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Masters Of the Digital Age

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Samsung has trounced its rivals by spinning out gadgets like televisions, VCRs, cameras and phones at a dizzying pace. But can the company come up with a killer app of its own?
Yun says speed is essential if you're selling sushi or high technology
By Rana Foroohar and B. J. Lee
NewsweekOct. 18 issue - Lee Jong Jin, 51, is no couch potato. but lounging in his apartment overlooking the mountains of Seoul, the international trader has little reason to leave his sofa. As he watches an interactive game show, he uses the remote to send in answers. In a corner of the 50-inch plasma screen, he can link to his online bank, or control his air conditioner and cooker. Lee is one of thousands of Korean consumers involved in trial runs of Samsung Electronic's so-called Home Network, which allows digital products to talk to each other. If Samsung has its way, millions around the world will be running their homes—from the comfort of their couches—within a few years.

Samsung has not been lounging. Over the past decade it has moved from copying rivals like Sony to become the world's most profitable consumer-electronics company. Samsung leads the global market for color TVs, VCRs, liquid-crystal displays and digital memory devices. It's second to Nokia in cell phones, and catching up to Sony in DVD players. Since 1999 revenues have doubled, and profits have risen 20 times on the back of a unique strategy. "To catch up with the early birds, we had to be the fastest in commercializing original technologies," says CEO Yun Jong Yong.

Speed is driving Samsung—and Asia generally—to the forefront of the digital age. This year will likely be the first in which digital electronics—from high-definition TVs to smart phones—will outsell analog precursors. In the digital world all these products will be networked to each other—the "convergence" so hyped in the 1990s—creating the sort of "smart" living space imagined in science fiction. That's the idea, anyway. The change, says analyst Keith Woolcock of Westhall Capital in London, will be "the biggest event in technology for the next 10 years."

Asian competitors are sprinkled throughout the field, as multinationals race to control the digital age. While Japan is losing its lead in videogames, and efforts to build wired biotech hubs founder everywhere except Singapore, India is coming on fast in pure research and Taiwan in computer chips. But no company, perhaps anywhere in the world, has anticipated or profited from the early digital age more deftly than Samsung.

The race is drawing in companies from all fields, blurring old battle lines. Consumer-electronics companies are teaming with software giants while computer brands like Dell and HP are making TVs and redefining themselves as consumer-electronics companies. Those slow to converge get run over. Kodak is belatedly reinventing itself to catch the digital-camera boom. Motorola has lost market share to rivals adding snazzy digital accessories, such as cameras to new phones—rivals led by Samsung. "They definitely saw the digital age coming," says Gartner Research principal analyst Paul O'Donovan. "Five years ago Samsung was already at the leading edge of thinking."

Samsung makes chips, screens and other building blocks of the digital age, as well as the gadgets they run on. That allows Samsung to sell components to everyone and—so far—to avoid costly fights over who will control the next big device or standard (remember Betamax?). While Sony battles Microsoft and Nokia to control proprietary standards for game players and unleash "killer apps," the effort has yet to secure its place in the digital future. Samsung, meanwhile, waits for others to develop technology; then it improves on it, and pumps out a greater variety of finished products faster than anyone else. Yun calls speed the key to all perishable commodities, from sushi to cell phones. "Even expensive fish becomes cheap in a day or two," he says. "For both sashimi shops and the digital industry, inventory is detrimental. Speed is everything."

It's a model well suited to today's lightening-fast business cycles. Samsung didn't invent the first cell phone but it produces the largest variety: 100 new models a year, versus Nokia's two dozen. It didn't pioneer "flash" memory used in MP3s or digital cameras (Toshiba did) but now owns this extremely profitable market. It didn't develop CDMA mobile-phone technology (that was Qualcomm) but it commercialized the standard in Asia.

As a result, it has overtaken archrival Sony in profits and total stock-market value. Sony ruled a slower age when it could bring out a new gadget like the Walkman as a luxury item, and gradually lower the price and widen the market. Now, since the rise of cheap Asian manufacturing since the 1980s, companies need to bring out a constant stream of new products that sell immediately at high volume for a relatively low price, and are quickly displaced by the next new thing. Samsung is the king of this age—the fastest-growing brand name in the world, according to Interbrand consulting.

Its rise dates to the mid-1990s, when chairman Lee Kun Hee made the decision to transform Samsung from a second-tier manufacturer into a first-rate brand. Upset by a disturbingly high rate of product breakdowns, he launched a dramatic, even melodramatic, quality drive. A selection of products that had drawn complaints were displayed in the corporate lobby. Cell-phone division head Lee Ki Tae was ordered to watch as 15,000 inferior cordless phones made under his supervision were crushed by a bulldozer. "It made me obsessed with quality," says Lee, who now insists that phones be thrown against walls and run over by trucks in test labs.

When the Asian financial crisis hit in 1997, Samsung was already in reform mode. It shut 32 unprofitable businesses and axed 40 percent of its workforce. The one thing it didn't cut was R&D. While rivals trimmed back during the slump, and again after the collapse of the dot-com bubble three years later, Samsung seized these opportunities to boost research budgets in growth markets like semiconductors and LCD screens.

As the economy improved, the price of these digital commodities rose, and Samsung had the capacity and quality to meet demand. Now, it is on pace to hit a record $12 billion profit this year, which would make it the second most profitable technology company after Microsoft. "I don't know what the Korean equivalent of chutzpah is, but the board of Samsung have it in spades," says Woolcock.

Today, nearly a quarter of Samsung's 88,000 employees are researchers, churning out digital gadgets with a twist—color LCDs on cell phones, phones with PDAs. "They've been incredibly prolific, just putting a lot of arrows up into the air, and seeing what hits," says Apax Partners venture capitalist Paul Vais. Samsung's "show of force" at least year's consumer-electronics show in Las Vegas convinced Vais that "the Koreans are going to rule the earth."

Vais and others credit Samsung's "Darwinian" culture. Traditionally, companies like Sony have protected divisional fiefdoms—TV guys make TVs—but not Samsung. It encourages competition between four main divisions—semiconductors, telecommunications, digital media and flat-screen panels—which spurs innovations. A recent contest between the digital-camera team and the camcorder unit led to the development of DuoCam, a product that combined both. The four division heads are all in their early 50s and in the running to be the next CEO, heightening emotions. "Our diversity doesn't always mean synergy," says one senior executive. "Often, it means a bloody confrontation."

The main battlefield is the dull, gray, five-story Suwon research facility outside of Seoul, known as the "VIP center." It brings together top engineers, designers and marketers in brainstorming sessions that can trigger shouting matches over how to make the best electronic gadgets. Ph.D.s get their say (Samsung employs 1,500 of them), but innovation must be practical. "Our mission is to consumerize digital technology," says vice president Park Seung Soo, "and that means finding economies of scale." Employees working on products as varied as cell phones and freezers are encouraged to devise common parts. And they do. In 2002, Samsung introduced 30,000 new products—up from 18,000 two years before—with the same number of parts (67,000). The cost savings are huge.

There are, however, a few smart naysayers. Most of Samsung's profits come from products like LCD screens on which margins are beginning to fall under competitive pressure, particularly from China. In short, it's getting tougher for Samsung (as for Sony) to justify higher prices on the strength of quality.

So how to fight back? Some experts say Samsung will be overtaken by cheaper rivals unless it shifts strategies, and there are signs that it is. Over the past year it has begun acting as a first mover, seeking to set new industry standards in new partnerships—with Sony on LCD screens, Toshiba on memory devices, IBM on chips and Microsoft on operating systems for digital appliances. Those who doubt that Samsung can remain digital master of all things insist it needs a killer app of its own. On the other hand, many experts say the key to the digital future will be simplicity—figuring out how to make all these gadgets easy to use. That's a battle that would play to Samsung's greatest strengths. And back at the VIP Center in Suwon, Samsung engineers are already competing to make it happen.

© 2004 Newsweek, Inc.