China (and Cupertino) Are Killing Korea in Mobile

Samsung, #1 in the mobile phones based on unit shipments, has two big problems in mobile. Apple’s iPhone; and China in general and Huawei in particular in the Android world where they live. They have just announced their fifth quarter of decline. Revenue was down 8% year on year but operating profit declined 38%. They sold 89M handsets (which includes about 20% of non smartphones, so maybe 72M smartphones). Their big problem market is China where they used to be the market leader but now are behind Apple, Huawei and Xiaomi (and maybe Lenovo/Motorola).

One problem is that the Galaxy 6 is not selling as well as expected. I’ve read that a problem with Galaxy 6 is that Samsung pretty much cloned an iPhone. Since iPhone doesn’t have a replaceable battery, or a memory card slot, and is not waterproof, those things don’t matter, right? The problem is that the Galaxy 5 had all of those things and probably some of its success was due to people who cared about them picking Galaxy over iPhone. After all, if you want an iPhone then why not just buy one; Apple will be happy to sell you one. But if you really want something different from iPhone, then how about the curved screen. Buy the “edge” version. The problem is that you can’t since, according to Bloomberg anyway, they failed to produce enough curved screens to satisfy demand. They said that they will increase their capacity for curved screens early next year (horses and stable doors spring to mind).

Or if you want a replaceable battery, waterproofing, memory slot then you have lots of choices and Huawei seems to be one of the beneficiaries. Analysts were expecting them to sell 50M smartphones in the first half but they also just announced that they sold 10M phones in each of May and June, which is clearly a higher run-rate. They must be close to 30M smartphones for the quarter. And, yes, they are profitable. They look to be #3 with 7% market share, ahead of Xiaomi who are now trying to sell in markets other than China and Singapore (such as India) where they don’t have existing distribution channels.

Samsung have said that they will further reduce prices on the Galaxy 6 to drive growth, but as Yoo Eui Hyung, an analyst with Dongbu Securities in Seoul, says:Poor sales of S6 only proved that it can’t beat Apple in brand loyalty among users and just ended up being one of the many Androids. The price cuts may increase sales, but I highly doubt it could promise bigger profit growth.

But there are two Korean cell-phone manufacturers. If Samsung is struggling then surely LG should be a beneficiary. But they only sold 14M phones in Q2, down 8% from Q1, and are basically breakeven. Their flagship phone, the G4, has the features that Samsung dropped from the Galaxy 6 so it is weird that they haven’t picked up share. Since they are only breakeven they have already executed what Samsung plans, namely selling the phones at a low price. That can drive volume but not profit. LG’s profits fell 45% mainly due to smartphone sales being down.

One area where Samsung is doing well is semiconductor. The switch from Qualcomm’s Snapdragon to internally developed Exynos was widely reported, not least in veiled remarks on Qualcomm’s earnings calls. Between the application processor business, and their memory business (plus some other smaller businesses) their profits in semiconductor are up 83%. But Samsung semiconductor needs Samsung mobile to be successful. Every Galaxy 6 sale lost to Huawei is an Exynos chip not sold. That dynamic may change a little going forward since Apple’s 6S application processor is known (or at the very least strongly rumored) to be fabricated by Samsung Foundry. So Samsung Semiconductor would love Galaxy 6 to be wildly successful, but when they lose a sale then they want them to lose to Apple not Huawei or Xiaomi.

The Bloomberg piece is here.