Samsung battles to stay ahead of the game

It’s the smartphone season. At the Mobile World Congress 2019 in Barcelona, the industry’s market giants are showcasing their new generation products. The range of innovations fighting for media attention is impressive – new 5G phones, foldable phones and one with five cameras.

But ahead of them all, the focus was on the new phones by world leader Samsung.

Next to its Galaxy 10 series, the Korean company presented the Galaxy Fold – the world’s first mainstream, foldable smartphone. The display technology has been in development for more than a decade. It will be on sale at the end of April and comes with a hefty price tag of 2,000 euros.

In the next five years, experts predict foldable phones will take up three percent of global market share, with roughly 15 million units to be sold.

To the annoyance of the South Korean conglomerate, one of its Chinese competitors followed only four days later with its own foldable phone. Huawei presented its Mate X, a direct challenge to Samsung’s Galaxy Fold. And it looks slightly superior in most details. Huawei’s foldable phone is slimmer, does without the ugly notches for its front and rear camera and has a foldable screen with the display always on the outside.

When launched in mid-2019 it will also be a couple of hundred euros more expensive at 2,299.

Declining performance

Samsung Electronics’ business stats for the last quarter of 2018 were cause for concern. The operating profits were down 30% from the year before at roughly US$9.64 billion. The company attributed the declining performance to “slowdowns in the semiconductor and smartphone areas,” its two core businesses.

But while the chip slowdown is cyclical, major question marks hang over the smartphone sector, which is now becoming a commodity play. In that sense, Samsung is vulnerable to the Chinese up-and-comers.

In China, the South Korean company has lost ground in the world’s biggest smartphone market. In 2014, Samsung Electronics enjoyed an impressive share of close to 13%. Now, this number has shrunk to less than 1%. 

“The threat of Chinese competitors is very real,” said Sanjeev Rana, a senior analyst at investment group CLSA in Seoul. “Samsung has not been very active in markets in emerging countries. And in terms of smartphones, they nearly don’t exist in China anymore.” 

Still, there might be no reason to panic. Professor Kim Byoung-joo from Hankuk University of Foreign Studies pointed out that while smartphone sales in China had been nosediving, Samsung’s exports to the country had overall increased, thanks to the semiconductor business. After all, Samsung is supplying most of its competitors with its own components. 

“The reliance on smartphones in China is not a real problem, it’s the reliance on semiconductors,” Kim said. “Samsung has recently built two semiconductor factories in the Xian region that cost the company around $7 billion.” 

That’s why the South Korean company is especially concerned about the ongoing US-China trade war. 

Samsung is shifting its smartphone focus to India, where it is eager to not repeat previous mistakes. While the company has, indeed, lost market share of more than 10% over the last five years, Samsung still stands solid with 22%. “In India, they still have hope,” said analyst Rana. 

India expands

One strategy is to expand efforts towards more affordable models in the midsize segment. In this, Samsung is increasingly focusing on its core strength – hardware – meaning phones with multiple cameras, high-quality displays, etc. 

In July last year, India’s Narendra Modi inaugurated a Samsung factory on 35 acres of land in Noida in Uttar Pradesh – the world’s biggest mobile manufacturing plant. It will enable the near doubling of Samsung’s yearly phone production in India from 67 million to 120 million pieces by 2020. 

Analyst Rana predicts India will become a new base for Samsung to also export to Southeast Asia where there is still a growing demand for smartphones. In its home base South Korea, Samsung dominates the phone market with a utopian share of more than 51%, according to the latest data on January 2019. Apple is far behind in second place with 35%. 

Its impact, however, goes well beyond smartphones and TV screens, said Christoph Heider, chairman of the European Chamber of Commerce in Seoul. “Samsung is the most important company in Korea,” he said. “There is a saying that you are born in Samsung hospitals, grow up in Samsung apartment buildings, then live with Samsung products like TVs and fridges, work at Samsung and finally will be buried by Samsung’s funeral service.”

It is not without reason that South Korea is often dubbed “The Republic of Samsung.” It contributes to roughly 15% of its gross national product, generates a quarter of the nation’s exports and an equal share of its corporate taxes. Its presence in everyday life is striking: Samsung builds apartment complexes, issues life insurance, runs an entertainment park and a subway line in Seoul.

Still, Samsung’s corporate culture seems in many aspects anachronistic, said Geoffrey Cain, author of an upcoming book about Samsung. “Samsung was built on a militaristic structure in which there is a family emperor up top.”

Samsung’s recipe for success relies on perfect execution, while on the other hand, lacking creativity, said Cain. “Samsung is a company that looks at other successful products, adapts them, improves upon them and then releases them,” he said. “This is one of the reasons why Samsung was able to up Apple in the smartphone wars.”     

Still, Samsung has proved more than once that it was able to reinvent itself. In the early ’90s, Lee Kun-hee – who suffered a stroke in 2015 and has been comatose ever since – the father of Lee Jae-yong, the current de facto leader of the company’s flagship electronics arm, demanded the transformation of the company from a mass-producer of cheap electronics to a global, high-quality brand leader that would outpace its then Japanese rivals. 

Against most predictions, Samsung succeeded in doing exactly that.

Change continues. In 2013, Samsung generated roughly 70% of its profits with its smartphones and less than 20% with semiconductors. Five years later those numbers have reversed: the share of semiconductors accounts for 76%, smartphones for 17%. 

“Samsung is very aware of the need for change – it’s almost paranoid about its survival,” said analyst Rana from CSLA: “Still, nobody can know the future technological trends. Even Samsung can be blind to new technologies.”