Samsung should rethink mobile growth strategy

Illustration: Chen Xia/GT

Smartphone prospects fade for S.Korean brand

South Korean tech giant Samsung has certainly seen brighter days. As many tech industry observers have noted, the company is facing new pressure from the latest iterations of Apple's iPhones as well as a continued squeeze from an up-and-coming pack of Chinese mobile device makers.

Indeed, Samsung's mobile device shipments have weakened recently, and the downturn is especially dramatic when compared against the results of its rivals. According to figures from IDC, a provider of technology industry data, Samsung's smartphone shipments contracted 3.9 percent year-on-year in the second quarter. In contrast, Huawei, a Chinese telecommunication equipment company based in Shenzhen, saw smartphone shipments jump to 20.3 million units in the second quarter, representing a dramatic 95.1 percent jump from the same period last year. Lenovo, a Chinese computer and mobile device maker, notched a 38.7 percent increase in smartphone shipments over the same period. Meanwhile, Apple, Samsung's largest challenger in the top-tier market segment, recorded shipment growth of 12.4 percent.

This situation has had an obvious impact on Samsung's earnings. Although Samsung has yet to reveal its complete financial results for the latest quarter, in a regulatory filing issued Tuesday the company announced that operating profits were down 60 percent year-on-year to 4.1 trillion won ($3.8 billion) during the three months ending in September, a slump which marks Samsung's fourth consecutive quarterly decline in operating profits. The company also noted - again, without offering specific figures - in its filing that the operating margin in its mobile unit had thinned due to rising marketing expenses.

These results follow a disappointing second quarter when the South Korean giant saw sales in its mobile business drop 12 percent quarter-on-quarter to 27.51 trillion won, a contraction it pinned on weakening demand in the European market and lower 3G demand coupled with intensified price competition in China. Meanwhile, operating profits in Samsung's IT and Mobile (IM) segment were down 31 percent quarter-on-quarter.

To stay competitive and promote profit growth, Samsung announced Monday that it will spend 15.6 trillion won to build a chip plant in South Korea, a move that will divert money into the company's non-mobile business interests. Although many experts see vertical integration - a practice whereby the company makes many of its own components for its self-branded devices - within Samsung as a key factor in its success, it remains to be seen whether this strategy will pay off for the company.

According to a recent analysis by Jackdaw Research, a technology research and consulting firm, between 60 and 80 percent of Samsung's operating profits and over 50 percent of revenue have come from its IM business unit over recent years.

Manufacturing smartphones with self-made chips can reduce costs over the long term, but recent trends in Samsung's mobile business unit hint at a prolonged decline. With so much of the company's revenue and operating profits coming from its mobile division, if business in this division takes a serious turn for the worst it could have a tremendous impact on Samsung as a whole.

Samsung has long struggled to differentiate its software and its services in an increasingly crowded marketplace. Its halting progress on these fronts has left it vulnerable to Apple in the high-end market segment as well as Chinese smartphone manufacturers with their sights on value-focused consumers. And since the Android operating system which powers Samsung's mobile devices is available to any manufacturer that cares to use it, there are few unique software features on Samsung's devices to prevent users from jumping ship to a different brand.

To stay profitable, it seems that Samsung cannot completely avoid intense price competition in China and other emerging markets. It should focus on launching less expensive mobile devices with unique software features that can help it stand out. This could not only help Samsung retain its market share, it could also bolster the company's chip business. Meanwhile, two other component divisions - semiconductors and displays - could generate significant shares of revenue if Samsung steps up its contract manufacturing operations for other smartphone and tablet brands.