Korean Smartphone Producers’ Operating Margin Seen to Plunge 20% in 3rd Quarter

South Korean smartphone manufacturers are now standing at a critical crossroads. They are still taking the lead in terms of market share but their operating margin is plunging due to rapidly growing Chinese producers.

According to data from the securities industry, the smartphone business divisions of Samsung Electronics Co. and LG Electronics Inc. will not be able to see an improvement in performance in the third quarter this year. The operating profit estimate of Samsung Electronics’ IT & Mobile Communications (IM) Division comes to 2.1 trillion won (US$1.89 billion), down 20 percent from the 2.67 trillion won (US$2.4 billion) recorded in the previous quarter.

LG Electronics’ Mobile Communications (MC) Division is expected to post 144 billion to 160 billion won (US$129.55 million to US$143.95 million) in operating loss in the third quarter. When the prediction comes true, LG Electronics will record a loss for 14 quarters in a row since the second quarter of 2015.

An even bigger problem is that such a trend is not a temporary phenomenon but stems from structural problems. Both companies have seen their production costs increase in the process of improving the performance of new smartphone models but they have failed to take away loyal customers from Apple Inc. in the high-end market.

Yet Chinese companies have developed new technologies at a faster pace than expected, narrowing the technology gap with the Korean companies. Accordingly, Samsung Electronics and LG Electronics might not be able to maintain their competitive advantages.

Samsung Electronics failed to dominate the market in advance, though it launched the Galaxy Note 9, the strategic model for the second half of this year, a month earlier than other previous models. This clearly shows the current situation in which the company is sandwiched between Apple and Chinese producers. Yoo Jong-woo, an analyst with Korea Investment & Securities Co., said, “The Galaxy Note 9 had a hardware improvement, including camera modules, but it was released with the same price as the Galaxy Note 8. Samsung Electronics couldn’t reflect the rise in component costs in the retail price of athe Galaxy Note 9 so the earnings foundation of its smartphone business has weakened.”

Industry experts say that domestic companies can face bigger problems because of the launch of new products by their competitors in the fourth quarter. Apple’s iPhone XS series were recently released in the United States, China and Japan and to be launched in South Korea in November as well. Huawei Technologies Co. is planning to unveil its second-half strategic smartphone “Mate 20 series” next month. There are also growing concerns that Samsung Electronics’ smartphone market share will go down further and the operating profit of its IM Division would fall to 1.6 trillion to 1.8 trillion won (US$1.44 billion to 1.62 billion) in the fourth quarter when the Mate 20 series make a soft landing in the market.