Has Samsung Electronics’ smartphone Business Reached Its Limit?

With Samsung Electronics’ negative performance outlook for the last quarter of 2013 turning into a reality, keen attention is being paid to how it will tackle the slump down the road. 

The consensus of electronics and securities industry insiders is that Samsung’s current efforts for the expansion of the mid-end smartphone market will do the trick in the short term, but the deterioration of its profitability is likely to continue, unless its new growth drivers such as battery and medical device manufacturing do their part.

At present, the mid-end smartphone market and China are mentioned as the keys to a turnaround. “The IT and Mobile Division of Samsung Electronics, which is in charge of the company’s mobile phone business, is predicted to have posted six trillion won [US$5.6 billion] in operating profits in Q4, 2013 due to the shrinkage of the premium smartphone market,” said LIG Investment & Securities analyst Hong Seong-ho, adding, “The amount is approximately 700 billion won [US$655 million] short of its highest record made in the previous quarter.”

The high-end smartphone market of handsets priced at US$500 or more has remained in the doldrums across the world since last year. The average selling price of Samsung’s phones dipped below US$300 for the first time, to reach US$272 in the third quarter. Under the circumstances, experts are forecasting that Samsung will concentrate on the market of between US$300 and US$500 so as to improve its profit-making capabilities. 

“If focusing on the mid-level smartphone market with its high manufacturing capacity and wide product distribution channels, Samsung will be able to increase the size of its operating profits significantly, although there would be some drop in profitability,” the analyst continued.

Still, its outlook in the Chinese market is not entirely rosy. “Apple and the number one local mobile carrier, China Mobile, are partnering with each other in the emerging LTE segment, while the rest of the Chinese market is dominated by local companies such as Huawei, ZTE, and Xiaomi Tech, which means things are far from favorable for Samsung,” said an industry insider.

In the meantime, the deteriorating profitability is expected to become a sort of trend for many in the mobile phone industry, not limited to Samsung Electronics. “It seems that the development of the performance of smartphones has reached its limit and no breakthrough is seen for now,” said Baek Jong-seok, Hyundai Securities research analyst. He went on, “The companies are expected to focus on design and cost competition, and thus an improvement in profitability will take more time.”

Experts are pointing out that Samsung Electronics needs to find new growth momentum following semiconductors and mobile phones if it is to get over this crisis. In fact, Samsung has already announced five new growth plans in 2010. According to the plans, Samsung will invest 23 trillion won (US$21.5 billion) in those sectors by 2020 to record 50 trillion won (US$46 billion) in sales. 

Specifically, it is going to invest 1.2 trillion won (US$1.1 billion) in the medical device business and double its manufacturing capacity to 20,000 units a month by 2020. To this end, it has acquired medical instrument manufacturers like Prosonic, Nexus, and NeuroLogica, but has shown no remarkable business results. The story is not so different in the LED and automobile battery businesses, either.