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AP Photo/Ahn Young-joon Positive sales of the Galaxy S5 wasn't enough to stop Samsung's net profit from falling.
# Competitiveness
Samsung blames slow smartphone sales and increased competition for profit slump
Slow global sales of smartphones and tablets and rising marketing costs to shift stock were some of the factors Samsung cited as its net profit fell by nearly 20% in the second quarter.

SAMSUNG SAID NET profit plunged almost 20% in the second quarter as competition from cheap Chinese phones and the strong won saw sales slump in its key mobile business.

The South Korean electronics giant said net profit came in at 6.25 trillion won (€4.5 billion), down 19.6% in the first on-year decline for nearly three years.

Operating profit stood at 7.19 trillion won, down 24.6% from a year ago, while sales tumbled 8.9% to 52.35 trillion won.

“The second quarter was affected by several factors including the slow global sales of smartphones and tablets and escalating marketing expenditure to reduce inventory,” the company said in its earnings report.

“The appreciation of the Korean currency also chipped away at this quarter’s operating profits, which amounted to about 500 billion won in missed revenues prompted by the foreign exchange market,” it said. The firm added that the second half of 2014 would “remain a challenge”.

The won is currently running at six-year highs against the dollar, hitting South Korea’s export-driven economy.

Cautious optimism

Thursday’s figures were in line with earnings estimates released earlier this month, when Samsung also issued an explanatory note attributing the profit decline to increased competition from cheap Chinese devices.

Samsung had expressed cautious optimism about a more positive third quarter with the release of its new smartphone lineup, and a much lower marketing spend compared with the second quarter.

But while the company is expected to roll out a new version of its popular oversized Galaxy Note smartphone, the next quarter will also see the expected launch of the iPhone 6 by main high-end rival Apple.

Alarm bells have been sounding for a while over Samsung’s reliance on smartphone sales in mature markets such as Europe and the US.

Efforts to expand sales in emerging markets, most notably China, have stumbled over the growing challenge posed by smaller rivals producing cheaper handsets.

Kim Hyun-Joon, senior vice president of Samsung’s mobile unit, vowed to “act more aggressively” in China by rolling out more mid- and low-end phones.

“There are concerns about profit margins being squeezed in a short term… but growth of the low- and mid-end market is a global trend,” Kim said in a conference call.

“We will respond more aggressively to meet demand in the Chinese market… in the latter half of this year by introducing more products with better specification as well as better price competitiveness,” he said.

But he added that concessions on price would probably prevent and improvement in mobile unit profits in the third quarter.

Samsung’s share price took a beating on the earnings news, closing 3.73% lower on Seoul’s main stock exchange.

‘Smartphone heyday over’

The world’s largest smartphone maker has a diverse product line ranging from memory chips to home appliances, but more than half of its profits are generated by mobile devices.

Second quarter sales of its mobile unit fell 20% on-year to 28.45 trillion won, while operating profit slid nearly 30% to 4.42 trillion won.

“You can say Samsung’s smartphone heyday is now over,” said Greg Roh, a Seoul-based analyst at HMC Investment Securities.

“Given that companies are now competing over price rather than hardware specification, the key challenge will be how to minimise the pace of profit decline,” he said.

The consumer electronics unit – selling products from TVs to refrigerators – saw operating profit surge 80% on-year to 770 billion won, but not enough to offset the decline in the mobile business.

April saw the global roll-out of the latest version of Samsung’s flagship Galaxy series smartphone, the Galaxy S5, which came with a free premium software bundle valued at more than $500 as the firm sought to pull in buyers tempted by cheaper models from Chinese rivals like Lenovo and Huawei.

Initial sales of the S5 were positive, although critics said it offered little in the way of real innovation to set it apart.

There is a general consensus that smartphone evolution has hit a barrier that will only allow incremental improvements on existing design and technology, rather than market-changing reinvention.

According to International Data Corp., a record-high 295.3 million smartphones were shipped worldwide in the second quarter.

Huawei nearly doubled its shipments from the same quarter a year ago, while Lenovo also weighed in with strong performance, IDC figures indicated.

Samsung remained the world’s top vendor with 74 million handsets shipped, but saw its overall market share slip seven percentage points to 25.2%.

© AFP 2014

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