Can Korean High-Tech Giants Find Their Creative Gene?

Cutting-Edge Hardware, Manufacturing Muscle No Longer Enough for Samsung, LG

By Kim Tong-hyung

Staff Reporter

South Korea has produced its share of world-beating technology companies, who took and perfected the old playbooks of their Japanese rivals to achieve supremacy in both parts and finished products.

Despite the success, however, it appears that the executives at these corporate beasts continue to be troubled by a deep sense of insecurity.

The most pessimistic comments come from none other than Lee Kun-hee, the son of Samsung Group's founder and the country's most influential businessman by any measure.

After returning as chairman of Samsung Electronics earlier this month, following a two-year hiatus forced by an ethics scandal, Lee claimed that Korea's biggest company is in for a ``real crisis,'' and that most of Samsung's flagship businesses and products will likely ``disappear'' within the next decade.

One may find the call for urgency puzzling, interpreting Lee's words merely as an attempt to soften criticism upon his return to the management helm. After all, it's not that the Koreans were worn and weathered by the economic turmoil of 2009, but quite the opposite.

Despite economists prating ad nauseam about how collapsed consumer spending in the United States and Europe would sink Korea's export juggernauts, Samsung Electronics and LG Electronics, another local high-tech giant, capped off last year with record profits.

The companies benefited from their breadth in products and established leadership in consumer electronics, mobile phones, semiconductors as well as digital displays. Their diversity in export markets also helped, as their growth in emerging economies like China more than made up for the lower sales in advanced nations.

All Eyes on Smartphones

Samsung Electronics, now the planet's biggest technology company ahead of Hewlett-Packard (HP), is the world's largest maker of flat-screen televisions, memory chips and liquid crystal displays (LCDs), while trailing only Nokia as the No. 2 handset vendor.

LG Electronics, which seems like a big threat to Samsung Electronics as Japanese powerhouse Sony, is the runner-up in the flat-screen television market and third in mobile phones, while another LG Group affiliate, LG Display, is second in LCDs. In memory chips, Samsung Electronics sees another domestic rival in the rear-view mirror ― Hynix Semiconductor.

The Koreans certainly silenced their skeptics last year, but how much longer they can rely just on manufacturing ability and hardware prowess to sustain their supremacy is a subject to debate.

There are concerns, shared by the industry watchers and the companies themselves, that the Korean high-tech giants may end up punching below their wealth should they fail to adjust to the transition from a software-driven market to manufacturing finished products.

Creativeness would be essential in up-and-coming products such as smartphones, Web-enabled televisions, tablet computers, and three-dimensional (3D)-related products, where a foundation in software and content would be just as important as ultra-cool appearances.

Both Samsung Electronics and LG Electronics are intent on hiring more software engineers and finding more ways to stimulate new ideas out of their employees, who are now pressed to rediscover their creative gene.

``The challenges that Samsung Electronics and LG Electronics are facing will be manifested most clearly in the market for smartphones, where Apple and Research In Motion (RIM) have already established leadership through the series of iPhone and BlackBerry handsets,'' said Ha Joon-doo, an analyst from Shinhan Investment Corp.

``Both Samsung Electronics and LG Electronics have been struggling to improve their weak positions in the smartphone market, and they will also have to compete with companies like Motorola, which is garnering attention for its clear focus on smartphones.''

Apple Envy

It appears like every technology company around the world wants to be Apple nowadays, and Samsung Electronics and LG Electronics are no exception. They are struggling to come up with products to compete with the iPhones of the world.

The failure is nowhere more evident than in their home turf, where Apple managed to sell more than 500,000 iPhones just four months into its Korean release, shattering the virtual duopoly by the Korean vendors.

The improving market share in smartphones, which provides a greater margin than conventional handsets, would be critical for those, who are hoping it's not too late.

Although Samsung Electronics' revenue from mobile phones last year was four times larger than Apple's sales from iPhones, the American company's operating profit was more than half of Samsung's, according to industry figures. The Korean company reported operating profit margins of 9 percent last year, compared to Apple's 36 percent.

In order to strengthen its focus on software and applications, Samsung Electronics is developing its own mobile platform, dubbed as ``Bada,'' and also expects to release a slew of smartphones based on the Google-backed Android operating system this year. However, it remains to be seen whether the company can ever foster a developer's network to allow it to better rival Apple.

LG Electronics, which doesn't plan to have introduce a smartphone platform, is betting heavily on Android. About 70 percent of the 20 or more smartphones released by LG Electronics are expected to be based on Android, industry sources said.

In memory chips and LCDs, the Korean companies are currently enjoying a more comfortable lead, but the expected emergence of low-cost producers from China is a looming, huge threat down the road.

For this year at least, LCDs expect to be a lucrative business for Samsung Electronics and LG Display, which combined made up more than 50 percent of the world revenue and production in the closing months of 2009. The demand for LCDs is expected to remain strong through the end of the year, driven by televisions and other consumer electronics products.

Although things are harder to predict concerning memory chips, the outlook remains positive for both dynamic random access memory (DRAM) and NAND flash memory chips.

The light-emitting diode (LED) industry also appears to be on the threshold of a new expansion phase, and the Korean companies are expecting to benefit from it.

In consumer electronics, Samsung Electronics, LG Electronics and Sony are also engaged in a three-way battle for supremacy in premium flat-screen televisions, while also testing the waters for the nascent 3D television market.