Samsung’s folding phone disaster is bad news for a $1.7 trillion economy, according to this economist

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Samsung tried to get ahead of its competitors in the smartphone market by releasing the first mass-market folding phone, the Galaxy Fold.
But reality punctured the hype when journalists reviewing the device found the folding screen broke after just a few days of use.
It’s more than just a PR disaster because Korea’s $1.7 trillion economy depends on Samsung doing well.
Economics professor Park Sangin told Business Insider: "Any issues at Samsung Electronics will spread out into the economy of Korea."
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Samsung’s folding phone was front and centre of Unpacked, the annual February event where the world’s biggest phone maker shows off their latest devices.

In a presentation that has now been watched more than 4 million times on YouTube, Samsung crowed "the Galaxy Fold is a device unlike any other that has come before it" and that the foldable phone "defies category."

The PR buzz didn’t last long. After issuing review units of the folding phone to tech journalists in April, Samsung was forced to retrieve the phones only a few days later after some reviewers reported problems with the display.

YouTube/MKBHD

It was yet another disaster for Samsung. The folding phone debacle follows the exploding Note 7 in 2016, which dented the Korean brand, and the highly political arrest of Samsung heir Lee Jae-yong.

Lee was convicted of bribing Korea’s ex-president and sentenced to five years in jail. He was freed in early 2018 after that sentence was suspended.

Korea-watchers say the country’s $1.7 trillion economy is still dependent on the success of a few domestic megacompanies like Samsung — and disasters like the Galaxy Fold saga are bad news.

"Any issues at Samsung Electronics will spread out into the economy of Korea," Park Sangin, professor of economics at Seoul National University told Business Insider.

Korea has a delicate, highly concentrated $1.7 trillion economy

AP Photo/Lee Jin-man

Korea is often hailed as a miracle story in economics, compared favourably to its communist and isolationist neighbour, North Korea. The two split in 1945, and then went to war, but the aftermath would look dramatically different for the two nations. The South would industrialise rapidly. The North would turn inwards and become an economic basket case.

Korea is now the world’s sixth-biggest export economy, according to the CIA, behind Japan and ahead of the UK. That is mostly thanks to its "chaebol" — a combination of the Korean words for wealth ("jae") and clan or family ("beol").

These are Korea’s family-owned conglomerates which now dominate the country’s manufacturing output. Several will be familiar names to Westerners: Samsung, Hyundai, and LG. Their global success has been good news for Korea over several decades, but the result is an economy that is dependent on a handful of companies.

Park explained: "The Korean economy is a very concentrated economy, in terms of the concentration of the manufacturing sector by a small number of big companies."

Manufacturing, he said, accounts for around 30% of Korea’s overall economy, and the chaebol are especially dominant. "It’s really huge," he said. Samsung is Korea’s most profitable chaebol.

Still, Samsung is hugely diverse with fingers not just in smartphones and TVs but semiconductors, advertising, insurance, and even shipbuilding services. According to Park, the main group has about 50 affiliated companies. In theory, then, failure in one Samsung business shouldn’t be enough to dent the entire economy.

Not so, says Park. There are two reasons why.

The first is that Samsung makes the bulk of its revenue from its consumer electronics arm. On its website, Samsung said it made 239.6 trillion Korean won ($206 billion) in revenue in 2017. This equates to around 13% of Korea’s GDP.

This makes sense, given Samsung’s devices are still hugely popular and it is by many measures the biggest phone maker in the world.

Drew Angerer/Getty Images

The second is that some of Samsung’s other businesses depend on the success of the consumer electronics arm, because those businesses are shareholders. That creates a potential domino effect.

"Samsung has around 50 or 55 affiliates, but Samsung Electronics is kind of the dominant one," Park said.

He added that Samsung’s founding Lee family has retained a complex, circular shareholding setup that has allowed them to retain control. The upshot is that various Samsung affiliates hold shares in Samsung Electronics.

Samsung Life Insurance is one example.

"Samsung has the number one insurance company in Korea, Samsung Life Insurance," Park said. "A failure of Samsung Electronics will cause a huge problem for Samsung Life Insurance because it owns a major asset in the form of shares in Samsung Electronics. So that would cause wider problems in the life insurance industry as well."

Bloomberg reported in July that Korea was considering forcing Samsung Life to sell off around $13 billion of its shareholding, as the country’s new president seeks to restrict the control the Lee family has over the Samsung empire.

Korea’s economy is at risk because no one is really willing to take on the chaebol

Paul Sakuma

Clearly, a poorly designed folding phone won’t bring down the entirety of the Korean economy.

But, as Park notes, Samsung is facing the continued threat from its main rival Apple, and emerging competition from Chinese phone manufacturers such as Huawei who can make high-end Android phones and offer them at lower prices. That squeeze is forcing Samsung to rush out innovative new products.

Bloomberg reported that Samsung pushed engineers and designers to design a workable folding phone and file as many patents as possible to beat the competition.

The report compared the Galaxy Fold debacle directly to the exploding Note 7: "[The] Fold episode shows similar tendencies to rush ahead with new technologies to satisfy corporate goals in spite of engineering risks. Even inside Samsung, employees have to wonder how they so quickly got so close to another debacle."

Park agrees.

"Samsung rushed into these more innovative products," he said. "That’s why we had the burning Note 7, and now I guess it rushed into the foldable phone, to be the first maker in the world. But they are really afraid of repeating the mistakes of the Galaxy Note 7 this time again."

Park said that Korea had "sensed the limitation" of a chaebol-based economy for years, and that it’s making noises about reform.

Samsung isn’t the only troubled chaebol. Korea Air is another family-owned conglomerate which is under scrutiny. Its chair, Cho Yang-ho, died earlier in April, and had been on trial for embezzlement and breach of trust. His daughter famously flew into a rage over the way the airline served macadamia nuts in its original packaging, and was subsequently sentenced to a year in prison.

AP/Lee Jin-man

The arrest and imprisonment of Samsung heir Lee Jae-yong was a watershed moment, as was the sentencing of Korea’s former president Park Geun-hye.

But reform under new president Moon Jae-in has been slow, partly because the chaebol families hold so much political sway. "Korean chaebol are the most powerful incumbent, they are the vested interests of Korea," said Park. "They are against reforms that are against their own interests.

"Even after Moon Jae-in took power… it’s been two years since he came to power but we haven’t seen any specific reforms at all. My sense is that it is unlikely the Moon government will do any fundamental reforms in Korean chaebol."

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