Samsung's mobile sales and profit dip in Q2 amid intensifying competition from China

Samsung Electronics saw sales and operating profit at its key mobile unit fall in the second quarter as the company faces intensifying competition from low-cost Chinese rivals and growing worries from investors of its ability to maintain its position as the No.1 handset and smartphone maker.

Overall, the giant electronics conglomerate reported that net profit fell 20 percent to around $6.1 billion (6.25 trillion won) from $7.52 billion (7.77 trillion won) in the year-ago period. It was the first time the company posted a drop in net profit on a year-over-year basis since the third quarter of 2011, according to the Wall Street Journal. Total company revenue slumped 8.9 percent year-over-year.

Samsung said demand for smartphones remained the same as in the first quarter and tablet demand fell slightly. The company increased its marketing but also said that sales of smartphones and tablets fell because of higher pre-existing inventories it had built up in Europe, indicating that the company overestimated smartphone demand.

Mobile sales make up the vast majority (97 percent) of sales in Samsung's IT & Mobile Communications division. Sales in the division clocked in at $26.64 billion, down 21 percent year-over-year and down 12 percent from the first quarter. The unit's operating profit dropped 31 percent from the first quarter and 30 percent from the year-ago period.

The mobile division's contribution to Samsung's bottom line fell to 61 percent from 76 percent in the first quarter, the Journal noted. Further, the unit's profit margin dropped to 15.5 percent from 17.7 percent in the first quarter, its lowest since the fourth quarter of 2011.

Samsung said sales in the U.S. were strong in the quarter but declined in Europe and in China, as 3G smartphone demand fell off there in anticipation of wider LTE rollouts.

Kim Hyun-Joon, a senior vice president at Samsung's mobile communications business, told investors on the company's earnings conference call that one upcoming high-end phone model will feature a large screen, while another will be made using "new materials." He didn't elaborate, though Samsung has hinted at bendable screens for its future smartphones. The company is expected to release its new version of its Galaxy Note phablet in the fall.

"In the second half of the year, market growth is expected to improve with stronger seasonal demand," Samsung said. "To meet this rise in demand, Samsung will focus on releasing new premium mobile devices, and a new flagship model in the large screen category, along with new mid-to-low-end models with more advanced features and competitive pricing."

The company said it plans to strengthen its product portfolio and in China it will "respond to growth in the LTE market by enhancing the competitiveness of its high-end smartphones and mass-market products." The company also plans to expand its tablet sales and its position in wearables.

"Despite this plan, prospects for improving profit margins are still uncertain, due to the increasing market competition," the company noted.

Samsung's recent mobile struggles have led to intensified criticism of co-CEO J.K. Shin, the head of its mobile vision. According to the Journal, critics say Shin may have been too optimistic about future smartphone sales, which has led to a glut of unsold phones. Further, they say Samsung may need to cut costs to keep pace with the likes of Huawei, Lenovo and Xiaomi, lower its sales expectations and use its marketing budget more efficiently. The company will also need to differentiate its products better in the long term either via hardware or software.

Research firm Strategy Analytics reported that Samsung shipped 74.5 million smartphones in the second quarter, good for 25.2 percent market share. Those figures are almost identical to ones reported Wednesday by research firm IDC, which reported that Samsung had 74.3 million shipments and a 25.2 percent share. Both firms said Samsung saw its market share drop by more than 7 percent year-over-year.

Interestingly, Strategy Analytics said Xiaomi was the No.5 smartphone player in the world in the second quarter with 15.1 million unit shipments, good for 5.1 percent of the market, the first time it has cracked the top 5. (IDC had LG Electronics as No. 5 with 14.5 million shipments.)

"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," Strategy Analytics said. "Xiaomi's next step is to target the international market in Asia and Europe, where it will have to invest big money to familiarize western consumers with its unfamiliar brand name."

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

Special Report: Wireless in the second quarter of 2014

Related Articles:
IDC: Huawei, Lenovo grew Q2 smartphone market share at Samsung and Apple's expense
Huawei sees 62% bump in first-half smartphone sales, commits to 80M shipments in 2014
Apple ships 35.2M iPhones, slightly below expectations
LG bounces back in Q2 with record 14.5M smartphone shipments, driven by G3
Microsoft's profit declines, Lumia smartphone sales reach 5.8M in quarter
Samsung dominates in Q1 smartphone shipments, but warns of coming slowdown

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