Samsung (SSNLF)’s Profits Decline Due to iPhones and Budget Smartphones

Samsung (SSNLF), the South Korean Smartphone Giant, announced that its quarterly operating profit will be about 4.1 trillion won (£ 2.3bn) against estimated 5.2tn won. This 60% decline from last year’s earnings of 10.2tn won, the lowest in last three years, is attributed to low end Chinese brands impacting budget market and Apple’s iPhones at the high end. Latest Galaxy models were unable to show promising results in July to September quarter and the same trend was recorded by the company in the previous quarter. As compared to last year, sales have registered a decline of 20% to 47tn won even below the forecasted 50.4tn won.

Besides smartphones, Samsung (SSNLF) also manufactures featurephones, phone and computer screens, PCs, televisions and semiconductor chips. Consequently, selling components for its own devices has partly contributed towards huge profits it earned in the last three years. In the two largest and fastest expanding smartphone markets, China and India, Samsung is no more the market leader due to aggressive marketing and sales of local brands. Whereas in US, launch of Apple’s iPhone 6 and 6 Plus with its signature larger screen might have taken away Galaxy’s potential buyers. Yet another factor which has eroded Samsung’s profits is High Marketing costs. Thus around 2tn won is forecasted as quarterly profit of its mobile businesses in contrast with 6.7tn won earned last year.

The company has admitted that due to larger marketing budget and reduced selling prices its operating margin has taken a hit. However, Samsung is hopeful to sell increased number of TV products and new smartphones. Jan Dawson, a Jackdaw Researcher, has indicated that competition is becoming tougher for Samsung (SSNLF) in mobile business. Apple and other android based players like LG and Xiaomi are hitting its high end market share, whereas, in Chinese market local brands have become highly competitive. Therefore, Samsung has to modify its core strategy in order to maintain its market leadership.

Hong Kong based Counterpoint Research analyst, Tom Kang believes that Samsung has the ability to grow more just by modifying its strategy since it has a loyal customer base. It has to shed its inflexibility and high headedness to compete. Lee Seungwoo, IBK Securities Co analyst advises Samsung to change its handset’s design all together and try to differentiate with design policies of Galaxy to counter threat from iPhone6. In China, Samsung has launched its large-screen Galaxy Note 4 a month earlier in late September to gain the benefit of early start since Apple which has revealed iPhone 6 has planned to sell it in China on 17 October.

Besides this, Samsung (SSNLF) has started to concentrate towards its semiconductor business to look beyond smartphones for future growth. It announced an investment of 15.6tn won to establish a new semiconductor manufacturing plant in Pyeongtaek, South Korea with production beginning in second half of 2017. Last month there was a good response for its Galaxy Note Edge smartphone with curved side screen to display weather, news and other information but its volume is not sufficient to improve earnings.