Lee's jail sentence casts cloud on Samsung's business

Leadership vacuum may hamper investment decisions amid growing competition

By Kim Bo-eun

Samsung Electronics Vice Chairman Lee Jae-yong enters the Seoul High Court for a retrial hearing of a major bribery case involving him, Monday. / Yonhap

The country's largest conglomerate has hit a major setback after an appellate court handed a prison sentence of two-and-a-half years to Samsung Electronics Vice Chairman Lee Jae-yong in a re-hearing of a major bribery case, Monday.

The court ruling puts the tech giant back into a leadership vacuum hampering major investment decisions in new businesses, which many expect will hurt the company's global competitive edge

Right after the ruling, the Korea Chamber of Commerce and Industry (KCCI), the country's top business lobby group representing the interests of conglomerates, said it had no official comment regarding Lee's sentence. The Federation of Korean Industries (FKI), another business lobby, released a statement expressing regret over the court's decision.

"Lee's sentence could put Samsung and the country's economy in jeopardy given its position in contributing to the Korean economy and its global recognition. A leadership vacuum would delay execution of business decisions, which could cause Samsung to lag behind its global peers," the FKI said. Other industry officials said Lee's imprisonment will keep Samsung from going forward with large-scale investment plans, at a time when competition is heating up in the chip industry and major rivals are stepping up their game.

Pending legal risks over the tech giant have put the brakes on key investment decisions in past years.

Lee was convicted and imprisoned in 2017 over charges of bribery involving former President Park Geun-hye and her confidant Choi Soon-sil. He was released in 2018 after the Seoul High Court suspended the sentence.

The top court, however, ordered a re-hearing of the trial in 2019, stating Lee should be found guilty of some bribery charges excluded from the previous court ruling.

Lee was said to have bribed Park and Choi to smooth the transfer of power from his father to him.

The jail sentence comes at a crucial point given Lee is now on his own leading the country's No. 1 conglomerate, after his father Lee Kun-hee passed away last year.

Lee appeared to have started 2021 with the determination to take Samsung to new heights. He spent the first week of January paying on-site visits to check the company's foundry facilities and latest technologies in artificial intelligence as well as the development of 6G services.

Upbeat forecasts were backed by growing demand for chips and display panels. Samsung Electronics recorded an earnings surprise in the third quarter of 2020 and showed a solid performance in the fourth quarter as well. The tech giant posted 35.95 trillion won in operating profit in 2020, up 29.5 percent from the previous year.

Lee will be jailed at a crucial time point amid forecasts of a semiconductor super-cycle. There have been expectations that the conglomerate would invest 12 trillion won in non-memory facilities this year.

But even if the investments are carried out, they would fall short of the scale of investments by its Taiwanese foundry chip-making rival TSMC, which has vowed to pour up to $28 billion (31 trillion won) into advanced processor technologies.

The decision on investments looms at a time when Samsung is preparing to challenge TSMC. The conglomerate pledged earlier to invest 133 trillion won by 2030 to become the world's No. 1 semiconductor powerhouse.

M&As with tech companies is another key task for Samsung. Its last large-scale M&A was the $8 billion acquisition of U.S. connected car systems provider Harman in 2016. This was before Lee became embroiled in his legal battles.

SK hynix, meanwhile, made a deal to acquire Intel's memory business for $9 billion last year.

The tech giant is also battling for a greater market share in 5G smartphones, as it currently lags behind Huawei and Apple.

Samsung continues to face uncertainties given Lee will continue to go to court for trials in other cases. Lasting uncertainty will likely weigh the group down.

No leniency

Calls had grown for leniency, given Samsung's role in the local economy. KCCI Chairman Park Yong-maan submitted a petition last week calling for the court to grant leniency for Lee.

"Samsung's market capitalization accounts for 30 percent of Korea's market cap, and the conglomerate pays 20 percent of the total amount of corporate tax collected and employs 300,000 workers," said Kim Dae-jong, a professor of management at Sejong University. "This shows the role Samsung is playing in the local economy."

The professor added, "Samsung plans to invest 133 trillion won over the next 10 years, and this would drive the growth of related industries as well. It is crucial for such a conglomerate to have an owner-chief present as only that person is able to make major investment decisions."

Last year, Lee set up a compliance committee to ensure Samsung's compliance with the law, following a court order. There had been expectations this could alleviate Lee's sentence, but the Seoul High Court stated it could not recognize the effectiveness of the committee.