Samsung’s profits are down nearly 25%, here’s why…

If the only place you can go from rock bottom is up then the inverse of the well known saying has just hit Samsung hard. Its earnings for the second three months of the company’s financial year are a disaster, mainly because the market has finally started to catch up with the lead Samsung had bulldozed for itself with Android.

The South Korean based electronics giant has issued an earnings preview today which predicts that its profits will be 24.5% lower than those for the same period last year. It has also has issued investors with a letter that explains why the once seemingly unstoppable juggernaut has taken a step backwards.

For two very different reasons and against two very different competitors, Samsung’s sales in China and Europe have fallen sharply. In Europe the smartphone market is rapidly approaching saturation with more and more consumers looking to keep devices for longer periods of time. This problem is exacerbated by the fact that there has been very little perceived improvement in smartphones from the likes of Apple and Samsung who were both heavily criticised for a lack of innovation in their flagship smartphones last year. Slowing sales meant that Samsung landed up with more inventory than it had planned on having which meant and increase in marketing and subsidies to get rid of the stock which hit the bottom line even harder.

In China the story is completely different with low cost Android smartphones from Xiaomi, Lenovo, ZTE and Huawei offering stiff competition to Samsung in a hyper-competitive and price sensitive market. Chinese consumers are also holding off on buying new smartphones that don’t have access to 4G/LTE connectivity as China Mobile, the world’s biggest network operator, is in the middle of massive roll out of 500 000 LTE base stations.

As Apple learned when sales of its iPad began to slow, consumers don’t upgrade their tablets as often as they do smartphones, and Samsung has just found that out the hard way as well. Generally flagging tablet sales have also been hit by the fact that phablets, with their large displays, have cannibalised sales of tablets with smaller displays. In other words, one of Samsung’s most successful product lines, the Galaxy Note, is now killing its tablet sales as well.

The South Korean currency, the Won, is not helping matters either having been on a tear against most major world currencies, especially the US dollar, which means that Samsung’s profits which are reported in its home currency will be smaller when converted from foreign currencies.

Is Samsung facing a similar fall from the top that we have seen from Nokia and BlackBerry? I would say not, but a drastic increase in competition in all sectors of the market could very well see Samsung’s once unassailable lead at the front of the smartphone pack disappear into a much smaller, but still sizeable chunk of the market, within the next two years.

[Source – WSJ]


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