sector, there are two things required. First, Korea’s financial firms should see globalization as a journey, not a project. Even if they make a mistake like Samsung Securities, they should not stop there. They have to take a lesson and keep trying.

Steven Chai, the co-head of the Boston Consulting Group’s Seoul office, points out that the key to successful globalization is not to do it over the short term but to take it one step at a time.

“Small setbacks should be part of the expectations. Globalization should be looked at as a journey and not as a project,” he said.

Another thing that should be in mind is that domestic financial firms should be made independent from both financial authorities and manufacturing firms.

Mauro F. Guillen, a director at the Lauder Institute at the Wharton School, said that influence by authorities and chaebol should be accountable for domestic financial firms’ poor competitiveness. He suggests that Korea model after Germany and Spain.

“Even when they (banks) were privatized, they were heavily influenced by the government. And then the chaebol were allowed to enter brokerage and other financial services. Banks in Korea, or financial services in general, are not as sophisticated as manufacturing,” he said.

“Note the difference with Germany and Spain, for instance. In these two countries banks were made independent from manufacturing firms, they were never nationalized, and they became powerful and certainly decisive in providing firms with financing. Today Deutsche Bank is a powerhouse; so is Santander of Spain.”