Samsung Starts to Feel the Squeeze

On the same day Samsung Electronics (005930:KS) reported disappointing results for its smartphone business, the Korean giant’s Galaxy handsets received an endorsement from an unlikely source: the lawyer for archrival Apple (AAPL). In his closing argument for Apple’s $2 billion lawsuit against Samsung for allegedly copying the iPhone, attorney Harold McElhinny told jurors the Suwon (Korea) company had made other Android handset makers irrelevant.

“The only products that are selling are Apple products and Samsung products that infringe Apple products,” he said. “It is literally a two-horse race.”

To which executives in Korea might say: if only. Samsung yesterday announced its mobile division’s revenue dropped 2.5 percent in the first quarter compared with a year earlier, in part because of a surge from new competitors.

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To be sure, at 31.36 trillion won ($30.4 billion), Samsung’s mobile sales are gigantic. Samsung shipped 89 million smartphones in the first three months of the year, giving the company 31 percent of the global market, according to Strategy Analytics. While that market share is down a smidge from its 32 percent a year ago, the company is still far ahead of Apple, which had 15 percent market share after shipping 43.7 million iPhones.

But Samsung has reason to be concerned. The fall in market share was the first since the end of 2009, and the quarterly sales performance was the company’s worst since the end of 2012. Operating profit dropped, too, down 1.2 percent, to 6.4 trillion won.

The problem for Samsung is that, despite the hyperbole of Apple’s lawyer McElhinny, the smartphone business isn’t a two-horse race. Plenty of other Android players are taking aim at the Big Two—especially in the world’s biggest market, China. Look at Lenovo (992:HK), the world’s largest PC brand. The company is winning customers for its smartphones in China and, having purchased Motorola from Google (GOOG), has ambitions to be a major player in Southeast Asia, Latin America, and other markets worldwide.

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With the Chinese names becoming more aggressive in low-cost phones and Apple surprising the market with strong iPhone sales at the high end, Samsung is in the same bind that is dooming smaller rivals such as Taiwan’s HTC (2498:TT). “You are seeing players like ZTE (763:HK), Xiaomi and Huawei (002502:CH) really coming in strong right now at the low end,” Rosenblatt Securities Managing Director Brian Blair told Bloomberg TV yesterday. “I think they’re getting hit on both sides.”

And since Samsung, unlike Apple, has lots of phones in the low end of the market, the Korean company is particularly vulnerable to competition from aggressive Chinese upstarts. As Standard & Poor’s (MHFI) reported in a credit analysis published on April 24, “it will be more difficult for [Samsung] to maintain high margins from its smartphone business over next two years due to rising competition and product commoditization.”