Samsung looks to China as it struggles with smartphone profitability

Samsung Electronics reported a 49 per cent drop in Q3 net profits to $4.0bn. Revenue plummeted 20 per cent year-on-year to $44.9bn. Revenue from its mobile division fell 34 per cent to $22.3bn, representing 49.6 per cent of the firm’s total revenue (down from a 60 per cent share this time last year). Operating profits from mobile almost fell off the chart, down 74 per cent year-on-year to $1.7bn. Unfortunately for Samsung, neither its Consumer Electronics or Device Solutions (semiconductors and display panels) divisions – the other two parts of Samsung Electronics – showed any significant increase in sales, but thankfully no decrease either.

But we had been warned this was coming (despite an absence of emailed press releases on results day from the usually prolific communications team, perhaps thinking that the media would miss the bad news?)

Two questions though: why, and what is Samsung doing about it?

According to Samsung, a “slight growth in shipments” of mobiles was negated by a decrease in average selling prices, which it put down to a “weak smartphone product mix and sales decrease” that put pressure on its cost structure. It said that its mid- to low-end smartphones sold “slightly” better, but the continuing availability of older models at ever-decreasing prices affected the ASP. There was no joy from its tablet sales, which it said were seasonal.

All of which leads us into the next quarter and the holiday season. Samsung said that it expects demand for both smartphones and tablets to increase, although it warns that competition amongst vendors will intensify and that there will likely be a price war sparked by end of year promotional activities.

As to what Samsung intends to do about reversing this negative slide, it has already taken the first steps, although it is certainly not being panicked into doing anything radical just yet. Earlier today it announced two new mid-tier smartphones that will launch in the China market; the Galaxy A3 and A5. They both feature full metallic bodies in the hope of attracting new sales, although the firm refused to released advance pricing details.

“For our mid to low-end smartphones we will enhance product competitiveness by differentiating our displays and materials as well as upgrading camera functionality," SVP Kim Hyun-joon told analysts yesterday, as well as promising to take steps to keep margins at double-digit levels.

According to research firm IDC, Samsung held a 23.8 per cent global market share in smartphone shipments in Q3 with 78.1m units, down 8.2 per cent year-on-year, whilst second-placed Apple saw its sales increase 16.1 per cent in the quarter to 39.3m units. But the real movement is occurring behind these two – Xiaomi has stormed up the charts with 17.3m unit shipments in Q3 to take third place with a 5.3 per cent share, which represents 211 per cent growth year-on-year.

It is highly unlikely that Samsung will lose its top spot in the near future, but as it fights to keep its crown it will merely place even more cost pressures on itself, which will do nothing to help its declining profitability. Samsung needs to do far more than release even more smartphones into an already over-crowded market.