Can Samsung’s new leader dethrone Apple?
Even for the de facto head of one of the world’s largest family-controlled business empires, Jay Y. Lee, vice chairman of Samsung Electronics (SSNLF), has had a lot on his plate lately. On the same Thursday morning in early June that he breakfasted in Seoul with J.P. Morgan (JPM) CEO Jamie Dimon, for instance, Lee learned that the $26 billion New York hedge fund Elliott Management had launched a surprise attack against him. Elliott wanted to stop Lee from merging two publicly traded pieces of his family’s network of companies, potentially foiling Lee’s plan to consolidate control.
A few weeks later, on the day he turned 47, Lee gave his first-ever nationally televised speech in South Korea to offer an apology—including a symbolic bow—because the Samsung Medical Center in Seoul had failed to contain an outbreak of the deadly Middle East respiratory syndrome virus known as MERS. Not long after, the scion of the family that runs Korea’s mightiest conglomerate led a team of executives on a fact-finding mission to Silicon Valley. An avid golfer, Lee found time to pop down to Pebble Beach for a members-and-guests-only tournament at the exclusive Cypress Point Golf Course with his pal and host Jerry Yang, the Yahoo (YHOO) co-founder. Days later, after returning to Korea, he jetted back to the U.S. to hobnob with other global tech leaders at the annual Allen & Co. gathering in Sun Valley, Idaho. In mid-July, Lee found out that he had prevailed in his heated six-week battle with Elliott, and that shareholders had voted to approve the merger.
A veritable prince of the realm in Korea and supremely well connected among the global elite, Lee, who has a net worth of around $8 billion, nevertheless is not widely known outside his native land. At home, Lee’s life as a single dad and the next-generation leader of Samsung makes him a boldface name. Even in Korea, however, it isn’t well understood exactly what he does. That’s partly because he has long been overshadowed by his larger-than-life father, Lee Kun-hee, chairman of the Samsung Group.
The younger Lee’s profile is about to grow dramatically. In recent months he has made himself more visible, implicitly acknowledging that he is now the leader of the Lee clan and its business interests. The elder Lee, age 73 and Samsung’s chief for nearly 30 years, suffered a heart attack 14 months ago. He has been hospitalized ever since—at the same Samsung-owned facility where the MERS crisis began—and his condition is believed to be so grave that he cannot communicate and isn’t expected to recover. In other words, the man who built Samsung into a global powerhouse in everything from semiconductors to TVs to mobile phones has all but left the scene. And he has been succeeded—in actions, if not yet in title—by his relatively untested only son.
So just who is Lee Jae-yong, known to his Western friends as Jay Y. Lee? Simply speaking, he is everything Samsung wants to be—but isn’t yet. One of three vice chairmen of Samsung Electronics, the conglomerate’s largest company, Lee runs no single business yet holds great sway over all of them. (He has two younger sisters who run businesses within the group; a third sister committed suicide in 2005.) He is the most international Samsung executive—he speaks fluent Japanese and English, and travels widely—yet is thoroughly a product of his Korean heritage. Just as Lee glides between Asian and Western worlds, his goal is to move Samsung beyond its Korean roots without losing the attributes that led to its success.
The generational transition comes at a critical time for Samsung. Its cash-gushing smartphone business is tops in the world by market share but has recently found itself squeezed by the vastly more profitable Apple on the high end and a bevy of price-slashing Chinese competitors below. As well, membership in the privileged club of Korean conglomerates, known (in both singular and plural) as chaebol, isn’t quite what it used to be, what with a new era of shareholder activism and public revulsion at the behavior of elites.
Lee doesn’t grant on-the-record interviews to the media, and he and Samsung’s top executives are exceedingly sensitive about upstaging the ailing patriarch, in keeping with the Confucian tradition of respect for elders. At the same time, Samsung is a notably image-conscious company, and it is well aware of the intensifying scrutiny of its all-but-anointed leader. With that in mind, Samsung recently gave Fortune unusually deep access to various corners of its domain. The company also made available the CEOs of two key companies in the Samsung Group. Both executives spoke openly about Jay Y. Lee’s leadership and the challenges he faces.
Among Lee’s priorities, these executives and others say, are to simplify a dizzyingly complex corporate structure, to prod Samsung’s leadership to be creative as well as relentless, and to globalize what has stubbornly remained an essentially Korean company that just happens to sell products around the world. Lee and his coterie of powerful executives know there will be plenty of resistance to these changes. After all, Samsung has successfully employed its traditional “me-too” approach for decades—jumping into new lines of business and out-executing the competition until it becomes the market leader. In the process Samsung has grown into one of the world’s biggest and richest corporate kingdoms. With $195.8 billion in revenue last year, Samsung Electronics ranks No. 13 on this year’s Global 500—the largest tech company on the list and two spots ahead of Apple (AAPL). Construction and trading business Samsung C&T (No. 441) and Samsung Life Insurance (No. 456) are also ranked in the Global 500. Together, the Samsung Group has more than $320 billion in sales from dozens of separate companies.
But the fear inside Samsung’s executive suite is that its success, especially in the realm of technology, could be fleeting. Leadership in tech markets tends not to last, as Samsung’s recent dip in smartphones shows. A sense of healthy paranoia pervades Samsung that an insular mentality and a reliance on commodity products won’t serve it as well in the future as they have in the past. Samsung executives frequently reference the downfall of once-powerful Japanese electronics rivals such as Sony and Sharp.
To avoid such a fate, Samsung today is hyperfocused on innovation—with an emphasis on game-changing advances. The company has long pushed the envelope in everything from semiconductors to smartphones to televisions. For example, its smartphone chips are considered superior to Intel’s (INTC). What it has not achieved is the creation of new industries, à la Apple. To increase the chances of a major breakthrough, Samsung Electronics spent nearly $14 billion on research and development last year—or easily more than twice the $6 billion that Apple devoted to R&D in 2014.
Money alone won’t achieve what Lee wants, however. To keep Samsung growing and to challenge Apple in the eyes of customers, Lee and his key advisers believe, the company must be willing to embrace both new ideas and new leaders from outside Korea. “The biggest challenge that we have is that there are a lot of people still, the old-timers of Samsung, who don’t really understand what ‘global’ means,” says Choi Chi-hun, CEO of Samsung C&T. “Jay is a very global person. He understands this.” Understanding is one thing, of course. Changing an organization with nearly half-a-million employees is another thing altogether.
The Power and the Glory
At the beginning of 2015 a group of senior executives in Samsung Electronics’ TV manufacturing division, which is No. 1 in market share with more than 20% of global sales, held a meeting attended by Jay Y. Lee. The vice chairman, as he is typically referred to by Samsung’s more formal officials, made some mildly critical comments about the division’s marketing efforts, according to a version of the meeting that has made the rounds of Samsung’s top managers. Thirty-year veteran Park Gwang-gi, an executive vice president and the unit’s head of strategic marketing, was said to be so rattled by Lee’s criticism that he immediately resigned his position.
The anecdote is notable because it helps illustrate the power that Samsung’s founding family wields despite the complicated chain of ownership and command inside the conglomerate. For starters, operating authority resides in individual business units, not headquarters. What’s more, the Lee family holds a relatively small stake in Samsung Electronics and even smaller positions in other Samsung affiliates. Further confusing things, it can be a challenge to define just what Samsung is—or isn’t. Consider a disclaimer Samsung posts on a corporate website: “Each company within the Samsung Group is an independent legal entity. Samsung Group is not a legal entity. Samsung Group is a term to conveniently refer to a group of companies that are tied together by their corporate history.”
That corporate history dates back some eight decades, to when Jay Y. Lee’s grandfather, Lee Byung-chul, started a food trading business in 1938. Today the chaebol comprises 67 distinct businesses whose product lines range from apparel and amusement parks to shipbuilding, washing machines, and financial services. Because of its market-leading positions in three massive industries—smartphones, memory chips, and TVs—Samsung Electronics is by far the most important part of the conglomerate, accounting for two-thirds of group revenues and an even greater portion of its profits.
Samsung owes its rise from middling chaebol to global powerhouse to the achievements of the current chairman Lee. He urged his executives to invest aggressively in order to gain scale and market share—regardless of short-term profits. “Our chairman consistently made the decision to invest regardless of the business environment,” says Kwon Oh-hyun, a Samsung Electronics vice chairman and head of its semiconductor business. Kwon, who earned a Ph.D. in electrical engineering from Stanford before joining Samsung in 1985, says there was a widespread belief back then that the elder Lee “was crazy and would bankrupt the company” with his investment in memory chips. “But he succeeded and became legendary.”
The company followed the same invest-for-scale model in each of its major businesses, displacing Sony in TVs and Nokia in mobile phones. Along the way it developed a reputation for brute-force tactics against competitors and a win-at-all-costs ethos among its overworked employees. Today Samsung Electronics is a behemoth with 307,000 workers. It’s so big, in fact, that it builds whole mini-metropolises to accommodate the growth. Its Samsung Digital City in Suwon, outside Seoul, has the look and feel of a Silicon Valley corporate campus, with 500 different bus routes ferrying its 34,000 employees to and from Seoul and other parts of South Korea.
This hyperplanned environment is in keeping with Samsung’s penchant for controlling every step of its production. Building its own factories gives the company a speed advantage, says Choi, the Samsung C&T executive. Samsung originally intended to release its Galaxy S6 line of smartphones in the fall of this year, says Choi, but decided to move up production by six months. “We were building that plant for them,” he says of his construction business in an interview at Samsung’s main headquarters in the posh Gangnam district in central Seoul. “Working together we were able to come up with a way of getting those phones to be produced that I don’t think anyone else could have done.”
The best and worst of the Samsung fast-follower model can be seen in both the soaring success and relative decline of late in its biggest business: smartphones. Samsung Electronics plunged full force into the market after the debut of the iPhone in 2007. And after a decision in 2009 to use Google’s low-cost Android operating system across its product line—as a way of quickly and cheaply countering Apple’s proprietary operating system, iOS—Samsung raced to the top of the heap in 2011 with its Galaxy S II phone. Its profits then skyrocketed, especially when its large-size screens proved popular and Apple was slow to respond. Then last year Apple rolled out its larger-screen iPhone 6 devices, and Samsung’s growth hit a wall. Samsung Electronics recently previewed second-quarter financial results, suggesting that profits will be $6.1 billion, down 4% from the year-earlier period and the seventh consecutive quarterly profit decline. All things—including screen size—being equal, consumers appear willing to pay a premium for the innovation coming out of Apple.
The view inside Samsung is that the margins and growth in smartphones during 2012 and 2013 were abnormal, and that even the current depressed level of profitability is an achievement. Shaun Cochran, Korea country head of brokerage CLSA, finds merit in the argument. “There are two companies in the world that have a profitable position in smartphones, and they’re one of them,” he says. “The margins are no longer supermargins. But really, supermargins are temporary by nature. Only Apple gets them now.”
People familiar with Jay Y. Lee’s thinking about the slowdown describe him as disappointed but not ready to back down. He acknowledges that Samsung isn’t No. 1 in smartphones yet. “It is Apple by revenue, profit, and mindshare of customers,” one of them related Lee as having said. “That said, we’ve been benchmarking Sony, Philips, and Nokia for years. Now we have fewer companies to benchmark.”
The Uncrowned King
Yang Yuanqing, the CEO of Lenovo (LNVGY), first met Jay Y. Lee at the Summer Olympics in Beijing in 2008. Samsung and Lenovo both were sponsors of the games, and, says Yang, “Our private booths were next to each other.” Despite being a competitor across multiple product lines, Lenovo is one of Samsung’s biggest customers, annually buying more than $2 billion worth of various kinds of semiconductors and LCDs for its computers. The two struck up a friendship. Yang praises Lee for his attention to detail and was particularly touched by a gift the Samsung leader brought on a visit to Beijing: “He found out my birth year and gave me a bottle of wine that was produced that year.”
The gesture is vintage Lee, who is known for his impeccable manners and cosmopolitan demeanor. Indeed, Lee in many ways was raised for the role of global ambassador for Samsung. He studied history at Seoul National University, Korea’s top school. Like his father and grandfather before him, he studied in Japan, earning an MBA from Keio University. He later completed doctoral coursework at Harvard Business School, though he left without a degree. After presiding over a failed business unit called e-Samsung during the Internet bubble of the early 2000s, Lee took on the role he’d been born for: learning beside his father for the day he’d take his place.
Part of that role has been representing Samsung with its most important customers—some of whom, like Lenovo, are equally bitter competitors. Lee, for example, is said to have personally negotiated with Steve Jobs over Apple’s critical purchase of flash memory for the iPod Nano. The deal was a watershed because it required a significant commitment of manufacturing capacity by Samsung for an Apple product that wasn’t yet proven in the marketplace.
To this day Lee is a linchpin of the complicated Apple-Samsung relationship, and he keeps in touch with CEO Tim Cook as well as Jeff Williams, Cook’s successor as head of Apple’s global procurement and supply-chain management. “I’ve heard them talk about Jay fondly,” says a U.S.-based executive who has interacted with both sides. Says Lee Keon-hyok, a former IMF economist who is Lee’s chief spokesman: “I compare it to Romeo and Juliet. The families go on feuding, but they agree to the marriage.” (Fond of Lee or not, neither Cook nor Williams agreed to be interviewed about him; in 2012, Apple, which still buys Samsung chips and displays, won a $1 billion patent-infringement judgment against Samsung in a U.S. court over disputed smartphone designs.)
Samsung’s might and Lee’s charm have cemented other important tie-ups for Samsung. John Elkann, the Agnelli family scion who is Lee’s equivalent in the Fiat empire, invited Lee to join the board of Exor, the publicly traded company that manages the Agnelli family’s stakes. He praises Lee for having advised Exor on its ongoing efforts to simplify its corporate structure and enter the insurance business.
A common refrain about Lee is how relatively normal he is. “He’s surprisingly casual and accessible and a nice guy and non-hierarchical, given who he is,” says a former Samsung executive who interacted with Lee occasionally. “He travels by himself, with no entourage. He dresses casually. He says, ‘Hi, I’m Jay, nice to meet you.’ ” Lee has instructed the guards at Samsung’s headquarters not to bow 90 degrees to him. He displays his own ID when he walks around the building. And he delights in taking visiting dignitaries to see the on-site day-care center his father built to help retain women at Samsung.
Lee may also be the most eligible bachelor in Korea. A father of a school-age son and daughter, he was divorced from their mother in 2009. He lives in what visitors describe as a relatively modest home built on land his family has owned for decades in an upscale Seoul neighborhood. His dining room is steps from the exquisite Leeum art museum—the name is a mashup of “Lee” and “museum”—which holds a priceless collection, begun by his grandfather, of ancient Korean and contemporary international art. Lee is said to be particularly proud of the solar panels he had installed on the roof of his home.
The son apparently intends to be a more visible chairman of Samsung than his father, who visited the head office infrequently, preferring to work from home and maintain an air of mystery. To the extent that the younger Lee already has made his mark, it is with an ongoing effort to streamline Samsung. In recent years Samsung has sold off businesses with interests in disk drives, defense, and petrochemicals.
Outside executives see savvy analysis behind that strategy. Steve Luczo, CEO of disk-drive maker Seagate, praises Lee for the insight and decisiveness that led Seagate to buy out Samsung’s drive business in 2011. The moment competitors Western Digital and Hitachi agreed to combine their businesses, says Luczo, Lee recognized that Samsung’s operation would be better off in the hands of Seagate, which had significantly larger market scale. “He started asking all the right questions,” says Luczo. “And they were detailed operating questions.”
Doubts linger about Lee closer to home, however, partly because of his privileged background. “Chairman Lee gathered a couple thousand people and said, ‘I’ll give you any resource. I want 50% share of mobile handsets,’ ” recounts a Korean executive who knows the Lee family well. “I’m not sure Jay has that. He was raised to be a king, not an entrepreneur.”
But according to those who know him, Lee doesn’t intend to become a headliner on behalf of Samsung’s companies, even when he assumes the chairman’s role. His father allowed operating executives to be the faces of their businesses, and so will he. Still, Lee has told people he understands the downside of being an enigma. He has said he understands the need to demystify the role of the founding family.
All in the Family
Far from Samsung’s headquarters, on the other side of Seoul, lies a newly developed section of town called Digital Media City that has become a hub for young television and gaming companies. (Not to be confused with Samsung Digital City; Korea is extremely “digital.”) On the set of a studio there on a sunny June afternoon, the boy band EXO is rehearsing a performance of its hit single “Love Me Right.” Two hundred adolescent girls wait impatiently to enter the studio to see their teenage idols. The band’s host is the entertainment division of film production and consumer-goods conglomerate CJ Group, sponsor of a popular TV show that will feature EXO later that day.
CJ has little in common with Samsung, which is as buttoned-up a company as they come, but for one fact: The entertainment group is run by a cousin of Jay Y. Lee’s named Miky Lee. She is known for having made an early and lucrative investment in DreamWorks Animation. The “C” in CJ stands for Cheil, the original name of the Lee family holding company that exists to this day as Cheil Industries.
As the No. 1 operator of Korean movie theaters and also the franchisee for multiple retail outlets, foreign and domestic, CJ is just one example of the vast reach of the family behind Samsung. One of Jay Y. Lee’s sisters, Lee Boo-jin, runs Hotel Shilla, a high-end hotel company that has expanded into the duty-free business. His other sister, Lee Seo-hyun, heads up the fashion business of Cheil Industries. Cheil Worldwide is the largest advertising agency in Korea. Relatives of Lee’s run the Shinsegae department store and the leading daily newspaper, JoongAng Ilbo, which was started by the patriarch in the 1960s and is considered friendly to Samsung, though it’s not owned by it.
In short, the Lee family touches almost every aspect of Korean life. Young people simultaneously blame Samsung (and other chaebol like Hyundai and LG) for sucking the air out of what other-wise could be an entrepreneurial climate and want to work for it. The 18 listed companies in the Samsung network are widely perceived to trade at a discount to their true market value based on the perception that the family runs the companies for its own goals rather than for shareholders.
This is precisely what attracted the attention of Elliott Management, which amassed a 7% stake in Samsung C&T, when it unveiled plans to be bought by Cheil Industries, which is 23% owned by Jay Y. Lee. Elliott argued that Samsung C&T was undervalued and that Cheil was unfairly acquiring it for its 4% stake in Samsung Electronics. The Lee family previously held a less than 5% stake in the electronics company, and the merger, Elliott contended, would give Jay Y. Lee and his two sisters a windfall gain they will need to pay the inheritance tax they will owe when their father dies.
If the assault by Elliott caught Samsung by surprise, it was prepared for the fight nevertheless. Samsung carried the day in Korean courts against two injunctions brought by Elliott. And shareholders in Samsung C&T, led by a large block of Korean pension funds, approved the merger in a much-watched shareholder vote on July 17. It was the first time the Samsung empire had encountered such an attack by foreign investors, but likely will not be the last.
The Future of Samsung
In the western city of Inchon, the port town on the Yellow Sea where Douglas MacArthur landed and turned the tide of the Korean War, lies a glimpse into Samsung’s future. Here, in just four years, the conglomerate has built a vast new business called Samsung Biologics, which manufactures biopharmaceuticals for global drug companies, including Roche Genentech and Bristol-Myers Squibb. The business is said to be a favorite project of Lee’s, and it has all the hallmarks of a Samsung endeavor: massive scale, billions in investments, and the application of manufacturing expertise to a promising new business.
On the surface, at least, it appears to be another example of fast-following. Samsung Biologics makes tough-to-produce drugs for the owners of the formula the same way Foxconn builds phones and computers for name-brand designers like Apple and Dell. Biopharmaceuticals are proteins, which means they’re more difficult to sterilize than traditional drugs, which are made from stable chemicals. In the Inchon facility, Samsung has built 30,000 liters of production capacity in a sprawling plant filled with large metal vats. It already is at work on its second plant, a so-called 10-pack, or 10 15,000-liter tanks. “No one else in the industry has a 10-pack,” says Jenifer Wheat, vice president of global business development and one of more than 60 expatriate veterans of Western pharmaceutical companies Samsung has hired to jump-start the biologics business.
The Samsung Biologics investment will take years to pay off, but already Samsung is finding ways to cash in on it. A 90%-owned unit called Samsung Bioepis makes “biosimilar” drugs—the generics of biotech—and recently said it plans to go public on the Nasdaq market in the U.S. Published reports have valued the generics unit at $7 billion. And the health care initiatives, Samsung says, are but part of a broader strategy of finding ways to marry medical markets with information technology. “There are a lot of maybe-not-so-obvious synergies between the two businesses,” says Wheat. The implication is that one of these synergies could even produce a new business built on real innovation someday.
Samsung has a pronounced preference for building its businesses rather than buying them. In part, this is because the South Korean government rewarded it and other chaebol for years for reinvesting their profits in R&D, the better to build the domestic economy. The company also carries the scars of a two-decades-old M&A fiasco, the mid-1990s acquisition of a Southern California computer maker called AST Research. Samsung spent nearly $1 billion on the purchase and then proceeded to lose billions more. The failure haunts Samsung strategists and is a frequently repeated discussion point for why Samsung avoids M&A.
Revenues: $195.8 billion
Profit: $21.9 billion
Five-year annualized return to shareholders: 11.8%
The company has become more acquisitive of late, but in small ways relative to its size. A U.S.-based venture arm recently bought a software company called SmartThings that addresses the so-called Internet of things market. And earlier this year Samsung’s mobile division paid $250 million to buy LoopPay, a mobile-payments startup the company hopes will be its answer to competing offerings from Apple, Google (GOOG), and others.
One place where Samsung comes up far short in comparison with Apple is in the development of its own mobile ecosystem. As its Galaxy line of smartphones took off, the company decided it needed to have mobile services to match Apple’s and Google’s. So it formed a Seoul-based outfit called the Media Solutions Center, funded by its mobile division but operating independently. The media-services group annoyed partners like Google and, worse, produced few hits.
Late last year Samsung quietly dissolved the unit, which had amassed a worldwide staff of 2,000, and reassigned its personnel. Curiously, Samsung left intact the Silicon Valley arm of the media-services unit and hired former Disney (DIS) executive John Pleasants to run it. Insiders say the hunt for a mobile-services strategy continues. Says venture capitalist Jay Y. Eum, a California-based former Samsung employee: “Samsung is the hardest-working technology company in the world. They will not stop until they’ve figured it out.”
A Yearning, Searching Company
At the beginning of the 1990s, Jay Y. Lee’s father realized that Samsung’s culture was too inward-looking. So he created a program to each year send 100 of Samsung’s most promising middle managers out to visit countries around the world on yearlong sabbaticals to soak up the local culture and return to Korea with new perspectives. It’s a tradition that continues. Today, at its headquarters in Seoul, it also employs several hundred non-Koreans with MBAs to work on global strategy, on the assumption that foreigners bring fresh thinking. Samsung has long been a yearning, searching company. And under the next chairman Lee it will attempt to complete the transformation from studying the rest of the world’s best practices to internalizing them.
Come December, when Samsung typically announces annual organizational changes, it is quite possible that Jay Y. Lee will be named chairman, whatever his father’s health status. In one fell swoop Samsung officially will have a leader whose experience screams out fresh perspectives. Putting them into action will be Jay Y. Lee’s challenge for the decades ahead.
To see the full Fortune Global 500 list, visit fortune.com/global500.
A version of this article appears in the August 1, 2015 issue of Fortune magazine with the headline “The uncrowned king of tech.”