Samsung's mobile profit plunges 74% in Q3 as competition intensifies

Samsung Electronics' third-quarter profit plunged thanks in large part to a steep decline in its mobile unit's profit and sales, as rising competition from Chinese rivals like Huawei, Lenovo and Xiaomi has started to take a toll. Samsung said its mobile performance in the current fourth quarter remains uncertain, but the company hopes to bounce back thanks new phones with flexible displays in 2015 as well as more competitive phones at different price points.

Overall, Samsung said that net profit for the third quarter on a company-wide basis fell 49 percent year-over-year to around $4 billion (4.22 trillion won). The conglomerate's operating profit plunged 60.1 percent year-over-year to $3.9 billion, matching the guidance Samsung issued earlier this month.

Samsung's mobile unit, which the firm has relied on as a profit center the past few years, stumbled badly in the quarter, sending ripples through the wider Samsung conglomerate. Operating income at the mobile unit fell 74 percent year-over-year, to around $1.65 billion, which the Wall Street Journal reported was the lowest since the second quarter of 2011. Mobile sales slipped to $22.2 billion, down 15 percent from the second quarter and off 34 percent from the year-ago period.

Despite what it termed a "marginal" increase in third-quarter smartphone sales, Samsung's smartphone earnings fell from the second quarter. Further, Samsung said the average selling price of its smartphones slipped due to a higher share of low-to-midrange smartphone sales and price cuts of existing smartphone models. Samsung's mobile margins fell to 7 percent, which the WSJ said was the thinnest since the company began selling smartphones.

"We will focus on obtaining a sustainable double-digit percentage margin" in mobile phones, Kim Hyun-joon, a senior vice president at Samsung's mobile unit, said during a conference call following the earnings release, according to the WSJ.

According to Bloomberg, Kim added: "In terms of the profitability of the high end handsets, it may not be as easy as before to maintain high margins. We will continue to differentiate our products in order to secure a premium in the market."

Samsung does not release its quarterly smartphone unit sales, but independent research firms have been estimating them for several years now. Strategy Analytics reported that Samsung's global smartphone market share fell to 24.7 percent in the third quarter from 35 percent a year ago, in tandem with a drop in smartphone sales to 79.2 million in the third quarter from 88.4 million a year ago. Similarly, IDC found that Samsung's smartphone market share fell to 23.8 percent from 32.5 percent a year ago, in concert with a drop in smartphone unit sales to 78.1 million from 85 million a year ago.

Both Strategy Analytics and IDC said Chinese smartphone make Xiaomi became the No. 3 global smartphone maker by volume in the third quarter (Strategy Analytics pegged Xiaomi's shipments at 18 million while IDC reported 17.3 million). Xiaomi's rise is emblematic of the challenges Samsung is facing from nimbler competitors, especially in China, the world's largest smartphone market.

"Xiaomi was the star performer in the quarter, capturing a record 6 percent market share and rising into third place in the global smartphone rankings for the first time ever," Strategy Analytics analyst Neil Mawston said in a statement. "Xiaomi's Android smartphone models are wildly popular in the Chinese market and it shifts millions of them every quarter through its extensive online and operator channels. Xiaomi's next step is to target the international market in Asia and Europe, where it may face stronger headwinds of low brand awareness and technology-patent challenges next year."

Samsung, for its part, said that it expects sales in the fourth quarter to be driven by its newly launched flagship model, the Galaxy Note 4, as well as new mid-range smartphone models as well as year-end holiday sales. However, market competition is expected to further intensify, Samsung said, as rising competition from Apple's (NASDAQ: AAPL) new iPhones and other competitors "may require a potential increase in marketing expenses associated with year-end promotions."

Looking ahead to how it can regain its footing in mobile in 2015, Samsung said it will focus on "enhancing product competitiveness for each price tier and solidify longer term business fundamentals, in order to secure sustained growth and profitability." Samsung said it will focus on differentiating its products through flexible displays and metal frames.

"If Samsung expands the adoption of the display to its new flagship Galaxy S model next year, its mobile business may turn for the better," Lee Do Hoon, an analyst at CIMB Group Holdings Bhd, told Bloomberg. "Samsung may come up with a phone in mass volume using flexible displays and that will help it stand out from other rivals, even from Apple."

The company also said its new product development strategy will focus on "streamlined strategic models in each price category to enhance product and cost competitiveness." That could lead to a thinning out of Samsung's broad smartphone portfolio. Samsung also said "differentiated technologies and designs will also be applied to tablets" and that it will look to wearable devices as a new "growth engine" and will work to diversify its offerings in that market.

For more:
- see this Samsung release
- see this presentation (PDF)
- see this Strategy Analytics release
- see this IDC release
- see these two separate WSJ articles (sub. req.)
- see this Reuters article
- see this Bloomberg article

Special Report: Wireless in the third quarter of 2014

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