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For South Korea, exploding phones are tied to the burning issue of chaebols

Timothy Dewhirst is associate professor in the department of marketing and consumer studies at the University of Guelph. Wonkyong Beth Lee is assistant professor in DAN management and organizational studies at Western University. Both are currently visiting scholars at Hanyang University's department of advertising and public relations in South Korea.

Electronics maker Samsung announced this week that it will stop producing and selling the Galaxy Note 7 smartphone due to safety concerns stemming from the smartphone's capacity to ignite. There has been a lot of speculation about the financial fallout. The market value of Samsung Electronics Co. Ltd. quickly dropped by $20-billion (U.S.) and some are questioning the company's future viability. But this brand crisis also highlights mounting trepidation about the broader issue of South Korea's huge family-owned business conglomerates – the chaebols.

Samsung is South Korea's largest chaebol, founded in 1938 by Lee Byung-chul. For nearly 80 years, the company has maintained hereditary succession. Chairman Lee Kun-hee is the founder's son.

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The company initially exported vegetables and dried fish. Over time, it has diversified considerably – the empire includes a number of subsidiaries. Beyond electronics and food processing, its interests include oil rigs and shipbuilding, engineering and construction, hotels, appliances, life insurance and securities, retailing and entertainment, as an operator of theme parks and owner of the Samsung Lions in South Korea's professional baseball league.

The conglomerate is omnipresent. It accounts for roughly 20 per cent of the Republic of Korea's gross domestic product – such a large portion, that South Koreans are apt to say they live in the Republic of Samsung. It's possible for a South Korean person to live a Samsung-only life, as The Washington Post detailed in a 2012 story: residing in a Samsung-produced and branded apartment furnished with Samsung appliances, watching the Samsung Lions play baseball on a Samsung television or digital device.

The Galaxy Note 7 situation has raised questions about the company's associations with quality and trust, as The Globe and Mail's Susan Krashinsky wrote this week. This is especially critical in household products. From a reputation-management standpoint, ceasing production appears to reflect Samsung's concern about losing consumer trust.

Considering how Samsung's corporate brand values are viewed domestically in South Korea, such discussion is somewhat ironic. The company's recent history includes a number of scandals.

In 2008, Samsung chairman Lee Kun-hee was found guilty of criminal tax evasion and embezzlement.

In 2010, former chief legal counsel Kim Yong-chul authored a book, Think Samsung, alleging that evidence was destroyed and fabricated while government officials, prosecutors, judges and journalists were bribed to facilitate a smooth transition of power to Mr. Lee's son. Mr. Kim alleged that he had helped Samsung commit bribery while he worked there.

Nevertheless, many South Koreans see Samsung as above the law. Months after Mr. Lee's conviction, he was pardoned by then president Lee Myung-Park, a former senior executive from Hyundai, the country's second-largest chaebol Mr. Lee was able to resume his position at Samsung and remained on the International Olympic Committee, which later awarded the 2018 Winter Games to South Korea.

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A common criticism of the chaebols is that their concentrated power may be seen as anti-competitive, raising antitrust concerns. And there is considerable skepticism about their influence on government decision-making.

Chaebols may also foster a business culture lacking transparency. Samsung's decision to stop producing Galaxy Note 7s, rather than repairing them, suggests that the underlying reason for the fires has not been adequately understood or that the company has not been fully forthcoming.

Chaebol business culture can facilitate a top-down, authoritative organizational structure where senior management is unlikely to be questioned – numerous analysts have speculated that Samsung senior management hastily insisted on the launch of the Galaxy Note 7 in efforts to compete with Apple's latest iPhone.

In South Korea, the smartphone fiasco will renew calls to rethink the role of the chaebol. Internationally, Samsung acknowledged its phone's ignition problems – a good start in crisis management communication. Future communication will need to reassure public stakeholders that Samsung does understand the underlying mechanisms of the problem and offer an explanation about how it will be fixed. Who will serve most credibly as Samsung's voice for such communication remains an open question.

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