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Samsung: Under pressure from local and Chinese mobile rivals

November 03, 2015
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Samsung has held the leading position in the smartphone market for several years. However, of late, the com-pany’s mobile business has been suffering and its profitability dwindling on account of increasing competition.

There was a 37.56 per cent decline in Samsung’s profits from its mobile business, which went from KRW 4.42 trillion during the quarter ended June 2014 to KRW 2.76 trillion during the corresponding quarter in 2015. This sharp decline can be attributed to a drop in the company’s share in the global smartphone market. According to research firm International Data Corporation (IDC), Samsung’s market share decreased from 24.8 per cent in April-June 2014 to 21.4 per cent in the corresponding quarter of 2015 despite significant growth in the overall smartphone market. Meanwhile, the company’s revenue from smartphone sales decreased from KRW 27.51 trillion to KRW 25.5 trillion during the same period.

The company has taken various measures to regain its share in the global market. It has launched new products in the low-end smartphone segment, targeting markets like India. In the high-end segment, it has switched from plastic to metal smartphones, introduced curved screens, and reduced the price of the Galaxy S6 devices when sales fell short of expectations. While these initiatives have helped the company increase its sales volume, they have not been able to prevent smartphone vendors like Apple (in the high-end segment) and Chinese manufacturers (at the lower end) from expanding their foothold in the market.

Declining share in India

According to IDC, a total of 26.5 million smartphones were sold in India during the quarter ended June 2015. This represented a growth of 44 per cent over the 18.4 million units sold during the corresponding quarter in 2014. Samsung remained the leader in the Indian smartphone market and registered a year-on-year growth in sales.

However, its share in the Indian smartphone market declined from 29 per cent in the quarter ended June 2014 to 23 per cent in the quarter ended June 2015 owing to the entry of several local and Chinese vendors into the Indian market. As per IDC, China-based smartphone vendors tripled their shipments in India on a year-on-year basis. Lenovo, Xiaomi, Huawei and Gionee together accounted for 12 per cent of the total smartphone market in the quarter ended June 2015, almost twice their share in the corresponding period in 2014. This can also be attributed to the recent slowdown in the Chinese economy, with most vendors from the country now targeting India as the next big growth market for smartphones.

The success of these Chinese vendors has been largely due to the affordability of their devices, which have specifications similar to many of the high-end smartphones available in the market. In addition, flash sales on online platforms like Flipkart, Snapdeal and Amazon have helped them generate huge interest among Indian customers. Many of these devices were reportedly sold out within a few seconds of their launch.

Meanwhile, many local players like Micromax and Karbonn have successfully established their products as low-cost alternatives. Instead of setting up a manufacturing facility in India, these players decided to assemble mobile handsets, particularly in the low- and medium-end smartphone categories, through imports from Chinese manufacturers. As a result, they were able to cut down costs and offer smartphones at affordable prices.

Samsung’s increased sales during the quarter ended June 2015 were on account of the availability of affordable smartphones like the relatively new Galaxy J1, and older models like the Galaxy Core, while the classic S6, which was expected to increase the sales volume, struggled to compete with Apple’s large-screen iPhones. The company also faced production constraints for its more niche S6 Edge model as it had underestimated its demand.

Samsung’s new handsets had little or no product differentiation and were mostly iterations of its previous models. Moreover, the company’s devices did not offer any incremental value as compared to those launched by Chinese and local players. With the commoditisation of smartphones in the Indian market, price has been the only difference between the products of Samsung and those of other players. Given the price-sensitive nature of Indian consumers, low-priced handsets started gaining mass acceptance, thereby driving the sales and revenue of local as well as Chinese players.

Regaining leadership

Samsung has been the largest global smartphone brand for several years. While the company’s leading position in the market is not likely to change any time soon, it has started losing ground to its rivals.

Samsung has been trying hard to retain its leading position in the global and Indian smartphone markets by introducing features like curved displays and reducing the price of its old devices. However, it is not certain whether these measures will be enough to arrest the fall in the company’s profits in the coming years.

Samsung has also launched a mobile wallet called Samsung Pay, which will be exclusively available on its devices. The move is aimed at countering similar services offered by its competitors, such as Apple Pay and Google Pay. Samsung Pay leverages both near field communication technology and a new proprietary technology called magnetic secure transmission, which makes mobile payments more accessible and effortless. Samsung has also partnered with major payment networks like MasterCard and Visa. Samsung Pay has the potential of being accepted at around 30 million merchant locations worldwide, making it the only mobile payment application with near-universal acceptance. Its popularity is expected to help the company expand its smartphone sales.

Samsung’s offline distribution channel has been growing faster than its online platform owing to a wide brick-and-mortar retail presence, with over 150,000 outlets across the country. However, given the increasing number of Indian consumers using online portals for purchasing smartphones, it will have to enhance its presence on e-commerce platforms. It has already started moving in this direction, recently launching two models on Flipkart and beginning exclusive online sales of its older models. Samsung is diversifying into new telecom segments like network and smartphone equipment to improve its revenue base and reduce the dependence on its mobile business division. Its high-margin semiconductor business has been compensating for the shortfall in its mobile division. It sells memory chips and screens even to competitors, including Apple. Meizu Technology recently launched a new smartphone using Samsung’s latest Exynos processor chip, a feature previously reserved for Samsung’s high-end phones. Samsung is also planning to sell its curved screens to other smartphone makers despite the fact that it is a special feature of its new Galaxy S6 Edge phone, setting it apart from other devices in the market. The growing demand for chips and thin-film displays is prob-ably the main reason that Samsung now expects its operating profits to have reached 7.3 trillion in the quarter ended September 2015, the first quarterly year-on-year increase since 2013.

Samsung has also partnered with Reliance Jio Infocomm Limited (RJIL) for the manufacture and supply of about 70,000 4G-enabled base transceiver stations. Samsung will reportedly launch 4G smartphones exclusively for RJIL at almost half the market rate. The large-scale roll-out of 4G long term evolution services in India is expected to drive the sales of Samsung’s smartphones in the country. In 2015, of the 16 new smartphones launched by the company in India till August, 11 were 4G compliant.

Going forward, Samsung will have to increase its marketing investments to make its latest smartphones more appealing to consumers as it tries to fend off competition from the iPhone 6s and the iPhone 6s Plus in the high-end category, and the plethora of new Chinese devices in the low-end category. Moreover, product differentiation through research and development should be a priority. While consumers look for low-price options, they are ready to pay extra for additional features and new technologies in smartphones.

Introducing innovative smartphones and technologies and targeting niche segments may help Samsung deliver the same growth rates it had experienced during earlier years.

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