Although Samsung XKRX:005930 remains the king of the hill in smartphone market share, its fortunes have suffered recently in that saturated market. The company’s presence in the Chinese handset market has virtually disappeared. Five years ago, the South Korean company was a colossus in the Chinese market, selling one out of every five devices in the country. Today, the company controls less than 1% of that market. The company was outmaneuvered by its Chinese competitors, Huawei, Xiaomi HKSE:01810 and OPPO, who sold comparable handsets at substantially reduced prices.
Although Samsung is still the top seller, its worldwide share dropped to 18.9% in the third quarter, compared with a 22.3% share in the previous year. The company hopes to recover from these setbacks and staunch the hemorrhaging to Chinese manufactures by its recent introduction of a wide array of new models it envisions will have cross-appeal to consumers in diverse segments of the market.
The company introduced four different variations of its Galaxy flagship, aimed at reaching a larger and diverse group of consumers. The star and most anticipated entry in its new lineup was the Galaxy Fold: a 4.6-inch smartphone that unfolds into a 7.3-inch tablet. The reaction of those in the Bill Graham Civic Auditorium where the rollout event was held was telling. When the new device was debuted, the technical prowess and multifunction capabilities drew loud applause from the audience, but when the price tag was revealed, audible groans could be heard.
Samsung has produced what many had pined for in a large smartphone, but thought could never be engineered: a large-screen smartphone that can fold in half, harkening back to the days of the Motorola flip and the convenience of being able to put the cumbersome device in a small pocket or purse. Although the bifold phone’s unit sales will be the ultimate arbiter, given the sheer number of existing devices available today that were not on the market 10 years ago, Samsung may be relying on yesterday’s consumer preferences that may no longer be as desirable today.
The functional gap between a large smartphone and a tablet is a difficult consumer niche to crack in terms of ascertaining preferences, likely demand and meeting consumer expectations. Samsung, with its new technically savvy small footprint entry, hopes to successfully address consumers who would appreciate the hybrid model for its convenience, portability and performance. Its 7.3-inch screen is not drastically smaller than Apple’s AAPL low-end iPad, which sports a 9-inch screen. But will there be enough consumers who will appreciate the hybrid design sufficiently to shell out $2,000?
Samsung’s strategy is a high-stakes gamble. The company is following the identical marketing strategy previously adopted by Apple. That strategy resulted in a 15% drop in revenue from Apple’s flagship product along with a 12% unit sale decrease, prompting the company to make an unprecedented revision to its earlier guidance figures. Does Samsung believe it can crack the nut of a saturated and maturing market where longer replacement cycles have plagued the once-dominant players?
If Samsung has written off the Chinese market and hopes to penetrate promising new regions, such as the nascent Indian market, it may be in for a rude awakening. Apple’s previous plans to make up for dramatically slowing sales in the Chinese market by penetrating the high-potential Indian market have been a colossal flop. Apple posted revenues of $1.8 billion from India in 2018, which is less than half of what it had hoped to capture. Since its presence in the world’s largest smartphone market has dissipated, what region does Samsung believe will respond favorably to its new models?
Much to Apple’s chagrin, many consumers, especially in the world’s largest smartphone market, balked at paying the steep price tag for its high-end luxury model. Even sales from the lower-priced model disappointed as Chinese consumers could obtain similar, if not more feature-rich, phones from domestic brands at drastically lower prices. The difficulty is that Chinese smartphone makers have closed the gap in terms of features and technical sophistication that once made Apple unrivaled in the smartphone market.
Samsung faces the same risks Apple encountered. It is difficult to see how its new models will be able to surmount the same obstacles Apple faced with a nearly identical product-price strategy rollout. Samsung is also betting it can break the longer replacement cycles that have plagued the maturing smartphone market by offering phones that will be 5G capable. However, 5G is still in its incipient stages of development; mobile carriers currently are not prepared to make the network a seamless and reliable experience for mobile phone users.
The big question, which at present remains unanswered, is will Samsung succeed where Apple failed in surmounting the replacement cycle dynamic that is endemic presently in the mature smartphone market?
Disclosure: I have no positions in any of the securities referenced in this article.
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