Samsung set to pounce on stalled rival

South Korea's Samsung Electronics is in a predatory mood right now when it comes to gaining ground in the global mobile-phone market. With Motorola (MOT) in the grip of a major earnings stall, Samsung has recently cinched deals with all major U.S. wireless carriers to offer its whiz-bang, feature-laden mobile phones in a market-share grab aimed directly at the industry's No. 2 handset manufacturer on its home turf.

In Europe, Samsung is rolling out its new Ultra Edition II line, the thinnest multimedia phones on the planet, to appeal to fashion-conscious consumers. It's also getting serious about catching up with both Motorola and industry leader Nokia (NOK) in fast-growing emerging markets such as India and China with more modest yet innovative phones in the $50 to $70 range.

The global assault by Samsung, currently the world's third biggest mobile-phone manufacturer, is already translating into impressive numbers. In the first three months of this year, Samsung set an in-house quarterly record by selling 34.8 million phones, up 9.1% from the fourth quarter of last year.

The younger generation

The rest of the top five manufacturers (which include Sony Ericsson [SNE] and LG Electronics reported declines in this period, though the first quarter is traditionally a weak one, reflecting the yearend shopping spree in major markets. More impressively, Samsung's profit margin jumped to 13% from 7.5% in the previous three months (it was 10% a year earlier).

Samsung executives argue the first-quarter success underscores its regained strength. Samsung struggled a bit during the past two years, thanks to the phenomenal popularity of Motorola's svelte RAZR phone line. However, Samsung added nearly 4,000 research and development engineers to prepare for the industry's shift to data-centric third-generation technologies, from voice-oriented second-generation tech.

That move helped spawn Samsung's current product blitz, and has set the stage for a run of very strong performance, the company maintains. 'The momentum for growth has just begun,' declares Vice-President Lee Kyung Ju, in charge of business planning for Samsung's mobile-phone business. 'We expect a record-breaking march to continue.'

Emerging-markets push

Spurring the drive to move up the ladder is Choi Gee Sung, president of Samsung's mobile-phone division, who until this January oversaw the company's digital media business. Choi is a versatile player and cut his teeth as a marketing expert with Samsung's chip business"”which is notoriously vulnerable to price swings. Now, Choi wants Samsung to eclipse Motorola and get within striking distance of Nokia.

At the 3GSM World Congress in Barcelona in February, his first public appearance as the new telecom president, Choi pledged to reshape his division within a year. He said he would continue predecessor Lee Ki Tae's premium strategy of wowing consumers with newfangled phones. But in a key strategic move, he also signaled that Samsung will chase growth in emerging markets, currently the biggest source of industry demand.

In fact, the sales surge this year is thanks largely to Samsung's push into the lower-priced segment. Its introduction of the $57 C140 color LCD phone in India and $70 C188 dual-band color phone in China helped its Asian sales advance 27% to 11.8 million units in the first three months of 2007, up from 9.3 million a quarter earlier.

 

Second-place battle

'We don't have a set cutoff in terms of pricing,' Samsung marketing Vice-President David Steel says of the new leadership that's also tightening supply-chain management to cut costs.

'We are really beginning to build our business now in some of these emerging markets, and we are not compromising on margin in order to do that.'

Woes at Motorola"”which posted a $181 million first-quarter loss and desperately needs a follow-up act for its fading RAZR line"”present a golden opportunity for Samsung. Wireless communications analyst Tina Teng at research firm iSuppli notes that Motorola's expected sales decline this year and Samsung's projected growth will place the two companies neck and neck during the next couple of years for the No. 2 position in the global handset industry, particularly in terms of revenues (see BusinessWeek.com, 4/19/07, 'No Easy Remedy for Motorola').

Of course, fortunes can change virtually overnight in the wireless-phone market. Motorola is definitely not out of the game, either. True, its product lineup needs shoring up, but the real source of its sales slump was its decision to pull out of a pricing war with Nokia for dominance in the low-end handset market. Motorola still sold nearly twice as many handsets as Samsung last year, although the gap has narrowed to less than a third more so far in 2007.

Two-faced, yet sophisticated

The popularity of Walkman and Cyber-shot phones at Sony Ericsson makes the fourth-largest handset player a strong rival for Samsung's spot. Sony Ericsson's first-quarter sales of 21.8 million units represent a 63.9% year-on-year jump, three times the pace of Samsung. The much-anticipated arrival of the Apple (AAPL) iPhone into the industry mix this summer is another wild card.

Yet Samsung executives believe the demand for multimedia data features and sophisticated handsets, an area where they think the company excels, and gaining ground in the critical U.S. market both play to the company's strengths. In March, its U620 phone was the first handset for Verizon (VZ) Wireless' V CAST Mobile TV service.

Weeks later, Sprint Nextel (S) said Samsung's double-faced UpStage phone"”the look of a phone on one side and a music player on the other"”would be used for its music download service aimed at competing with Apple's popular iTunes service.

Meanwhile, Samsung has been selling about 100,000 BlackJacks every month"”since Cingular Wireless (T) introduced the smartphone last November. 'The BlackJack phone heralds our push into the corporate market that will take on greater importance in the wireless Internet era,' says Samsung's Lee. With Samsung closing in both in the lower-end and data-centric, high-end segments, Motorola may have to watch its back for some time to come.

Moon is BusinessWeek's Seoul bureau chief.

 

Copyright 2000-2007 by The McGraw-Hill Companies Inc. All rights reserved.

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