Samsung (SSNLF) is the world’s largest smartphone manufacturer and one of the few companies — other than Apple (AAPL) — that actually makes money at the business. However, it’s selling fewer smartphones and making a lot less money these days. Q3 earnings tell the story: profit for Samsung phones is off by 74% driving overall profit down by 60% en route to what is shaping up to be Samsung’s worst year since 2011. Reuters is reporting that during Thursday’s earning call, the company pledged to revamp its smartphone line-up.
Will the Galaxy S5 successor be clad in metal instead of cheap-looking plastic? Will it be free of the UI clutter that led Wired’s Mat Honan to describe the latest flagship Samsung phones as being so confusing they resemble “a bus full of professional wrestlers driven full speed into the feather boa section of an art supply store?”
Actually, Samsung’s pledge is all about China. That means fans of the flagship smartphone will have to wait for Samsung to put everything it has into making any future Galaxy S5 successor the ultimate smartphone.
Instead, the move is directed at high volume, low end Samsung phones for China and emerging markets, along with mid-range phones that are able to take on the aggressive Chinese manufacturers cutting into Samsung’s sales globally. Quoted in the Reuters piece, a Samsung senior VP explained “The mid-to-low end market is growing rapidly, and we plan to respond actively in order to capitalize on that growth.”
Samsung Phones Are More Than the Galaxy S5
In the U.S., most consumers think of the Galaxy S5 (reviewed here) when it comes to Samsung Phones. This is the flagship device that takes on the Apple iPhone, Google (GOOG) Nexus, HTC One and other premium smartphones.
However, Samsung makes a huge range of less expensive smartphones for other markets. Of the 78.1 million smartphones a new IDC report says the company sold in Q4, only 11 million were Galaxy S5s.
While Apple continues to challenge at the premium level, it’s the less expensive devices that most American consumers don’t see that are under siege, both in China (where Samsung phones have been overtaken by Xiaomi) and by Chinese manufacturers like Lenovo (LNVGY) whose global sales are surging even as Samsung’s slide.
In Q3, Lenovo posted a 38% increase in global sales compared to 2013, while Xiaomi was up by over 211%. Apple gained over 16% even though the iPhone 6 was only launched at the end of the quarter. Meanwhile, Samsung phones slipped by more than 8% dropping its share of the global market for the quarter to under 24%.
Faltering Sales of Samsung Phones Could End its Reign As Biggest Smartphone Vendor
Samsung has enjoyed a two-year run as the world’s biggest seller of mobile phones after toppling Nokia (NOK) in 2012, eventually helping to drive the Finnish company out of the mobile phone business altogether. But while Nokia spent 14 years on top, Samsung’s reign is in danger of being much shorter.
Much of the future growth potential for smartphones isn’t in the saturated U.S. market — where the majority of consumers already own a smartphone — it’s in emerging markets.
According to the IDC report, developed markets have now slowed to single digit growth while emerging markets are growing at more than 30% annually. And while there are consumers who will shell out for a flagship smartphone like an iPhone 6 or Galaxy S5 in those emerging markets, the vast majority of people are looking for something a lot less expensive.
That’s why the emphasis is on improving Samsung phones that compete at the lower and middle range. The cheaper Chinese smartphones run Android, so there’s no advantage to be had there. Samsung must take on its surging Chinese rivals by cutting the costs — and price — of smartphones while upping its design game.
Time to Take Action
As the Wall Street Journal points out, it was only six months ago that the IT & Mobile division (led by Samsung phones) accounted for 76% of SSNLF’s operating profit. That’s down to 43% today.
The American market may yet see a Galaxy S5 successor next year that sports a more premium look and a more elegant interface. After all, Apple and the iPhone 6 proves there is still money to made and growth potential in a flagship device. But if there’s any hope of turning things around, retaking the lead in the Chinese market and holding on to its lead in the global market, its those cheaper Samsung phones that never make it to the U.S. that must be addressed first.
That’s what Samsung’s plan to revamp its smartphones is all about.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.