Samsung was not always a sleek paragon of high tech and cutting-edge design. In fact, its products were so poorly made that the company was at one time dubbed "Samsuck" in the English-speaking world and among expats living in Korea.
Samsung was founded in March 1938 by Lee Byung-chul in the port town of Taegu, Korea. As the company web site boasts: "Initially, his business focused primarily on trade export, selling dried Korean fish, vegetables, and fruit to Manchuria and Beijing."
So how did a food trading company get involved in electronics? Brute force, basically. The long-reigning South Korean President Park Jung-hee (term: 1961-1979; father of current president Park Geun-hae), secured international loans in the 1960s and 1970s to help turn Samsung into a major manufacturing concern. Until the 1980s (before it started becoming known for its microchip-manufacturing prowess), Samsung was known as a maker of cheap of household items – electric fans, microwaves – that didn't work well to begin with and broke quickly. As Korean business professor Chang Sae-jin wrote in his book "Sony vs. Samsung," the Samsung-made electric fan "was so poorly designed and manufactured that even lifting it up with one hand broke its neck." (Related: Apple and Samsung Head to the Supreme Court Tomorrow (AAPL, SSNLF)
The company's watershed moment, its rags-to-riches, idiot-to-savant transformation, came under the helm of legendary Samsung CEO Lee Gun-hee (currently age 74), who took that post in 1987, following the death of his father, Samsung founder Lee-Byung-chul. Lee Gun-hee was forced to resign in 2008 following a bribery scandal, but during his term he had implemented one of the most radical company shifts in global business history. He brought his company to surpass Sony's market cap (in 2002) as well as its brand value; due to his legacy, Samsung has since 2011 earned/produced some 20% of the South Korean GDP.
Great News: Nobody Has Ever Heard of Us
In 1993, Lee Gun-hee got fed up with his company's reputation for shoddy products and famously announced to his employees, "Change everything except your wife and children," meaning that the company was going to undergo a significant top-to-bottom, inside-out transformation. He didn't just come up with slogans. The measures he took were drastic and have become the stuff of legend.
Chang believes 1995 was the year of reckoning for Korean electronics companies wishing to engage in self-criticism. “Goldstar couldn’t do anything about [its reputation], so they dropped the name ‘Goldstar’ and came up with a new brand called LG.” As for Samsung, “They did market research and came up with good news: Nobody had heard of Samsung.” So the name stayed, even as they reinvented themselves, in what has become a textbook case of successful rebranding strategy.”
Around that time, as part of its new manufacturing strategy, Samsung started making mobile phones. But it couldn't even get Koreans to buy them; in 1993, Samsung phones were fourth-place in their own nation. Overseas, they were sold at places like Wal-Mart (WMT) practically as burner phones.
In 1995, when it came to his attention that some of the early-model Samsung phones were defective, Lee Gun-hee paid a visit to the manufacturing plant where the phones were made. He demanded that every single Samsung mobile phone in the factory – some 100,000 to 150,000, depending on which account you believe – be brought before him and placed on the factory floor. He then had the factory staff set the pile ablaze. The message was clear: These phones are worthless and we are starting from scratch. From that phone funeral pyre, Samsung emerged as the world's top-selling mobile phone manufacturer.
A Road Diverged in the Wood
Perhaps the best decision Samsung (and Lee Gun-hee) ever made was by commercial necessity, which didn't make it any less shrewd. It was the decision to go digital over analog at a time (the early to mid '90s) when it was genuinely not clear which of those two formats would win. For consumer electronics such as TV and VCRs, Europe and parts of Asia were leaning toward digital, whereas the US seemed to be stuck in analog. Remember that the US didn't go fully digital, TV-wise, until the Obama administration. And back in the '90s, the US was by far the most important market for any product – China had not yet become an economic powerhouse.
In other words, Samsung would not have been idiotic to adapt a manufacturing strategy that followed the demands of the US market: i.e. make goods that used analog technology.
But, it couldn't. At least, not efficiently.
As "Sony v. Samsung" author Professor Chang Sae-jin told me in an interview, "“One of the more important factors of Samsung today is that there was a revolution from analog to digital. If Samsung had tried to compete on the analog stage, it would be impossible to catch up with Matsushita or Sony, because in the analog world experience matters. There were several elements of engineering – mechanical and circuitry – in which Samsung was behind."
Though Samsung was behind in analog technology, it was certainly not behind in digital technology. No one was behind, because at the time it was new for everyone – a level playing field. Samsung had targeted an area where it didn't have to play catch-up.
The advantage of developing digital technology for a company impatient to change gears is that it operates in terms of ones and zeros – nothing in between. A switch is either on or off (which is what the ones and zeros represent). A microchip either works or it doesn't; there are no qualitative differences.
That is how Samsung became the world's leading manufacturer of semiconductors. Even Apple, Inc. (AAPL)'s iPhones, the archrival of the Samsung Galaxy line, use Samsung chips.
Ashes to Ashes
And speaking of phones, Samsung phones currently hold a 28.8% market share in the US, ahead of Apple's 23%. All Samsung had to do to ensure its global reign, basically, was to not make phones that had a possibly life-threatening defect.If you thought the the Galaxy Note 7 was the first Samsung Electronics Co. (SSNLF) phone to catch fire, you were mistaken. Its combustibility was demonstrated once before back in 1995, when some 150,000 Samsung phones caught fire. Except that in that incident, those phones did not burn by accident. They were burned deliberately. And the person who set the fire was none other than the Samsung chairman himself, legendary Korean titan of industry Lee Gun-hee. (Related: Paul Singer's Demands on Samsung Show Ignorance of the Chaebol System.)
Which brings us to September 2016, when reports began to surface that Samsung's Galaxy Note 7 phones were exploding. Attempts to offer replacement phones ended in failure, with reports of replacement phones overheating as well. The company announced on Oct. 11 that it would cease production of the Note 7 altogether. When on Oct. 14, the Federal Aviation Association and the US Department of Transportation announced that the phones would be banned on all flights, this was a matter of unprecedented embarrassment in the entire history of mobile phone technology.
What's Samsung's future? Hard to be sure. The parent company is highly diversified with many interests outside the mobile arena; on Nov. 14, for example, it announced plans to acquire U.S. audio company Harman International Industries, Incorporated (HAR) in an all-cash deal worth $8 billion. It could easily survive even if it were to shut down its mobile division – which it absolutely will not. Most likely, its mobile division will have to completely retool itself. Lee Gun-hee is no longer CEO, but another phone bonfire might be in order.