End of an Era for Samsung (and the Start of Uncertainty)

There has been an endless news cycle in 2020 that continues to ramp up as the year ramps down, so it is understandable that some of the softer investing news slips by without the coverage it would usually warrant. The death of Lee Kun-hee on Oct. 25 was one such event that would likely have garnered more interest if it hadn’t occurred in the lead-up to a hotly contested election taking place during a global pandemic. Despite all this, it is worth marking the impact that Lee had on Samsung Electronics Co., Ltd. (SSNLF) and the Samsung conglomerate as well as what lies ahead for the company and the family dynasty.

Building Samsung into an Electronics Giant

Lee Kun-hee officially took the role of chair of Samsung Group after Lee's father, the company founder, Lee Byung-chull, passed away in 1987. Although Samsung has only just now seen its third chair, Lee Jae-young, Lee Kun-hee's own son, in each case the son of the current chair began taking greater responsibility within the business long before the largely symbolic transfer of the chair title. Samsung under Lee Kun-hee's father was a trading company that collected a diverse set of businesses that generated cash to buy more businesses. This grow for the sake of growing strategy was perfectly timed with what would be the golden age of conglomeration in Asia.

Starting in the 1960s, Lee Kun-hee was instrumental in pushing Samsung toward the electronics manufacturing sector. This allowed Samsung to establish an early mover advantage in semiconductors and telecommunications. When Lee officially took over for his father as chair, Samsung had a global electronics supply chain that allowed the company to overtake more established Japanese rivals in the booming LCD television business line. Lee also slimmed down the conglomerate to focus electronics throughout the 1990s, in addition to ongoing efforts in engineering and chemicals. Samsung's focus later helped it overtake Nokia Corporation (NOK) as the world's largest maker of mobile phones in 2012.

Lee Kun-hee's legacy is not without issues, however, as the company lost a patent battle with Apple Inc. (APPL) in the same year it overtook Nokia. More problematic were the domestic scandals Samsung faced around bribery and allegations that some of it was undertaken to ensure succession of another Lee as chair. In the face of these issues, Lee left Samsung briefly from 2008 to 2010. He returned and served as chair for another four years before a heart attack in 2014. From that point on, Lee's son Lee Jae-young has been the real leader of Samsung. This became official with Lee Kun-hee's death, and Lee Jae-young has promised that he will be the last dynastic chair of the Samsung Group. 

The Challenges Ahead for Lee Jae-Young

Lee Jae-young is now in charge of the profitable business his father built to have amazing expertise in electronics manufacturing. To this day, semiconductors continue to generate revenue for Samsung, as do display panels and, unsurprisingly, mobile communications. The biggest challenge for Samsung Group's third chair is all about what Samsung doesn't have – its own software platform. Samsung depends heavily on update cycles for technology because it is a hardware company at its core. The software for its flagship phones are all provided by Alphabet Inc's (GOOGL) Google, and none of Samsung's other products integrate into a shared platform as seamlessly as its biggest competitor, Apple. 

Add to this the fact that Google is moving ahead with manufacturing its own products built specifically for its platform, and it seems inevitable that Samsung must improve its software and services around the tech or face the risk of being part of a supply chain for other tech companies to host their cash-generating platforms on. Although the death of Lee Kun-hee marks a largely symbolic transition for the tech giant, Lee Kun-hee's shadow still lies over Samsung with its focus on hardware while other firms have moved to products and platforms. Addressing this challenge is now Lee Jae-young's job, and Samsung's investors no doubt hope the pivot will accelerate now that the transfer of power is official.

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