Samsung’s profits fall as cheaper smartphones gain market share

Last Friday tech giant Samsung Electronics hit the market with its ultimate creature. The Galaxy S5 was released worldwide, in more than 100 countries. Samsung said there was high demand for its latest flagship smartphone in many countries across the globe such as France, India and Canada, reporting that there were long queues for the device, way before the shops’ opening. Moreover, the Korean giant is pretty confident that the peculiarities of the S5 – like being sand and water resistant – will guarantee success in areas like Middle East.

That’s pretty interesting, although there’s no real report of long queues in front of the shopping malls and it’s quite tough to verify the general demand. On top of that, the Galaxy S5 – which received positive review also gathering general consensus that it lacks real innovation at the same time – was priced lower at its commercial launch than the previous S4 model. And this is definitely not accidental.

Three days before launching the S5 the electronics company announced it was facing a second consecutive quarter of profit decline. The company estimated its first quarter operating profit at 8.4 trillion Korean WON (€ 5.76 billion) – a 4.3 percent fall – marking a second straight year-on-year decline. Sales are flat at 53 trillion Korean WON. No doubt that the S5’s price lowered is a sign, not yet a symbol, of the challenge that the company faces.

The smartphones sector is shifting to mass-market, this is the knot, as high-end growth eases off with sales slowing in mature markets. Smartphone sales growth is slowing down in North America, Europe, South Korea and Japan, while consumers in developing nations tend to buy cheaper devices. Huawei, Lenovo and Xiami are expanding in Southeast Asia and China, and consequently they are forcing down prices. Market research and analysis firm IDC estimated the average selling price of smartphones will fall to € 192 globally by 2017 from € 244 in 2013 and € 280 in 2012, generally speaking. The average price of a Samsung smartphone this year will likely be € 199, down 9 per cent from 2013, according to analysts at Nomura Financial Investment, as reported by the Times Colonist recently. Declining prices of smartphones also puts pressure on profit margins for micro components which are complementary to mobile devices, such as memory cards and display panels, which are all key products made by Samsung.

Samsung is attempting to cut costs in response to its business challenges, and this would have been unthinkable even 12 months ago. The Korean giant, the world’s largest smartphone maker, has cut back on marketing to save money. “This strategy gives them price competitiveness that can be leveraged to drive sales volume and defend overall profits,” IM Investment analyst Lee Min-Hee said, as reported by Reuters.

Many see wearable devices such as smartwatches or glasses as the next key of success in an incredibly saturated market. However, Samsung’s first internet-enabled smartwatch series, which was introduced last September, was greeted coldly by consumers. Analysts believe that, given its enormous economic potential, the tech giant will likely invest billions in this segment anyway.

No doubts that this is going to be a very challenging year for the Korean company, as also a patent trial was opened in the United States last week, with arch-rival Apple vowing to prove that Samsung copied their iPhone features and should pay more than $2 billion (€ 1.45 billion) in damages.

Most analysts expect Samsung’s earnings to improve in the current quarter anyway, and the Korean multinational company to get back on track very soon.

The Seoul-headquartered company is the world’s largest maker of smartphones, televisions and memory chips. Samsung made more than 30% of all smartphones sold in the world last year, nearly twice the share of Apple.

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