Samsung may merge building units

Samsung C&T and Samsung Engineering are likely to be merged in Samsung’s group-wide reorganization, experts said Monday.

The group’s two major construction affiliates do not have overlapping functions; and Samsung Engineering suffered losses last year due to rising costs.

Samsung Engineering shifted to a net loss of 708.66 billion won ($684 million) in 2013 from a net profit of 524.46 billion won a year earlier. Samsung C&T‘s net income plunged 43 percent to 266.37 billion won from 465.41 billion won during the same period.

A Samsung Engineering spokesman said turning fortunes around is now the top priority for the company rather than seeking further growth. A Samsung C&T spokesman said a marriage with a loss-making company was “unwelcome.” The spokesmen refused to be named.

Analysts gave a mixed response regarding the possible union.

“A merger between the two builders could create some synergy in terms of technologies. But it might be a hard sell when it comes to financial status and industry outlook,” Kyobo Securities analyst Cho Joo-hyoung said by telephone.

Samsung Engineering is specialized in building petrochemical plants, largely in the Middle East. Samsung C&T, which owns a 7.8 percent stake in Samsung Engineering, has largely built high-rise buildings and power plants.

Lee Young-hwan, a researcher at the Construction Economy Research Institute of Korea (CERIK), said to compete with global players, there should be bigger construction companies in Korea.

The domestic construction market grew by an average of 11 percent a year from the 1970s through 1996. But the annual growth rate plunged to 0.3 percent from 2000 to 2010. In contrast, the value of orders won overseas jumped by an average of 30 percent from 2007 to 2011, Lee at CERIK said.

“For a builder to succeed in global markets, it needs engineering expertise and unrivaled project management skills. In addition, it takes physical size to make a sizable investment to win projects overseas,” he said.

Rising expectations over a combination between the construction units came because Korea’s top conglomerate by assets has been stepping up its realignment drive since September by offloading non-core assets and integrating similar businesses into larger ones.

Economists and analysts said that Samsung Group is preparing for the “post-Lee Kun-hee” era which he hopes will be firmly managed by his three children ― his only son Lee Jae-yong and two daughters Lee Boo-jin and Lee Seo-hyun.

While seeking to increase effectiveness and profitability through reorganization, “Chairman Lee is definitely tidying up Samsung’s vast range of affiliates to pass them on to his children without causing any big problems,” said Lee Phil-sang, an economics professor at Seoul National University by telephone.

The 73-year-old business tycoon is having Jae-yong take the helm of the flagship electronics business, with his elder sister Boo-jin and younger sister Seo-hyun controlling non-electronics operations that include hotels, and the production of fashion clothing and food, said the professor.

There is little doubt that Samsung has grown rapidly enough in the past decade to challenge Apple on robust sales of its Galaxy S smartphone series. But the high-end smartphone market is nearly saturated; so there are growing concerns that Samsung badly needs to find a new growth engine or at least develop its existing businesses into future growth drivers.

In that vein, Samsung Electronics Vice Chairman Lee Jae-yong said in the Boao Forum for Asia held in China last week that the medical and healthcare business will generate a great opportunity for Samsung, according to the company.

“The global smartphone market has shown unprecedented growth over the past seven years. But smartphone sales are slowing in global markets except China,” Lee said during the forum designed to promote business ties among Asian countries.

The remarks back up the need for a new growth engine at Samsung. But the company also has other reasons behind the restructuring, said economists.

Samsung’s realignment has something to do with taxes, said Kim Sang-jo who teaches economics at Hansung University. “Under current laws, more transactions between affiliates result in bigger taxes imposed. So Samsung is moving to pay less tax by integrating similar businesses.”

Kim added that some affiliates have competed with each other in similar business categories. “In some cases, they have overlapping business functions and even cannibalized each other in the same industry.”

The reorganization began in September when Samsung SDS and Samsung SNS were merged into a combined information-technology solutions provider.

In November, Cheil Industries sold its fashion business to Samsung Everland before it was folded into Samsung’s battery-making unit, Samsung SDI, in March. Cheil Industries, which produces electronics materials used in mobile phones and flat-panel TVs, started out as a fabric maker in 1954. Samsung Everland is the de facto holding company for the Samsung Group.

Meanwhile, Samsung named Choi Chi-hun who spent 24 years at Samsung Electronics as chief of Samsung C&T in December. Samsung wants him to successfully lead the possible merger between the two builders and the post-merger integration, analysts said.

In the past three months, Choi has emphasized “profitable growth” for Samsung C&T and pushing the overseas business division to win more projects. By Choi Kyong-ae The korea times