Samsung Profit Growth Slows As Galaxy Faces Heat From iPhone And Cheaper Rivals

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Samsung’s latest financial results underscored slowing growth in the smartphone business and its increased rivalry with Apple, which seems to be closing the gap, at least in the U.S.

Samsung reported its first decline in quarterly profit in two years for the December quarter. Fourth quarter net income was 7.22 trillion won ($6.7 billion), lower than what the analysts expected. Operating income for Samsung’s mobile business during October to December period remained flat at 5.47 trillion won.

While consumers in both India and China are expected to buy over half a billion smartphones this year, they are going to look for cheaper versions, triggering a pricing battle. This basically means lower profit margins for Samsung’s Galaxy range of phones — the company’s biggest and most profitable business division.

With Apple iPhone at the higher end of the market (and even pushing out lower-priced iPhones in markets like India), and aggressive rivals such as Lenovo and Micromax selling much cheaper versions of Android phones, this year is going to be tough for Samsung.

Investor concerns on Samsung’s ability to keep growing its mobile phone business became visible early this year, when the company lost $8 billion of the market value. According to a Bloomberg report, Samsung shipped only 9 million units of Galaxy S4 during the fourth quarter ending December, much lower than the 13 million units it had expected.

Samsung chairman Lee Kun Hee even warned employees last January to watch its back and continue to innovate in new business, as competition increases and the global economy continues to drag.

Earlier this year, Apple finally managed to strike a deal with China Mobile for selling iPhones in the country. Tim Cook also said that Apple sold more iPhones in China than ever before during the quarter. Moreover, Apple now seems to be working on bigger-sized iPhones to address the opportunity in markets like China where many consumers still prefer the 5.7-inch Galaxy Note over iPhones that offer 4-inch screen.

Among new launches planned for this year, Samsung said it will release Galaxy S5 by April and at least one other wearable device during 2014.

The company attributed lower growth to currency fluctuations and one-time bonus payments to workers to celebrate the 20th anniversary of chairman Lee’s new management strategy.

To be sure, Samsung is still the world’s biggest smartphone maker, accounting for nearly half of all the sales, but the challenge is more in terms of protecting its turf — both in terms of volumes and profitability.