Samsung of Crises
Samsung Electronics’ operating profits for the third quarter of this year dropped to 4.1 trillion won (US$3.8 billion), which is a three-year low. Quarterly sales plummeted by over 20 percent, too.
The company announced on Oct. 6 that its quarterly profits fell 59.65 percent from a year earlier and 42.98 percent from the previous quarter to fall short of the most recent market consensus of 4.9 trillion won (US$4.5 billion). Sales dropped 20.45 percent year-on-year to 47 trillion won (US$43.8 billion) as well, to record a 33-month low.
The problem is that the performance decline is too fast. Not a few economists are saying that it implies a significant problem with both its growth potential and productivity. Samsung Electronics, which topped 10 trillion won (US$9.3 billion) in quarterly operating profits last year, has failed to improve its profits for two quarters in a row since the second quarter of this year. The consecutive decline is the first since the first half of 2011, when the European fiscal crisis reached its peak.
The decline in operating profits is closely connected to the drop in the prices of Samsung Electronics’ high-end smartphones caused by the supply of cheaper smartphones from Chinese manufacturers. Its shipment is showing no increase and the factory prices are falling, which means the business profits cannot go up.
The market consensus is that the performance would not be getting better in the last quarter. Chinese handset manufacturers are increasing their supply volumes while Apple is also threatening Samsung with new products. “It seems that Samsung lost its way between the premium image of Apple and Chinese companies’ mass-market phones,” said an industry insider, adding, “Samsung may have to struggle for a while down the road because cheaper phones will become the mainstream in the market over time.”
At present, approximately 70 percent of Samsung phones are mass-market products, but Chinese companies are appealing much more to those customers who opt for handsets priced at US$150 or less. “Although Samsung Electronics is expected to increase its lineup of mid-market phones, this could backfire for it when its brand image is taken into account,” he continued.
In the meantime, Samsung Electronics is planning to make a record-high capital expenditure of 29 trillion won (US$27 billion) next year, despite the ongoing difficulties. The amount is approximately 5 trillion won (US$4.7 billion) higher than this year’s. The idea is to seek new business opportunities and contribute to the national economic recovery through the aggressive investment. Samsung Electronics’ total investment for 2015 is estimated to reach 45 trillion won (US$41 billion), given that its annual R&D investment is around 15 trillion won (US$13.9 billion).