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Samsung's year goes from bad to worse as profits continue to plunge

Weak smartphone sales and increased competition meant the company recording its smallest quarterly profit in three years.

Image: AP Photo/Lee Jin-man

SAMSUNG REPORTED ITS smallest quarterly profit in nearly three years Thursday as its key smartphone business faltered under competition from Apple’s iPhone 6 and Chinese handset makers in an increasingly saturated market.

Net profit for the South Korean electronics giant amounted to 4.22 trillion won (€3.17 billion) for July to September, marking a dramatic fall of 48.8% from a year ago, and the lowest figure since the fourth quarter of 2011.

Operating profit also dropped 60% from a year ago to 4.06 trillion won (€3.05 billion), while sales tumbled about 20% to 47.4 trillion won (€35 billion), Samsung said in a statement.

The firm’s mobile phone unit reported operating profit of 1.75 trillion won (€3.05 billion) in the third quarter, a dramatic decline from 6.7 trillion won (€5.04 billion) a year ago.

Samsung has a diverse product line ranging from memory chips to home appliances, but it’s the mobile division that had driven the company’s record profit surge of recent years.

The current slump was starkly reflected in the fact that the mobile unit’s operating profit in the third quarter accounted for 43% of the company’s total, compared to 76% just six months ago.

Despite a slight increase in unit sales volume, actual sales revenue tumbled to 24.6 trillion won from 36.6 trillion won.

Falling margins

“The average selling price of smartphones declined due to an increased share of middle- to low-end smartphone sales and price reductions of existing smartphone models,” the company said.

The third-quarter performance by the world’s largest manufacturer of smartphones and televisions followed a 20% drop in profit in the second quarter.

Despite the slump, Samsung’s share price closed 4.51% higher Thursday at 1.18 million won on expectations of potential dividend payout.

Robert Yi, Samsung’s head of investor relations, said the firm was considering some form of “shareholder return” next year and would make a final announcement in the fourth quarter.

The latest edition of Samsung’s previously all-conquering Galaxy S smartphone met with a lukewarm response on its launch in April.

It was also forced to introduce the new edition of the oversized smartphone Galaxy Note earlier than scheduled in September as the latest iPhone6 from US rival Apple enjoyed better-than-expected demand.

Samsung initially pioneered the market for “phablet” devices – sized between a smartphone and a tablet computer – when it introduced the Galaxy Note series in 2011.

But the firm has come under pressure with the release of the iPhone 6 Plus, which also boasts a large screen.

China challenge

And in the low- to mid-range smartphone segment, Samsung has faced a growing challenge from Chinese firms nipping at its heels in key emerging markets including China.

Samsung saw its leading share in the global smartphone market slip to 25.2% in the second quarter of this year from 32.6% a year ago.

At the same time, Chinese firms – Huawei, Lenovo Xiaomi – saw their combined share rise to 17.3% from 11.4%, according to market research firm Strategy Analytics.

While voicing optimism Thursday over sales of the Galaxy Note 4 and new middle-end smartphones, Samsung acknowledged that “market competition is expected to further intensify.”

“Uncertainty remains for the (mobile) division, due to the year-end surge in competitor smartphone launches, which may require a potential increase in marketing expenses associated with year-end promotions,” it said.

Kim Hyun-Joon, senior vice president of Samsung’s mobile unit, vowed to dramatically reshuffle product lineup to “actively respond” to the needs of the mid and low-end markets.

“Our mobile unit is going through a temporary difficulty, but we are trying to maintain a steady growth by… fundamentally changing our business structure,” he said.

But analysts saw few quick fixes.

“Samsung is struggling in the Chinese market and it may take a while until the situation improves,” said Lee Min-Hee, an analyst at Seoul-based IM Investment and Securities.

China’s Xiaomi dethroned Samsung as the top smartphone seller in China, with its share rising to 14% in the second quarter followed by Samsung’s 12%, according to estimates by the market research firm Canalys.

Xiaomi’s devices typically sell for around $100, while phones in Samsung’s headline Galaxy series are priced at more than $500.

- © AFP, 2014

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