Samsung heir joins board, moving toward top leadership role
SEOUL, South Korea (AP) — The grandson of Samsung's founder is stepping up as its new leader as the South Korean company grapples with the recent failure of a flagship smartphone.
Shareholders of Samsung Electronics Co. voted Thursday to appoint 48-year-old Lee Jae-yong, chairman Lee Kun-hee's only son, to its board of directors.
The appointment of the Harvard-educated vice chairman as a board member comes at a crucial time for Samsung, South Korea's biggest company.
Samsung Electronics, the world's largest maker of smartphones, memory chips and TVs, reported a sharp fall in its quarterly earnings after the unprecedented recall and discontinuation of the fire-prone Galaxy Note 7 smartphones wiped out its mobile profit.
The Note 7, initially launched as Samsung's weapon to kill the iPhone, was scrapped less than two months after its launch after consumers reported incidents of the devices catching fire. Replacement Note 7s given for the recalled phones also were found to be overheating.
For the July-September period, Samsung's net income was 4.4 trillion won ($3.9 billion), down 17 percent from 5.3 trillion won a year earlier.
Samsung's troubled mobile business generated just 100 billion won ($87.9 million) in operating income during the quarter, compared with 2.4 trillion won one year earlier. Samsung's mobile business usually contributes more than half of its overall income.
Sales fell 7 percent to 47.8 trillion won ($42 billion), while operating income slumped 30 percent to 5.2 trillion won ($4.6 billion), in line with the company's guidance earlier this month.
Even before the messy recalls, like other big "chaebol," or industrial conglomerates, Samsung was facing growing pressure to improve transparency and corporate governance.
Lee Jae-yong is the grandson of Samsung's founder, Lee Byung-chull. The younger Lee is thought to have been making key decisions for Samsung since his 74-year-old father was hospitalized after a heart attack in 2014 left him unable to oversee the company.
But Lee's appointment is nonetheless raising questions. He has not held any "C-level" positions: Samsung now has three CEOs overseeing its components, mobile devices and TV businesses.
"He has never successfully demonstrated that he is eligible to be a board member," said Lee Jee-soo, a lawyer and head of the Law and Business Research Center. "Just because he was born as the son of Lee Kun-hee, he is joining the board."
Kwon Oh-hyun, one of the Samsung CEOs, said Lee has proven his leadership in other ways, helping improve the company's profitability through restructuring.
Samsung's earnings report Thursday showed that while its mobile profit shrank dramatically, its component businesses, especially its high-density chips for computers and next-generation smartphone displays called OLEDs, performed well thanks to strong demand from global smartphone makers. The component businesses generated more than 80 percent of the company's quarterly income in the latest quarter, helping Samsung weather the cost of the handset recall.
Analysts expect those high-end components to be Samsung's growth engine next year as more smartphone makers adopt Samsung's OLEDs.
The South Korean tech giant said its annual investment this year will be at a record high as it seeks to expand production of lucrative components for computers and smartphones. Samsung said it will spend 27 trillion won ($23.7 billion) this year to increase production of OLEDs and an advanced chip that are expected to see huge demand growth.
Looking ahead, Samsung hinted that the worst may be over for its mobile division, forecasting that its fourth-quarter mobile profit will likely recover to the similar level as that of the last year. The company estimated that the Note 7 discontinuation will cost in the mid-2 trillion won range during the October-December period and another 1 trillion won ($884 million) during the January-March quarter, bringing the total cost of the recall to at least $5.3 billion.
Lacking a new high-end gadget to fight Apple's new iPhone due to the discontinuation of the Note 7, Samsung said it will introduce new mid- to low-end handset models while selling the Galaxy S7 and S7 Edge smartphones, which were launched in spring.
Lee Byung-chull founded Samsung in 1938. The company grew into an empire offering washing machines, finance and semiconductors, helped by cheap government financing as South Korea rushed to catch up with Japan and other developed nations.
The Lee family holds only a minority share in the company, but maintains control through a maze of cross-shareholdings in the 70-odd companies that make up the group.
Lee Kun-hee resigned from the board of Samsung Electronics in 2008 as he faced investigation over alleged tax evasion and other financial violations.