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Along with Apple Inc, Samsung Corp has long been the envy of the consumer electronics industry. The company’s success with its Galaxy line of Android smartphones has eaten into the fortunes of once dominant players like HTC Corp. But the latest quarterly earnings confirmed that Samsung Corp’s reliance on mobile revenue and profit is a significant risk. Revenue declined 8.9% and profit fell 24% year on year in the second quarter of 2014. The fall was largely due to deteriorating operating conditions in the smartphone market, which was the focal point of my discussion of the company’s earnings forecast on CNBC’s Worldwide Exchange. Samsung’s main challenge is that outside of smartphones it has few other sources of profitability.
At the core of Samsung’s problem is the rapidly changing smartphone market. Not only is the demand growth stalling, but it is also becoming reliant almost exclusively on low-income consumers. At the same time its competitors both large and up and coming are becoming increasingly competitive. Not prepared to simply cede the smartphone market to Samsung and Apple, companies like Sony Corp and LG Corp have been revamping their line-ups to better compete with Samsung’s Galaxy line-up, and, by 2014, these changes started to result in share gains for smartphone manufacturers previously sidelined by Samsung. A number of Chinese smartphone brands have also been working hard to expand globally. They have long been eating into sales of Samsung’s low-end phones, but, in 2014, flagship devices from Huawei, Xiaomi and Lenovo became a serious threat to Samsung’s entire line-up. Together, these factors will continue eroding the company’s volume sales and eat into profit margins.
With over 60% of the company’s income coming from the mobile division, a deterioration in this market puts the company’s overall performance in great jeopardy, leaving its semiconductor business as the only other major source of profitability. The success of the Galaxy line of smartphones drew attention away from the company’s struggling product lines. But, much like most of its competitors, Samsung has struggled to turn a profit in TVs, cameras, and a host of other product lines. The company has also struggled to gain traction with its line of wearable electronics. With smartphone profits evaporating, these weak spots are coming to the forefront.
Samsung Corp can no longer rely on earnings from its mobile division to make up for inefficiencies in other product lines. The company will work hard to keep ahead in smartphones, and we can expect it to leverage its OLED display technology advantage to differentiate its next generation of Galaxy flagships. However, outside of smartphones, we are likely to see product line optimisation to improve profitability. The company has already announced that it will cease the production of plasma TVs by the end of 2014, but more cuts are likely to follow. A reduction in LCD TV model count would free up more resources for OLED panel development and production, so we may see the company reducing its presence in the less profitable low-end and mid-priced LCD TV lines. Samsung’s camera business has long struggled to compete, especially when it comes to interchangeable lens cameras. As camera sales continue declining globally we can expect Samsung Corp to start winding down its operations within the market.