Profit Differential
Thanks to the strong sales of the iPhone, Apple posted US$18.2 billion (about 18 trillion won) in operating profits in the first quarter, reaching a record high for a quarter. Out of the 18 trillion won of total operating profits, 12 trillion won (US$11.2 billion) comes from operating profits related to the iPhone. In comparison, Samsung Electronics is expected to reach only 2.4 trillion won (US$2.24 billion) in operating profits from its own smartphone business in the first quarter this year.
Samsung Electronics got the lead in the sales of smartphones in the first quarter, but Apple overwhelmed it in terms of profit. As the competition between Apple and Samsung has begun in earnest in this second quarter with the launch of the Galaxy S6, the profitability of Samsung smartphones has become the talk of the town.
On April 28, Apple announced that it recorded US$58 billion (about 62 trillion won) in sales, a 27.1 percent increase from a year earlier, in the first quarter from January to March. Its net profit increased 33 percent to US$13.5 billion (about 14 trillion won) compared to the same period last year, while its operating profits grew 35 percent to US$18.2 billion (about 18 trillion won). It renewed the highest record for a quarter in the fourth quarter last year.
The iPhone 6 led such good results. The iPhone was sold 61.7 million times in the first quarter, a 40 percent growth from a year ago. About two thirds of the total sales of Apple came from the iPhone. In particular, the sales of the iPhone in the Chinese market increased as much as 72 percent compared to a year before, and the sales of the iPhone in Chinese-speaking countries surpassed its sales in the U.S. market for the first time.
Due to Apple’s earning surprise, Samsung Electronics is being pressured, as the company is expected to announce its Q1 performance today. The stock market expects that the operating profit of Samsung Electronics’ IM division, including smartphone, in the first quarter will amount to 2.4 trillion won (US$2.24 billion). The sales of its smartphones in the first quarter is estimated at 82 million units, a 9 percent growth from the previous quarter. In terms of sales alone, Samsung sold 20 million units more than Apple. However, the profits is only a fifth of Apple’s.
Industry sources say that Apple has completely overwhelmed Samsung Electronics in the strategy of high-end smartphones. Some say that it is partly due to the fact that Samsung Electronics has focused on selling low-end products, including the Galaxy A, in emerging markets.
It is also said that another factor is Samsung Electronics’ sales structure, in which the production cost is high while the selling price is relatively low. According to foreign media reports, including by Re/code, the production cost of the iPhone is estimated at US$240 (257,184 won), while the cost of the Galaxy S6 Edge is US$290 (310,764 won), which is US$50 (53,580 won) more expensive than Apple. However, the sale price of the Galaxy S6 is 60,000 won to 70,000 won (US$56 to 65) cheaper than the iPhone 6. Accordingly, Apple’s total margin rate of smartphones in the first quarter reached 40.8 percent, a 1.5 percent point increase from a year ago. The market presumes that Samsung Electronics’ smartphone margin rate will be only 10 to 20 percent. Also, Apple has set a 31 percent business profit rate, while Samsung Electronics is recording early 10 percent.
Moreover, Samsung Electronics is directly involves in manufacturing its smartphones from the investment in the smartphone production facilities to the supply of parts. However, Taiwanese OEM Foxconn produces the iPhone. This is why the production cost of the iPhone is much lower than the cost of Samsung Electronics. Since Apple’s iPhone has lower production cost, higher selling price and is selling well due to high popularity, it is the structure that Samsung Electronics cannot outdo Apple in profits from the start.
Samsung Electronics is confident to significantly improve its performance in the second quarter with the Galaxy S6. However, it is too early to say that the Galaxy S6 will be a big hit, and some industry sources even say that it will be a “medium hit” due to the lower sales than expected.