Samsung Galaxy Note 7 Crisis Signals Problems at Korea Inc.

By CHOE SANG-HUN and PAUL MOZUR JAN. 23, 2017

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D. J. Koh, Samsung’s mobile chief, at the company’s headquarters in Seoul, South Korea, on Monday. He said that the company felt “a painful responsibility for failing to test and confirm that there were problems” with the batteries used in the Galaxy Note

SEOUL, South Korea — Before a world audience watching online, Samsung on Monday offered details and schematics showing how its Galaxy Note 7 smartphone went from cutting-edge technology to a costly, combustible failure.

But for many of the company’s critics, the most interesting part of the presentation was what Samsung did not say: How could such a technologically advanced titan — a symbol of South Korea’s considerable industrial might — allow the problems to happen to begin with?

The answer to that question gets to deep shortfalls that former employees, suppliers and others who watch the company say may have contributed to the incident. Samsung, like South Korea as a whole, fosters a top-down, hidebound culture that stifles innovation and buries festering problems, they say.

For those critics, these problems have come to light through another front: politics. Samsung has been caught up in a scandal surrounding the country’s president, which they say illustrates a hierarchical culture that tends to micromanage away creativity and insulate family-run business empires from accountability and competition.

“The Korean economy as a whole has reached a kind of limit,” said Park Sang-in, a Seoul National University economics professor who thinks that the cozy relationship between the government and business is stifling innovation in South Korea.

Mr. Park pointed to a decision by a South Korean court last week to block the arrest of Jay Y. Lee, Samsung’s de facto leader, after a prosecutor sought a warrant accusing Mr. Lee of bribery in relation to the presidential scandal. A string of major South Korean executives, including Mr. Lee’s own father, have been pardoned or had sentences suspended after being convicted of wrongdoing over the past decade.

Samsung has said Mr. Lee did nothing illegal. But corporate executives in recent years have said Mr. Lee has been working to loosen up a top-down corporate culture. Under him, Samsung began a campaign to root out harsh and often violent language supervisors used with their staff, a practice common in the South Korean corporate world. Samsung officials described Mr. Lee as a polite, casual leader who encouraged employees to use English more widely in internal communications.

Though Samsung did not address its corporate culture directly in its discussion of the Note 7, it apologized and detailed new steps it would take to stop future problems, including naming a board of battery advisers.

“To produce an innovative Galaxy Note 7, we set the goals on battery specifications,” D. J. Koh, Samsung’s mobile chief, said on Monday. “We now feel a painful responsibility for failing to test and confirm that there were problems in the design and manufacturing of batteries before we put the product out to the market.”

Despite the troubled handset, the company said on Tuesday that profit more than doubled in the last three months of 2016, to about $7.93 billion. The increase was driven by chip sales, and gave Samsung the financial firepower to announce a nearly $8 billion share buyback program.

Over the past decade Samsung and South Korea have been widely viewed as a model of forward-thinking, technological prowess. In Asia it was viewed as the exception to the sluggish economic growth of nearby Taiwan and Japan, whose once world-beating electronic makers have been in decline.

So large and influential is Samsung that some worried South Koreans call their own country the “Republic of Samsung.” The company is responsible for 20 percent of South Korean exports, and any blow to its success often raises anxiety about the overall health of the country’s economic prospects.

But as with the rest of the country, a shake-up has been slow to come. In recent years the company has run initiatives to push back against what is widely described as a rigid, top-down management system. Samsung engineers and midlevel managers are seldom allowed to second-guess management goals set by top bosses, former employees say.

Pressures rose after Mr. Lee’s father, Lee Kun-hee, its chairman, suffered a stroke in 2014 and fell into a coma. One engineer in the United States who works with Samsung suppliers on projects, including the Note 7, said Samsung’s no-questions-asked corporate culture had grown more inflexible in recent years.

“In the Samsung culture, managers constantly feel pressured to prove themselves with short-term achievements,” said Kim Jin-baek, who worked at Samsung until 2010 before becoming a professor at the business school of Chung-Ang University in Seoul. “Executives fret that they may not be able to meet the goals and lose their jobs, even when they know the goals are excessive.”

With the Note 7, Samsung pushed its business model, as well as its technology, to the limit, according to Samsung officials, who spoke on the condition of anonymity while the Note 7 investigation was being completed. Driven by the desire to prove it was more than a fast follower of Apple, Samsung rushed the Note 7 to market ahead of Apple’s iPhone 7. To fend off Chinese competitors like Huawei and Xiaomi, it packed the phone with new features, like waterproof technology and iris-scanning for added security.

But battery scientists, including those who spoke at the announcement, said aggressive decisions in designing the batteries made problems more likely. Pushing to make the battery thinner and more powerful, Samsung opted for an exceptionally thin separator in its battery. As the critical component that separates

the positive and negative electrodes in a battery, separators can cause fires if they break down or contain flaws.

UL, a safety science company contracted by Samsung to investigate the battery, said the thin separator offered poor protection against defects. It also said that the high energy density of the battery could increase the severity of failures when they occurred.

Samsung’s insistence on speed and internal pressures to outdo rivals in part signal a breakdown in the ability to truly innovate and push out new ideas, critics say. In place of big new ideas, Samsung focused on maxing out the capability of components like the battery. That philosophy, which worked to keep Samsung on the heels of the likes of Apple, simply is not as effective as Samsung tries to push ahead, they argue.

A similar strain can be felt in other parts of South Korea’s economy. Even the symbols held up as signs of the country’s forward thinking, like speedy internet and eye-popping creative mobile apps, come in part from the support of the government. While that has helped create new companies, workers in the tech industry argue that approach also ensures start-ups do not challenge the country’s biggest companies.

“The government is trying to pick the next Steve Jobs,” said Mr. Park, the Seoul National University professor. “You cannot pick the next Steve Jobs. You need to allow somebody to achieve that.”

Tim Chae, a venture capital investor in South Korea and partner at 500 Startups, a venture fund, cites another government program called TIPS. The government program is designed to support new companies with funding. Yet with the money come rules, he said, such as funding that can be used to pay only certain types of employees – engineers are included, but sales personnel are not.

Mr. Chae said that he should lean toward more freedom: "Just give them the money and trust them to use it right."

Mr. Chae highlighted other problems. Many of South Korea's most talented workers are sucked up into companies like Samsung, where they imbibe their corporate culture, making it harder for them to work elsewhere or develop the right mentality to start their own company, he said.

That top-down culture that pervades both Samsung and South Korea hints at a deeper question embedded in the accusations about the company's involvement in the unfolding graft scandal: Would Samsung itself not be better off if South Korean regulators treated it more harshly?

In October, at Samsung's request, the Korea Testing Laboratory investigated Note 7 that had caught fire. Within a few hours, he issued a report indicating the fire was due to an "external shock."

Its chief, Lee Won-bok, now regrets that decision, calling it "too hasty."

"They did the test for Samsung and produced the findings that Samsung wanted," Woo Won-shik, an opposition lawmaker, said during a parliamentary hearing. "This Republic of Samsung phenomenon actually hurts its international credibility."

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