How Deeply Could Bribery Scandal Wound Samsung?

South Korean prosecutors on Tuesday indicted Samsung head Lee Jae-yong and four other executives on bribery and embezzlement charges, following a lengthy investigation into Lee’s ties with impeached president Park Geun-hye and her confidant, Choi Soon-sil.

Samsung Head Lee Jae-yong

Charges against Lee, vice chairman of Samsung Group, include pledging bribes to organizations tied to Choi in an effort to cement his control of the conglomerate.

The Samsung Group has denied paying bribes to Park or seeking improper favorable treatment from her.

Lee could face up to 20 years in prison if convicted. He, Park and Choi all have denied wrongdoing.

Two senior Samsung Group executives — Vice Chairman Choi Gee-sung and President Chang Choong-gi — offered to resign to take responsibility for the conglomerate’s involvement in the scandal, Korean news agency Yonhap reported last week.

The two have been identified as suspects in the probe into Lee.

Lee shut down Samsung’s corporate strategy office last December. With about 200 staff from various Samsung affiliates, the office ran major initiatives, such as investment in new businesses. It reportedly was key to Samsung’s questionable lobbying efforts.

Fallout From the Investigation

CEOs and boards of Samsung’s various affiliates now will run their organizations independently.

This is going to hit Samsung hard in areas such as the smartphone industry, where “the tight connection gave it advantages in both time to market and cost,” said Rob Enderle, principal analyst at the Enderle Group.

“A fight between the units over profits and costs could result in increased inefficiencies, and the lack of a strong central unit to ensure the good of the group suggests the risk of a problem has just gone up significantly,” he told the E-Commece Times.

For example, Samsung’s partners could get more aggressive when competing for business from affiliates currently sourcing from other affiliates, Enderle suggested.

“A change like this crippled IBM in the 1960s and was key to the company’s near-collapse in the 1980s,” he recalled.

On the other hand, “relationships are everything at the top levels of major corporations,” observed Michael Jude, a program manager at Stratecast/Frost & Sullivan.

“These people will talk and will continue to collaborate,” he told the E-Commerce Times.

Samsung’s Corporate Identity

South Korea’s largest business conglomerate, or chaebol, Samsung consists of four business groups: Samsung Group, Chinese Group, CJ Group and Hansol Group.

Samsung has numerous affiliates.

Samsung was a major force behind the “Miracle on the Han River” in the 1950s, as South Korea’s rapid economic growth in the Korean War aftermath is known.

“Samsung employs more people than any other company in South Korea,” noted Andreas Scherer, managing partner at Salto Partners.

The conglomerate accounts for “roughly 17 percent of South Korea’s GDP,” he told the E-Commerce Times, and it “is a major force in politics, media and culture.”

The Stakes for Samsung

Samsung dominates the smartphone industry. It shipped more than 77 million smartphones in Q4, commanding 77 percent of the global market, according to Strategy Analytics.

However, global smartphone shipments in Q4 were down 5 percent from the 81 million units shipped in Q4 2015. Apple picked up the slack, with global iPhone shipments totaling 78 million, up 5 percent from Q4 2015.

“A weakened Samsung would be a boon to other Android manufacturers and Apple, particularly at the high end, where Samsung and Apple largely stood alone up until now,” Enderle remarked.

Still, given Samsung’s size and importance to both the Korean economy and social structure, noted Salto Partners’ Scherer, “it’s safe to assume nothing will happen fast.”