Can Samsung, LG Claw Way Out of iPhone Hole?

By Kim Yoo-chul
Staff Reporter

The explosive growth in the demand for smartphones is happy news for some manufacturers. But that's not at all good news for others, especially for those who are still updating their strategies.

Worries are running high that the relatively weaker smartphone lineups at Samsung Electronics and LG Electronics might dampen the overall profits of the world's second- and third-biggest handset vendors, respectively, according to market watchers and analysts.

They say smartphones produced by top-tier players such as Apple and Microsoft and the aggressive promotions even from the followers of the South Korean duo are poised as bigger threats for the bottom line in their profits.

"The outlook seems murky for Samsung's handset business. The operating profit for its telecommunication division in 2010 is expected to fall 4 trillion won due to its weaker smartphone lineups and massive promotions," a high-ranking industry watcher told The Korea Times.

Samsung's telecommunication division had clinched 4.13 trillion won in operating profit for all of last year.

Of the projected 4.3 trillion won operating profit at Samsung for the first three months of this year, analysts expect the contribution from the telecom division to remain between 1 and 1.1 trillion won.

"Samsung was aiming to reap some 16 trillion won in operating profit in 2010. At least 4.2 trillion won should come only from the telecom division, which controls the mobile business. But that might not be easy," an analyst at a foreign brokerage, said.

"The challenging outlook is based on a weaker competitive edge for Samsung's smartphones. It has revised the sales target for Bada-embedded smartphones to some 25 million units. But that means Samsung should spend more on promotions," he added.

Bada, which means ocean in Korean, is a mobile platform developed last year by Samsung Electronics. It remains uncertain whether Bada will appeal to software developers and handset majors.

The average selling price (ASP) for Samsung phones outside the peninsula declined by 12 percent from the first quarter to the fourth quarter of last year.

Samsung wasn't alone in lowering its ASP to maintain the market share, research firms say.

"The ASP for Samsung's export models is to remain below $115 per unit," another expert agreed.

Strategy Analytics (SA) forecasts the operating profit for Samsung's telecom unit to fall 8.3 percent in 2010 from 9.7 percent in 2009, which observers claim is due to less competitiveness in smartphones. Samsung's market share for smartphones was 3 percent, last year.

The firm's mobile chief, Shin Jong-kyun earlier said that the Nokia trailer was planning to sell 18 million smartphones this year out of overall handset sales target of 270 million. Samsung sold 6 million, last year.

To water down such uncertainties and to quell concerns about its weaker lineups, Samsung was recruiting software-talent and creating necessary task force teams to build up its mobile ecosystem, though company spokesmen were mum over the latest changes.

Red Alert

Things are as bad, if not worse, for LG Electronics. LG doesn't have its own mobile operating system.

Although it has been alloting massive investments to churn out competitive smartphones, LG has virtually failed to produce practical results.

Analysts say the situation will worsen for the world's No. 3 handset maker as times passes unless its top decision-making executives take bold action.

SA says LG, which is looking to sell 140 million phones this year, will suffer a freefall of its operating profit to 4 percent in 2010 from 7.3 percent in 2009.

A recent survey conducted by JP Power indicated that LG was delisted from the top five in terms of consumer satisfaction in smartphones. Samsung was ranked fourth, while Taiwan's HTC was No. 3. LG's 2009 share in smartphones was less than 2 percent.

"Samsung was heavily investing to ride on the changing technology trend. But I don't see any direction from LG towards that path," Han Eun-mi, an analyst at Hi Investment, said.

An LG Electronics spokesman said that the company will release more upgraded smartphones in the latter half of this year after its first "Andro-1" model wasn't received well a few months ago.

LG, which will report its first quarter earnings on April 28, is expected to report earning some 490 billion won in operating profit.

But its mobile division will be hit by the drop in ASP due to the lack of high-end products, Nam Dae-jong, an analyst at SK Securities, said.

"The ASP of LG's mobile phones fell 23 percent in the fourth quarter last year from the second quarter. That's because of a less than ideal product mix-up."

Chun Seung-hoon, an analyst at Eugene Securities, said it might be difficult for LG to recover from the profit losses in the short run as fewer smartphones are weighing it.

Despite their status with handsets, analysts, however, predict the first quarter for LG Electronics would be "fair" thanks to its impressive television sales and the rising shipments for home appliances amid signs of a global economic recovery.