Why Samsung heir’s jailing will do little to dent its smartphone profits, in the short term at least

It’s easy to feel sorry for Samsung’s Lee Jae-yong, led out of the Seoul district courtroom, found guilty of embezzlement and bribery, arms bound in ropes, clasped by guards on either side. He does not fit the picture of the scheming chieftain of Korea’s largest chaebol, or conglomerate. Seen on the street, he might be mistaken for a diligent salaryman: quiet, serious, neither flamboyant nor particularly tough.

The visual image is enough to convey the impression that Lee is the victim of powerful executives his father installed throughout the Samsung empire. He has the title of vice-chairman of Samsung Electronics, flagship of a group accounting for 20 per cent of Korea’s economy, and his tentacles extend throughout its 80 or so companies, but he’s also at the mercy of senior bureaucrats who know far more about corporate machinations.

Sadly, the whole case suggests that Lee was in way over his head after his father, Lee Kun-hee, suffered a heart attack more than 3½ years ago. The elder Lee retains the chairman’s title but remains unable to make decisions or participate in group strategy. In fact, JY, as he is known, was thrust into responsibilities for which he had been groomed for years by men whose advice he accepted.

This helps explain why Lee’s arrest and imprisonment, along with two of those executives, will not greatly impact Samsung Electronics sales worldwide. There should be no appreciable dent in earnings, whether he serves all of his five-year sentence or, as is likely, gets out earlier on probation.

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The numbers show Samsung Electronics rivals - Apple, Micron, Intel and Toshiba – have no reason to gloat as the new Galaxy Note 8 hits global markets. Samsung, selling 23 per cent of the world’s smartphones, nearly twice that of Apple’s 12 per cent, enjoyed a record US$8.7 billion profit in the first quarter of this year and a stupendous US$12.4 billion profit in the second thanks to the success of the Galaxy S8 smartphone.

Longer term, however, Samsung may suffer consequences, because South Korean President Moon Jae-in is dedicated to reforming the chaebol system, curbing the ability of companies in the same group to guarantee control by the same ruling family generation to generation.

Kim Sang-jo, chairman of the Fair Trade Commission, has stated that “profiteering by chaebol owner families not only leads to illegal transfers of wealth but also destroys the corporate ecosystem”.

What better place to begin than Samsung? It was Lee’s scheme to consolidate power by having Samsung C&T take over Cheil Industries, increasing his hold over Samsung Electronics and other companies, that got him into trouble. The result of the takeover was that Lee and his two sisters hold controlling stakes in the combined company, which dominates Samsung Electronics.

For the US$7.8 billion deal to go though, the National Pension Service, under the thumb of the government, had to vote its shares over the strenuous objections of stubborn minority shareholder Elliot Associates. Samsung, to get on the good side of then president Park Geun-hye’s government, channelled funds to two foundations and donated enough for the daughter of Park’s long-time confidante to acquire a horse for dressage training in Germany. The TV image of that high-stepping steed has become a symbol of Lee’s crimes.

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But what difference will the furore make? No one forgets that Lee’s father got convicted twice and pardoned both times for financial transgressions. Lee and his sisters still hold their shares in Samsung C&T and rule, at least by remote control.

Will Lee be able to do so from prison or will his executives undermine his authority while minority shareholders demand a greater say? Foreigners, who own more than half of Samsung Electronics shares, will probably want to intervene in company affairs even as the Fair Trade Commission challenges its sway over the economy. The foreigners will never unite as a bloc, but they may insist on reforms matching the commission’s.

Short term, though, buyers of smartphones and other gadgets won’t notice. Most are probably not even aware that the heir to the Samsung throne remains in jail. If there is to be change, it will be long-term and gradual.

For Moon, the “paradox of reform” is that it risks holding back the economy. The challenge of the Samsung case will be to see if it leads to change for the better, a greater role for stockholders outside the family and more opportunities for smaller rivals.

Donald Kirk is the author of three books and numerous articles on Korea