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| Consumers check features of the Samsung Galaxy S7 and S7 Edge at the Galaxy S7 Experience Zone installed in Seoul Station in this file photo. / Korea Times file |
Amid collapse in handset profits, firm seeks new strategy for profitability
By Kim Yoo-chul
Samsung Electronics is pursuing a new strategy to maintain its place as a competitive global cell phone maker and cope with a continued collapse in profits in the sector.
"We have been seeking growth in terms of shipments for years. Samsung is preparing for the post-smartphone era and that's why our handset unit has identified profitability as a priority over growth," an executive at Samsung Electronics said.
The executive added the strategy shift doesn't mean Samsung will let its rivals take over the company's market share.
"Samsung will keep the company-set share according to markets. We will launch promotional campaigns if we have to. But the company will be unlikely to initiate cash-intensive promotions to clear inventory and increase market share," he said.
Samsung is expected to maintain ship around 400 million smartphones based on the revised business strategy.
The executive added that the company had notified investors of its new strategy.
The change is expected to boost the profit margin at the company's handset division by up to 17 percent during the second quarter of this year from 15.8 percent a quarter earlier, though a Samsung spokesman declined to comment.
The rapid rise of budget Chinese smartphone vendors and consumers' lukewarm response toward "fancy features" were cited as "key reasons" for Samsung to change its mobile strategy, according to the executive.
Samsung plans to cut the number of budget models and is unlikely that the market leader will follow Chinese competitors seeking increased share with aggressive pricing strategies.
Fitch Ratings director Shelley Jang agreed with the executive as the global credit ratings agency expects Samsung's handset margins to decline gradually to high single-digits percentage over the long term due to increasing competition and narrowing product differentiation as lower-cost competitors' handsets improve.
"However, the positive impact from the launch of new flagship models _ Galaxy S7 and S7 Edge will lead to revenue growth and modest margin improvement in 2016," Jang said.
The Samsung executive said the strategy shift won't cost the company's handset business too much given the firm's technology leadership, strong market position and diversified business portfolio.
"We expect Samsung's financial position to remain intact over the next 12 to 18 months, backed by its robust cash generation," said Fitch.
LG follows Samsung's steps
Samsung's chief local rival LG Electronics is following suit by scaling down the number of staff members and tightening its marketing budget.
LG Electronics is expected to report an operating loss at its mobile division led by the company's co-CEO Cho Juno for the second quarter of this year, extending its losing streaks for the fourth straight quarter.
The number of workforce at LG's mobile division was cut to 7,321 by the end of the first quarter of this year from 8,041 that it kept in the second quarter of last year, LG said.
Because LG's global share was below 4 percent by the first quarter of 2016, LG has no plans to significantly cut the shipment of its G-branded flagship models.
Rather, the firm is seeking to improve corporate margins by sending staff members to the vehicle component (VC) business division.
During the same period, the number of its VC division rose to 3,625 from 2,635.
"The biggest difference between Samsung and LG is that Samsung Electronics has realized the ‘economies of a scale' in its handset business, meaning Samsung is well-situated to seek profitability by making some changes. But LG Electronics is nowhere to be seen. LG Electronics is in deep trouble, which is unlikely to be addressed in the near future," said an official who has recently moved to the VC division.
LG released its first modular-type G5 in late March and the initial response to the new G5 was impressive. But LG failed to continue the positive traction due to tight supplies.
"LG Electronics may report a 100 billion won operating loss during the second quarter and we expect LG to report 37 billion won and 18 billion won operating losses in its handset business for the third and fourth quarter of this year," said Daishin Securities in a report.
According to CounterPoint Research, a market research firm, LG shipped 13 million smartphone units for the January-March period, a cut by 12.3 percent, year-on-year. It is competing with Samsung, Apple and Huawei in the premium segment.
"LG needs to overhaul its smartphone business from the starting point. Market leaders plan to release new phones with a new form factor in late 2017, at the earliest. This will put further pressure on LG," said the local brokerage.
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