Samsung (SSNLF, Financial), the South Korean mobile phone manufacturing giant, was just any other phone maker about three years ago and did not even feature anywhere near the then top shots in the segment. Today it is among one of the most sought after company when it comes to mobile devices competing at par with the likes of Apple (AAPL, Financial) and Google (GOOG, Financial). The smartphone era brought the turning point in the pathway of Samsung and bolstered it to the helm of success overnight.
Today Samsung sports the premium lineage of handsets which the world looks up to. Now whenever there is any news of an upcoming Samsung launch the whole world awaits for its launch eagerly. But for the last few quarters even though Samsung has held up to its repute in term of smartphone launches however it has been seeing a downtrend in its profit margins which has triggered the management to sit up and do some strategic rethinking. Let us take a look at what is happening on the Samsung management deck.
Samsung managementâs analysis
Samsung admitted erring in its smartphone strategy and vowed to overhaul its handset lineup after profit from those devices tumbled last quarter to the lowest in more than three years.
Samsungâs profit numbers and sales numbers did see a downside in both developed nations and developing nations. While in the developed nation it saw a dent inflicted by its arch rival Apple in the developing countries like India it had to face stiff competition from the local players offering similar features in their smartphones as Samsung but at a price tag almost half of that of Samsung. Even the much hyped Samsung Galaxy S5 did not manage to make the sales meter move much.
Though itâs not very common that companies confess about their misses in strategy and would rather cover it up with situational justifications, but Samsung stood out in setting an example when Robert Yi, the companyâs head of investor relations, admitted in an earnings conference call that Samsung had lagged behind changing market conditions. The companyâs response âwas not quick enough.â
The Samsung think tank is now considering a new smartphone strategy for the next year in which the major focus will be to enhance efficiency and fewer models with better attention to each model and do justice to consumer demand. This would allow the Samsung team to focus more on acquiring components at cheaper prices to save costs.
Samsung goes about expressing that it had given consumers more choice in terms of sizes and features to choose from suiting their needs unlike its arch rivals where the deal is more like âtake it or leave itâ owing to its huge fanfare that Apple has gathered as a brand globally.
Number mix
Though Samsung had met and exceeded analysts' expectations of net income of $3.5 billion by posting a net profit of $4 billion, this was the dullest quarter for Samsung since 2012, when the net earnings tumbled around 49%.
Operating income from its mobile segment, which held the lion's share of its total earnings stood at 60%, nosedived from $6.3 billion to $1.66 billion in a matter of a year. Quarterly sales fell 20% to $45.1 billion while operating income shrank by 60% to $3.9 billion.
In early October, Samsung management had issued a warning guideline that stated that handset profits were on the decline despite a marginal increase in shipments. Analysts speculated that many of the Samsung users this year did not go for upgrading their mobile handsets when the Galaxy S5 was launched and preferred waiting for the new iPhones to hit the shelves.
âHigh-end smartphone sales result was somewhat weak,â said Kim Hyun-joon, senior vice president at Samsungâs mobile communications business. âWe will fundamentally reform our product portfolio.â
Though Samsung managed to retain its lead in the global smartphone market during the quarter 3, but it was the only one among the top five handset makers to record a sales downtrend. Apple, Xiaomi, Lenovo (LNVGF, Financial) and LG Electronics (LG, Financial), all of them posted more than 15% growth in their smartphone shipments, according to market research firm IDC.
Samsungâs order dispatch numbers tumbled down by 8% to 78.1 million smartphones in the third quarter and its market share scaled down to 24% from last yearâs 33%.
Samsungâs journey
Samsung skyrocketed to instant success since it was among the first to launch smartphones based on Googleâs Android operating system. But soon after seeing the huge success of Samsung other players followed suit and brought in smartphones with performance, features and design, at par with Samsung with a more economic price tag due to which the sales numbers of Samsung saw a dent.
One of its answers to this stiff competition was the Galaxy Note Edge smartphone with a curved side screen that can display icons, news flashes or weather at just one touch. But due to the limited supply of curved displays, Edge smartphone production will remain low in numbers. It went on sale in Japan and South Korea this month.
Nothing much has been disclosed, but Samsung sources said the company is planning to regain its position in the smartphone section by making subtle changes to its lineage like flexible display and metal casing which will help its new phones stand out.
After being badly hit last quarter by the mobile division, Samsung is also changing its priority to the semiconductor division which reported a quarterly profit âĂ $2.19 billion âĂ than the mobile communication division.
Samsung has also released a projection to keep its investors tied to the company that its earnings would grow in the current October-December quarter, driven by the memory chip business. Though the company is not very optimistic about its smartphone business since it might have to increase marketing expenses to compete with rival handsets and to clear out inventory before the start of 2015.
The Galaxy Note 4 smartphone, which is poised to compete against the iPhone 6 Plus, will hit the shelves in more countries during the last quarter of 2014, Samsung said that the Note 4 is aimed at consumers who like smartphones as big as tablets and do heavy work on their phone while on the go.
Parting words
Though the future of the mobile device segment of Samsung does not look very bright but it aims to cover up the misses through the semiconductor and component division. Especially when companies like Google and Microsoft (MSFT, Financial) have stepped up their focus on the mobile device segment Samsung would need to do some serious rethinking with their smartphones.
In the semiconductor and component segment as well it is bound to face a stiff competition from the already existent top players and thus Samsung though holds a strong position in the market and would not get phased out at one go but its future does not look very positive. Hence it would be best to wait for a couple of quarters to see how Samsung works out its strategies to arrest its downfall before taking new investment positions in the company.
