hankyoreh

By Kim Jin-cheol, staff reporter

Mr. Cheon, the CEO of a medium-sized company called Primatech that manufactures buttons and other parts for Samsung Electronics, will never forget February of 2010. That was when he first visited Mexico and dreamed of taking his company to the next level. Samsung Electronics had planned to produce drum-type washing machines to be sold in the North American market, and when they started looking for companies to work with, Cheon responded. In March of that year, after returning from Mexico as part of a team researching the investment environment in the country, Cheon made up his mind to provide parts for Samsung’s washing machines.

Now it is two years later, and Cheon’s dreams are in tatters. In March 2012, just one year after the company began supplying the parts, Samsung Electronics him that they would stop manufacturing washing machines in Mexico.

“We discontinued manufacturing drum-type washing machines in Mexico this past April to achieve greater efficiency in our global production of the washing machines,” said a contact at Samsung.

Samsung Electronics’ actions came in response to an anti-dumping ruling on the washing machines by the U.S. government, but for Primatech, which had “staked everything on the joint investment in Mexico,” it was a “devastating blow.”

“When Samsung Electronics announced that they were looking for a partner for the deal, they offered a 5-year supply contract,” Cheon recalled bitterly. “I’m not saying they had to follow the contract to the letter, but for a smaller company, a unilateral withdrawal of that sort is equivalent pushing our company into bankruptcy.”

When Samsung Electronics started the bidding process, they said that production would begin in 2011 with 1,336,000 washing machines and that the goal was to increase production to 2,225,000 by 2015. But when these figures vanished into thin air as Samsung decided to stop production, Primatech faced financial ruin.

In April 2012, Primatech filed a damage claim against Samsung Electronics for 32.7 billion won (US$30.41 million), which covered 19.5 billion won (US$18.14 million) of investment cost along with the opportunity and liquidation costs.

Samsung Electronics did not reject the offer entirely. The Mexico subsidiary of the company agreed to pay 7.5 billion won (US$6.98 million) of the investment cost along with part of the liquidation cost, but did not acknowledge the need to compensate Primatech for the opportunity cost. They offered 7.83 billion won (US$7.28 million) altogether.

During the negotiations that followed, Primatech gave up on the opportunity cost altogether and adjusted its claim to 17.1 billion won (US $15.9 million). Samsung Electronics is holding to its offer of 9.1 billion won (US$8.46 million).

Throughout the process of phasing out the production and negotiating damages, what has left the biggest impression on Cheon is what he perceives to be the treachery in the attitude adopted by Samsung Electronics.

“When Samsung Electronics was looking for companies to take part in the Mexico plan, Seoul headquarters took an active role in persuading us to participate,” Cheon said. “But now that we are shutting down operations, they have more or less washed their hands of us. They keep telling us to deal with the Mexico branch, which can’t make any important decisions.”

Needless to say, Samsung Electronics sees things in quite a different light from its supplier.

“Primatech’s lack of experience and excessive investment in the early stages of the Mexico project led to defective products and a business deficit,” a contact from Samsung Electronics said. “This kept getting more serious, and in fact we had already announced that we would be discontinuing the business in 2011. Our other partners in Mexico had been expanding their supply to include refrigerators and other products in addition to drum-type washing machines, which had helped stabilize their business. Primatech was the only company that had gone about things the wrong way, and now they are asking us to compensate them for their losses.”

Responding to these allegations, Cheon said, “As we started losing more and more money because of the ridiculously low supply price that Samsung Electronics had set, we asked the company to either help us make up the deficit or to buy the operating rights and cut our losses. When they decided to shut production, it was like adding fuel to the fire. Most of Samsung’s other partner companies in Mexico are expecting losses because of further decreases in the supply price.”

“We have been supplying Samsung Electronics for 20 years, and this is the first time we’ve experienced anything like this,” Cheon complained.

Primatech has been a long-term supplier of the Philippines subsidiary of TSST (Toshiba Samsung Storage Technology), a collaboration between Samsung Electronics and Toshiba. From 2004 until now, the company has been recognized about 20 times as an “excellent partner” in the areas of injection and molding.

A contact from Samsung said, “Their claim for compensation for losses in their overseas investment is a baseless demand that lacks objectivity. We will consider legal measures to respond to any unlawful claims.”

Please direct questions or comments to [english@hani.co.kr]