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The chaebols: Samsung and LG's 50-year 'star wars'

LG and Samsung are among the best-known of South Korea's conglomerates, and their ongoing rivalry is just as famous. We take a look at their closely intertwined histories in part two of this series on chaebols.

This is the second part in a series on chaebols -- the conglomerates that make up the cornerstones of the South Korean economic, political and social landscape. Read part one here.

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Skyscrapers at night in Busan, South KoreaPicture by Duesride (CC BY-SA 3.0)

Samsung and LG had some uncharacteristically warm words for each other during this year's Mobile World Congress trade show. Samsung co-CEO JK Shin commended the LG Watch Urbane, while LG's mobile boss Juno Cho in turn praised Samsung's new Galaxy S6 and S6 Edge smartphones.

The rarity likely occurred because the two companies weren't launching competing products for once. Just a few months ago at the Consumer Electronics Show, the two conglomerates blasted each others' TV strategy, at odds over OLED and LCD screen technology. The two chaebols were embroiled in legal proceedings over an allegedly vandalized washing machine. Though this particular chapter has come to a close, the rivalry itself has gone on for 50 years.

Samsung and LG are perhaps South Korea's two best-known chaebols worldwide. More than ever before, the electronics arms of both chaebols are globally relevant players. While Cupertino's iPhone 6 might hold the current crown in the smartphone arena, LG's G series and Samsung's Galaxy flagships, as well as their home appliances and other electronics, have made it impossible to ignore South Korea as a superpower in the tech world.

Samsung's Galaxy S6 Edge. Josh Miller/CNET

But while they might be better known internationally for the Samsung Galaxy S6 or LG G3, in South Korea, they are household names for their sprawling, epic enmity.

The South Korean media certainly fans the flames and plays up the animosity. The chaebols and their chairmen hold a special place in Korea, the basis of a kind of celebrity culture. Comparing Samsung and LG has long been de rigueur, for no other reason than the fact that the chaebols are rivals in the fiercely competitive electronics industry.

And despite Samsung and LG's diverse and extensive portfolios, it all comes down to Samsung Electronics and LG Electronics. These are not only their respective chaebols' flagship subsidiaries, but they are also the companies best-loved by the chaebols' founders.

It's also how the rivalry began. Samsung's founder, Lee Byung-chull, and LG's founder, Koo In-hwoi, were in-laws who deeply respected each other -- that is, until the former started a competing electronics company turned that flipped that mutual respect on its head.

Sugar and cream

Samsung is not merely the largest chaebol in South Korea: it is a political, economic, cultural and social institution. Samsung Group posted revenue of 334 trillion won ($304 billion) in 2013 -- almost 25 percent of South Korea's entire GDP [Korean], according to statistics from the Fair Trade Commission.

The conglomerate traces its origins back to 1938, during the Japanese occupation of Korea, when Lee Byung-chull founded a trading company in his home province of Gyeongsang, calling it Samsung -- meaning "three stars" in Korean.

He lost almost everything during the Korean War, but he started a sugar refinery with what little capital he had left -- earning the nickname "Sugar BC" from officials of US Aid stationed in South Korea.

LG Group, though the perennial Pepsi to Samsung's Coca Cola, has rarely fallen out of the top five largest chaebols in South Korea. In 2014, the group marked 116 trillion won ($104 billion) in revenue [Korean], driven by its three core business areas: electronics, chemicals and telecommunications, according to statistics from the Fair Trade Commission. A LG Group spokesman said it posted 150 trillion won ($136 billion) last year.

LG's founder, Koo In-hwoi, also hailed from Gyeongsang Province. After moderate success in dry goods and importing, he opened The Luk Hai cosmetics factory in 1947 which produced "Lucky" face cream, a word he picked up from US forces stationed in Korea.

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The A-501, South Korea's first vacuum tube radio. Cultural Heritage Administration of Korea

In 1958, he founded Goldstar -- the company that would become LG Electronics. Despite current standings, LG was actually the first company of the two to enter the consumer electronics game. Goldstar was famous for making the A-501, South Korea's first home radio.

LG's culture is considered ultra conservative even today, in large part due to Koo's upbringing and the tendency for the chaebols to model themselves after their chairmen. Koo's family were staunch adherents of South Korea's traditional Confucianism. LG has also upheld the rule of primogeniture more than any other chaebol: Koo Cha-kyung, In-hwoi's first born son, would inherit the LG dynasty, and Cha-kyung's first born, Koo Bon-moo, leads LG today. Bon-moo, who has no natural born son, adopted his younger brother's son, a move widely believed by the South Korean press as LG's way of continuing the tradition of giving the empire to the firstborn male heir.

Thanks to their shared hometown (Koo and Lee even went to the same elementary school), Lee and Koo shared a close friendship and mutual respect. They were in-laws, too: Lee's second daughter was married to Koo's third son, who even worked at Samsung. They also kicked off Tongyang Broadcasting, a joint venture that enjoyed considerable success -- at least for as long as Lee and Koo remained on good terms.

The star wars begin

On June 19, 1969, the government announced a comprehensive eight-year plan to support the fostering of electronics businesses [Korean], thanks to President Park Chung-hee's strong personal interest in electronics. He even banned smuggled foreign radios to protect LG's interests in the market.

"I think the government's decision then to foster the technology-intensive electronics business was very astute, considering the fact that South Korea has no natural resources," said Cho Yong-soo, a professor at Chung-ang University's electric engineering department. "Trade, construction and heavy industries that powered our growth then are all in a decline today, but IT is an area where we are among the top in the world, thanks to Samsung and LG."

Samsung was prepared to dive into electronics even before the government's announcement. Lee's son told the story in his autobiography: The Samsung founder met with his friend Koo and told him that Samsung was planning to enter the electronics business. Koo didn't take the news well. He shouted at Lee, who was shocked at the unexpected opposition from his in-law. Without another word, Lee left, and the two were never close again.

Koo later told his heir Koo Cha-kyung that he felt hurt that his in-law would venture into his turf, when he would never open a sugar refinery -- Samsung's best business at the time -- out of respect. Koo's third son left Samsung and returned to LG. Lee and Koo couldn't decide how to manage Tongyang together, and in the end Koo gave up his share.

A few months later, Samsung's newspaper subsidiary published Lee's columns on why he believed the electronics industry was vital to South Korea's future. LG's own newspaper published pieces attacking Samsung's move [Korean]. In the end, Lee personally met with Park to convince him to allow Samsung to enter the electronics business, as then heavy regulations prevented from companies to enter certain industries without permission. The South Korean president finally gave the go-ahead.

Because Samsung means "Three Stars" in Korean and origins of the "G" in LG is Goldstar, the South Korean press dubbed the battle "the War of the Stars."

White goods and black ops

Samsung entered the local electronics market with a vengeance and in 1976 toppled Taihan, then the second-largest electronics maker in the country, to become runner-up behind LG. In the 80s, demand for home appliances was at an all-time high and LG and Samsung's first true competition was in consumer appliances like TVs and computers.

In 1993, two Samsung employees were caught entering LG's refrigerator factory without permission. Samsung apologized for the gaffe, but didn't miss the opportunity to blast LG, accusing their rival of sending spies to Samsung's semiconductor plant.

Samsung Chairman Lee Kun-hee famously called the act a "moral hazard," and was furious at his company's employees. Behind closed doors, however, many Samsung and LG employees were friends from the same universities and high schools, and would tell each other their company's plan over a cigarette or beer.

Under new management

LG's Koo In-hwoi died on December 31, 1969 -- the year the fight between Samsung and LG began -- and his son Koo Cha-kyung took the helm of the LG empire. LG's new chairman worked to build on his father's legacy. His father had the advantage in electronics and chemicals as the first mover, but increased competition from other chaebols meant LG needed to differentiate itself. Koo the younger began preaching the need for quality over quantity before any other chairman in South Korea.

Samsung's chairman Lee Byung-chull, meanwhile, designated his third son Lee Kun-hee as his heir -- an unusual move in Korean culture, and in marked contrast with LG -- but it would prove later to be one of his best managerial decisions. Newcomers Hyundai and Daewoo were making strides in the 80s, and a stagnating Samsung needed a wildcard.

Not to be outdone by LG, Lee Kun-Hee, Samsung's second chairman, also famously preached quality over quantity -- and with more panache. In a publicly broadcasted address, he called defects "cancers." In 1995, he burned 150,000 cell phones that were considered defective to prove how serious he was.

Semiconductors

Lee Byung-chull's boldest move as chairman of Samsung was to announce in Tokyo in 1983 that Samsung would be entering the semiconductor business. Samsung faced mountains of challenges: the semiconductor business required billion-dollar investments and it was an intense, winner-take-all industry.

At the time, Japanese giants NEC, Toshiba and Hitachi dominated the production of memory chips. They towered over their closest competition -- the US-based Motorola, Texas Instruments and National Semiconductor. Both the American and Japanese companies found the news amusing.

Samsung proceeded to develop a 64K DRAM in the same year [Korean]. Quick to prove Moore's Law, in 1988, Samsung developed a 4MB DRAM, only six months behind Japan.

Due to poor production choices made by the Japanese chipmakers and aggressive investment by Samsung during the Asian Financial Crisis, the South Korean tech giant was able to finally leapfrog their overseas competitors. Samsung became the No.1 memory chip manufacturer in 1993. It has never lost the top spot since.

"It was arguably the most important decision made by Lee and Samsung," said Lee Sin-doo, a professor in electric engineering at Seoul National University. "Samsung faced incredible challenges, of the least which was having no experience in the area, but thanks to massive, timely investments, semiconductors would become its cash-cow that will provide the seed money for success of its later businesses such as TV and mobile.

"Competence in semiconductors also meant competence in transistors, which would directly lead to Samsung's success in flat-screen panels," said Lee.

LG and Hyundai both made their own forays into semiconductors, just few steps behind Samsung. But the same Asian Financial Crisis that gave Samsung the edge would put an end to LG's efforts: In 1997 LG was forced by the government to give up its semiconductor business to Hyundai as part of mandated restructuring.

Samsung and LG survived the crisis through aggressive restructuring, which would later prove to be blessing in disguise. Not only did the crisis allow the two chaebols to focus on their core businesses, it highlighted the importance of quality, well-designed products over thoughtless mass-production.

Big screens

The big goal of Samsung and LG was to beat their Japanese counterparts who dominated the consumer electronics industry. South Korea was closing the gap in semiconductors quickly, but memory chips didn't mean anywhere near as much as branded consumer electronics.

To upend the Japanese, the South Koreans took a gamble: stop playing catch-up in analogue, and jump into digital. While Japanese companies were trying to milk CRT screens -- which resulted in bulky tube television sets -- for all they were worth, Samsung and LG proceed to invest billions into Thin Film Transistor Liquid Crystal Display, financial crisis be damned.

Demand from foreign set-makers soared, especially notebook makers, who saw the advantage of the razor-thin LCD panels over bulky CRT screens. Samsung became top dog in LCD panel shipments in 1998, according to DisplaySearch.

LG's OLED TV range for 2015. Sarah Tew/CNET

LG partnered with Dutch tech partner Philips in 1999 and formed LG Philips LCD (Now LG Display), much to Samsung's dismay. It didn't take long for both Samsung and LG to use the new screen tech in their own consumer products.

Samsung's new design focus and power in making gorgeous display translated into the wineglass-shaped Bordeaux LCD TV that in 2006 helped the chaebol become the world's largest TV maker, ending Sony's 35-year reign. While Taiwanese companies caused an upset in recent years by taking over a significant portion of the market share, and at one time, holding top place, and Chinese vendors are challenging South Korean dominance, Samsung and LG still remain the powerhouses in LCD today.

"Samsung and LG effectively took over the leadership in LCDs from the Japanese in the mid-2000s thanks to aggressive investments in the area," said Kim Byung-ki, an analyst at Kiwoom Securities.

"But strictly speaking, technology-wise, South Korea, China and Japan are now near-equal. It comes down to cost and clientele. Samsung and LG have a huge client base thanks to their dominance in TVs, and they will likely continue to capitalize on that," he added.

Connecting calls

Samsung's mobile business is the chaebol's bread and butter. It contributes over two-thirds of their total profits thanks to the popularity of its smartphones, and Samsung Electronics is considered one of the few real competitors to Apple in mobile.

Unlike Apple, which has been making mobile handsets for a relatively short time, Samsung has been in the cellphone business for more than two decades. After two middling attempts in previous years, Samsung launched the SH-770 Anycall in 1994 -- so named because it could be called anywhere in the mountainous terrain of South Korea that normally resulted in patchy radio frequencies. The following year, it became the best-selling brand in Korea [Korean].

During the Asian Financial Crisis, the South Korean government decided to strategically push wireless networks as the new growth engine of the country. The country's quick shift towards 3G networks was commercialized in 2006, effectively giving South Korea some of the fastest wireless connectivity in the world.

4G LTE was deployed in 2012, again keeping South Korea on the bleeding edge. Today LTE-A, or LTE-Advanced, has been deployed, and local mobile carriers SK Telecom, KT and LG Uplus are already eyeing the commercialization of 5G, tentatively set for 2020.

The push toward faster wireless networks made for a dream landscape for handset manufacturers like Samsung and LG. The two made countless models, each with a different niche. Samsung's SCH-X430S, dubbed the "Lee Kun-hee Phone" after the chairman, launched in 2002 and was the first phone from the tech giant to sell over 10 million units.

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LG made a name for itself internationally with the Chocolate phone. LG

"Two major occurrences after the Asian Financial Crisis contributed to Samsung and LG's growth: the emergence of ultra-fast Internet and flat-screen display panels," said John Park, an analyst at Daishin Securities. "South Korea's fast adoption of the latest high-speed networks in 3G and 4G helped Samsung and LG set a clear hardware road map for handset development."

Samsung went abroad early, securing a foothold in the US and Europe. LG retaliated with its biggest hit, the "Chocolate Phone," in 2005 and made large inroads into the US market. Coupled with their display technology in LCD and AMOLED, their diverse design portfolio and powerful components, the South Korean chaebols were quickly catching up to the Finnish mammoth Nokia near the end of 2006.

"Design was arguably the most important factor in a feature phone. Samsung and LG led the innovation then with foldable and sliding models," said Park. "Thanks to that strong design focus, Samsung quickly became world No. 2 while LG positioned itself safely within the top five. Price was the second most important then, and the two were also quickly catching up to Nokia on that too, at the time."

The road ahead

Despite their core differences, Samsung and LG can be strikingly similar in many ways. As the old Korean saying goes: "those who fight take after one another." Samsung and LG have a storied past, and there's little doubt that South Korea would be different without them.

There's no end in sight to the "war of the stars," but today the battlefield has changed. Samsung and LG's brands speak for themselves, and they're doing so on an international stage. The two chaebols aren't playing catch-up to Japanese tech companies or scrambling for footholds in the US market. Today the world is at the dawn of the Internet of Things, and two companies founded by old friends turned bitter rivals are leading the charge.