Fate of Samsung’s investments in Vietnam questionable?

Currying favour

Samsung heir Lee Jae-Yong had a less-than-ideal Valentine’s day this year, as Seoul prosecutors looking into the recent bribery allegations brought against him announced intentions to make a second attempt to arrest him.

The scandal centres on impeached South Korean President Park Geun-Hye’s confidante Choi Soon-Sil, who is accused of using her ties to the president to strong-arm local firms to “donate” nearly $70 million to two non-profit foundations, which Cho allegedly used for personal gain.

As reported before, Samsung was the single biggest donor, giving millions of euros to Choi and her daughter, allegedly in exchange for policy favours from Park in return.

After his father’s heart attack in 2014, Lee has become the de facto head of the Samsung Group. According to allegations, he had a key role in the scandal and is accused of bribing Choi to the amount of $40 million.

Once released for insufficient evidence and freshly over a marathon questioning on February 13, Lee had little time to breathe as the prosecution made its announcement on the next day.

Prosecutors are investigating whether Samsung’s payments to Choi were aimed at currying favour and secure state approval for the controversial merger of two Samsung units in 2015. The step was seen as a means of third-generation power transfer to Lee Jae-Yong and garnered strong opposition by many investors.

Exploding devices

Perhaps the biggest news in the latter months of 2016 was Samsung’s debacle with its Galaxy Note 7 units. On September 2, the company suspended the sales of the phablet and recalled 2.5 million Note 7 devices that had been shipped worldwide, after faulty batteries started exploding while charging.

The recall, servicing, and re-shipping of products hit the company badly not only on the financial front, but—probably more importantly—by hurting the brand’s image at large.

Notably, Samsung Electronics Vietnam (SEV), one of the two facilities producing the Galaxy Note 7 units, reported a loss of VND3 trillion ($131.98 million) and a 30 per cent, VND32 trillion ($1.41 billion), reduction in revenue compared to the second quarter.

Nevertheless, looking at the annual figures, SEV still made a net profit of VND25 trillion ($1.09 billion) in the other three quarters of the year, posting encouraging results at the most trying year in a while.

The other facility responsible for producing the faulty Note 7 units, Samsung Huizhou in China, and its US mobile trading arm Samsung Electronics America reported losses of $307.59 and 114.9 million, respectively.

In January, Samsung’s investigation arrived at the conclusion that the battery suppliers were to blame for the faulty devices, but realised that the findings would not fully mitigate the damage done to the brand.

Altogether, Samsung claimed that the debacle cost approximately $5 billion to the group, and an additional $170 million to strengthen product safety, and its first place in the global smartphone market to Apple in the last three months of 2016.

Samsung Electronics is one of the largest foreign investors in Vietnam, with three manufacturing plants in Bac Ninh (SEV), Thai Nguyen (SEVT) and Ho Chi Minh City  (SEHC). With an export turnover of over $37 billion in 2016, Samsung Electronics in Vietnam contributed 20 per cent to the country’s exports.

Samsung Display going strong?

On February 10, VIR reported on Vietnamese subsidiary Samsung Display’s plans to expand its production base in Bac Ninh. The $2.5 billion project would push the firm’s investment in Vietnam to $6.5 billion in early 2017.

Minister and Government Office chairman Mai Tien Dung has confirmed that the proposal lodged by the Bac Ninh People’s Committee to grant the same privileges to the project as are applied similar large-scale hi-tech projects was approved by the government.

“We are currently in the legal setup stage, hoping to secure the investment certificate by the upcoming 20th anniversary celebrating Bac Ninh’s re-establishment,” said a provincial source knowledgeable in the matter.

Probably the first multi-billion dollar investment in the Year of the Rooster, the expansion project has come in the wake of Samsung Display’s global successes throughout 2016.

Last April, the Wall Street Journal reported that Samsung had signed to supply OLED screens to US tech giant Apple. The screen volume was not disclosed, but it was estimated to be in the range of 100 million units.

Shortly after, Japanese Nikkei broke the news that Samsung is planning a $6.82-billion investment to upgrade and expand its OLED screen production lines for the Apple deal.

In late 2016, DigiTimes, Taiwan’s leading high-tech media outlet, disclosed that Samsung Display will supply AMOLED screens—a kind of OLED screen—for Apple’s new iPhone line in 2017.

Samsung Display’s Bac Ninh plant is reported to have reserved individual production lines to meet Apple’s demands, news in line with the company’s plans to turn Vietnam into their global manufacturing base.

Will Samsung’s current debacles put a halt to its expansion in Vietnam?

Before political shenanigans and the Galaxy Note 7 debacle, Vietnam was to play a pivotal role in Samsung Group’s development plans. Express intent to turn the country into a major production base was followed by sound action: both by bringing the production of the Note 7 to Vietnam and by preparing Samsung Display for the stellar Apple deal went far beyond empty words.

In addition, the corporation’s commitment to raising the local supporting industry to be able to operate at the adequate standards offers a rare opportunity for Vietnamese businesses, in line with the corporation’s agreement with the Vietnamese government to increase the localisation rate and the presence of local companies in Samsung’s component supply chain.

“I do hope that, through Samsung’s supporting programme, Vietnamese enterprises could gain the knowledge and experience to enhance their capacities. Samsung believes that if a product can be localised, we will maximise its localised content," said Han Myoungsup, executive vice president of Samsung Electronics.

As previously reported by VIR, as of January 16, 2017, nearly 200 Vietnamese enterprises were participating in the supply chain of Samsung’s three plants in Vietnam, including 20 tier-1 and 178 tier-2 vendors. The corporation planned to raise the number of tier-1 suppliers to 29 throughout the year.

Will the damaged reputation from units produced in Vietnam, albeit due to battery suppliers’ error, have a negative impact on Samsung’s plans, taking away once-in-a-lifetime opportunities on the horizon?