Analysts: Samsung faces challenges ahead as mobile pressures intensify

Samsung Electronics' weaker mobile performance in the second quarter, despite the introduction of its flagship Galaxy S6 and S6 Edge smartphones, indicates that the company is in for a tougher stretch than any it has faced in years in the smartphone market, according to financial analysts.

Samsung had gone toe-to-toe with Apple (NASDAQ: AAPL) in the premium smartphone market, dueling against the iPhone with its Galaxy S line and creating the phablet category with its Galaxy Note series, reaping billions in profits along the way. Now, Samsung will be focused on maintaining its leading position in the global smartphone market as it faces more pressure to cut prices amid competition from Chinese vendors Huawei, Xiaomi and Lenovo, especially in the mid-tier smartphone market.

Sales in the Samsung's mobile division fell 7.3 percent from a year ago to around $21.73 billion. Operating profit in the mobile unit was around $2.35 billion, up slightly from the first quarter but down 37.6 percent from $3.76 billion a year ago. Overall, the unit's closely watched operating profit margin was 10.6 percent, down from 15.5 percent in the year-ago period and about the same from the first quarter of the year. All of this came despite widespread praise for the new S6 phones. Samsung acknowledged it underestimated demand for the S6 Edge phone, though it said supply issues have been addressed.

Although Samsung is still profitable in mobile, Apple is reaping the vast majority of industry profits. Samsung is now starting to feel the bite that other OEMs that rely on Google's (NASDAQ: GOOG) Android platform have felt. Lower-cost competitors pressure prices and margins, forcing price cuts.

Samsung said its average selling price for smartphones improved in the second quarter due to the expansion of Galaxy S6 sales. However, Samsung also pointed to price cuts of its own ahead for the S6 line. It said the smartphone market is expected to grow year-over-year in the second of the half of the year, but that the growth rate is expected to slow down. "The Mobile Business plans to firmly maintain its sale of premium smartphones by flexibly adjusting the price of the Galaxy S6 and S6 Edge, and launching a new model with a larger screen," Samsung said, referring to its expected launch later this month of the S6 Edge Plus.

Samsung intends to add more middle- and low-end models to its lineup and cut spending in the mobile unit. "In order to drive up the shipment, we will actively respond to the market, which could have a negative impact on our average sales price," Park Jin-Young, vice president of mobile communications, said during a conference call last week, according to Bloomberg. "There's a possibility that the third-quarter sales price could slightly drop."

According to Reuters, analysts and investors say Samsung is right to try and maintain as much smartphone market share as it can, but argue Samsung will not be able to compete with Apple on hardware alone if it does not bring a major technological breakthrough. Samsung has hinted at flexible screens for its phones but has yet to commercially launch those.

"Some still seem to think that a well-made product will sell well, but the Galaxy S6 showed that assumption is wrong," IBK Securities analyst Lee Seung-woo old Reuters. Lee expects Samsung's mobile division margins will fall to 9.3 percent this year, which would be the lowest since before the first Galaxy S phone was launched in 2010.

Nomura analyst C.W. Chung told Reuters that Samsung still has the economies of scale to outlast rivals. That's in large part because Samsung produces its own chipsets, memory and displays, which it can also sell to other smartphone players. Chung said that there will eventually be further consolidation in the smartphone market. "The ones that ultimately survive will then have plenty to be happy about," said Chung.

For more:
- see this Reuters article

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