Busy Global Samsung Hindered by Judicial Risks

[Image source=Yonhap News]

[Asia Economy Reporter Changhwan Lee] As the prosecution decided to indict Samsung Electronics Vice Chairman Lee Jae-yong on allegations of illegal succession of management rights, concerns have arisen that Samsung's management uncertainty has increased. Since Vice Chairman Lee has not escaped judicial risks, it is analyzed that major decisions requiring foresight into the distant future, such as Samsung's large-scale investments and mergers and acquisitions (M&A), will be negatively affected.

On the 1st, the Economic Crime Criminal Division of the Seoul Central District Prosecutors' Office indicted Vice Chairman Lee without detention on charges including unfair trading and market manipulation under the Capital Markets Act, and breach of fiduciary duty. Ten Samsung officials, including former Samsung Future Strategy Office Chief Choi Ji-sung (Vice Chairman) and former Future Strategy Office Strategy Team Leader Kim Jong-jung (President), were also brought to trial.

This comes one year and nine months after the Securities and Futures Commission reported Samsung Biologics to the prosecution on November 20, 2018, for accounting fraud allegations. Although the prosecution's investigation review committee previously concluded that the investigation of Vice Chairman Lee was inappropriate, the prosecution ultimately proceeded with the indictment.

With the judicial authorities indicting Vice Chairman Lee, the management environment surrounding Samsung has become more uncertain. As the judicial risk of the group head increases, uncertainty has grown regarding matters where Samsung must decide on large-scale investments in semiconductors, smartphones, automotive electronics, 5G, artificial intelligence (AI), and more.

After being released in February 2018 related to the political scandal case, Vice Chairman Lee announced a large-scale investment plan worth 180 trillion won within six months in August, focusing on key businesses such as artificial intelligence (AI), 5G, bio, semiconductors, and automotive components.

In April last year, he declared the long-term plan "Semiconductor 2030" vision, aiming to become the world's number one in system semiconductors by investing 133 trillion won by 2030. Vice Chairman Lee directly decided on bold and aggressive investments in future growth engines that will sustain Samsung.

However, with this prosecution, as trials are expected for several years, Vice Chairman Lee's inability to escape judicial risks has increased uncertainty regarding additional investments.

Concerns have grown especially as the global management environment surrounding Samsung's core semiconductor business becomes increasingly competitive. Samsung Electronics has decided on large-scale investments, focusing on system semiconductors as a future growth engine to expand its semiconductor business.

Among system semiconductors, the foundry (contract manufacturing) business is the core focus, and investments continue. However, the foundry business still lags significantly behind Taiwan's TSMC, which holds the world's number one market share.

According to market research firm TrendForce, Samsung Electronics' share of the global foundry market is expected to be 17.4% in the third quarter of this year. This is still significantly lower than TSMC's projected share of 53.9%. On the 25th, TSMC announced the construction of a new ultra-fine 2-nanometer (nm) process factory, putting pressure on Samsung Electronics.

M&A has also become uncertain. Since acquiring the U.S. automotive electronics company Harman in 2016, Samsung Electronics has not conducted any large-scale M&A. The halt in large-scale M&A since 2017 is evaluated to be due to the absence of the group head after Vice Chairman Lee was detained in connection with the political scandal case, making it difficult to make large-scale investment decisions.

While overseas companies such as Apple and Amazon have taken advantage of the economic crisis to pursue aggressive M&A strategies, Samsung Electronics has continued to be unable to even attempt such moves properly.

A business community official said, "The prosecution's indictment of Vice Chairman Lee has increased management uncertainty surrounding Samsung," adding, "As judicial risks grow, there are concerns that Samsung's large-scale investments may shrink in the future."

This content was produced with the assistance of AI translation services.