Growing Challenges

 

There is a growing concern about the weakening competitiveness of the local smartphone industry. Samsung Electronics recorded an earnings shock in the first quarter of this year owing to poor performance of its smartphone business, and Pantech is likely to enter court receivership. LG Electronics also recently released its flagship smartphone the G3, but has met with little success.

The gap between premium and mid to low-range phones is narrowing, as the premium smartphone market is growing slowly. Sony, Lenovo, Huawei, Xiaomi Tech, Asus, and Acer also continue to launch new offensives to dominate the mid to low-end market. On top of that, the fact that it is hard to find new growth engines that can lead to explosive growth of the market makes the prospects for the local smartphone industry bleak.

Samsung announced its Q2 estimate on July 8, recording an earnings shock with sales of only 52 trillion won (US$51 billion) and operating profits of only 7.2 trillion won (US$7.1 billion). Samsung's Q2 performance fell far short of market expectations that predicted a high 7 trillion to low 8 trillion won in profits.

The tech giant's weaker-than-expected performance is mainly attributable to a continuing downward trend in the exchange rate, a reduction in sales of smartphones and tablets, and marketing costs aimed at reducing the inventory.

A Samsung associate explained, “The reason for our company's worsening performance lies in the fact that competition between handset makers became intense amid the slowing growth of the smartphone market. So, Samsung, Apple, HTC, and other smartphone manufacturers all encountered difficulties. But the unfavorable market conditions are not related to structural problems. The current market conditions are just temporary phenomena.” The official added, “It will be possible for our company to improve performance in the latter half of this year through new growth engines like tablets and wearable devices other than smartphones.”

However, the outlook for Samsung in the second half is bleak because of the continuing slowdown in global premium smartphone market growth. Moreover, the tech firm has been floundering in the mid to low-end market, which is believed to be the main cause of Samsung's poor performance in Q2.

According to industry sources on July 10, Samsung predicts that a new market of phablets, tablets, and wearable devices will become new growth engines in the second half that can help the firm get out of a slump in the smartphone market. To achieve this, the firm is planning to focus on expanding the market by showcasing a variety of products such as wearable devices — the Gear 2 and Gear Fit — the GALAXY Tab S, and the Gear Live.

The market for wearable devices compatible with smartphones is expected to continue to grow, but the tablet market is likely to show a downward trend next year.

Taiwanese IT news site Digitimes recently reported that IT companies are reducing the number of new models owing to a weak outlook in the tablet market. But they think that the wearable device market will grow fast.

Pantech's situation also shows the limits of the local smartphone market. Creditor banks of Pantech, which is currently under a debt-workout program, are aiming at management normalization of the troubled company through three mobile carriers' participation in a debt-for-equity swap, but they did not get any response from the carriers. If the three carriers refuse to agree on a debt-for-equity swap, creditors must end debt restructuring and file for rehabilitation proceedings. Since they did not hear from carriers, they extended the deadline for the agreement indefinitely as a last resort.

Not only creditor banks but also handset makers in the nation are hoping for the management normalization of Pantech on the grounds of healthy competition of the local smartphone industry and concerns about the outflow of technology and manpower. Some in the industry think that Pantech's crisis is largely attributable to current market conditions in which smartphone makers compete with each other for subsidies rather than product performance, and the government is regulating mobile phone subsidies as a result.

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