Samsung faces a lame situation: mobile phone addiction drags down performance

Lee Kun-hee, the helmsman of Samsung Group, is still seriously ill, and Samsung Electronics, the global electronics giant that grew up under his leadership, is also in decline.

As a latecomer, Samsung Electronics' profits were once staggering, but on October 10, Samsung Electronics China confirmed to the China Times reporter that Samsung Electronics' operating profit in the third quarter of 2014 was 4.1 trillion won. This means that its operating profit in the third quarter will drop by about 60% year-on-year.

Crisis often hides in calmness. Countless former leaders in the electronics industry have missed opportunities by clinging to their original interests in the tide of industry change. Can Samsung Electronics, which has recently invested heavily in the chip field, still seize the opportunity that belongs to it?

Worse data coming

When Samsung Electronics announced a 25% drop in operating profit in the second quarter of this year, people might not have thought that worse data was yet to come.

On October 7, Samsung Electronics predicted that due to the weak sales of smartphones, the company's operating profit in the third quarter ending September this year will likely decline by as much as 60% year-on-year to only 4.1 trillion won (about 3.846 billion U.S. dollars at the exchange rate at the time of writing). Official data obtained by reporters from Samsung Electronics in China showed that the figure was 10.2 trillion won in the same period last year.

The 4.1 trillion won in operating profit obviously means that Samsung Electronics' profitability has distanced itself from its high-end competitor Apple . Although there is no direct operating profit figure for comparison, Apple's net profit in the third quarter ended June 28 this year reached 7.75 billion US dollars, an increase of 12%.

It is worth noting that this is the fourth consecutive quarter that Samsung Electronics' operating profit has declined. It is also the largest year-on-year decline in Samsung's operating profit in a single quarter in the past five years.

Samsung Electronics' revenue also declined year-on-year. Samsung Electronics also expects its third-quarter revenue to be around 47 trillion won (about 44.091 billion U.S. dollars), a decrease of 20.45% from the same period last year.

Mobile business became the main reason for the decline in performance.

Samsung Electronics analyzed that the main reasons for the decline in performance in the third quarter were the sharp drop in performance of the IT and mobile communications division (hereinafter referred to as the IM division), as well as the sharp drop in revenue in the system large-scale integrated circuit (LSI) and organic light-emitting diode (OLED) display industries as market demand for mobile communications products decreased.

It is reported that when Samsung Electronics released its second quarter report, it had already begun to drastically cut its spending to save itself. The latest news is that Samsung Electronics' new planned fiscal spending for 2015 will be 50% less than last year. There is also the possibility of adjustments to the management.

Regarding the above news, a relevant person in charge of Samsung Electronics China told reporters that it needs to be confirmed from the Korean headquarters and cannot be responded to at present.

However, Samsung Electronics has already started to adjust its regional senior management in its mobile business. In June this year, Wang Tong, former executive vice president of Samsung Electronics Greater China, was appointed president of the Greater China Mobile Communications Division.

Encountering a lame pattern

The weak mobile phone business led to a sharp decline in performance, which was caused by Samsung Electronics' over-reliance on the mobile phone business, resulting in a lame product structure.

According to the reporter, in addition to the IM department which mainly engages in mobile business, Samsung Electronics' businesses also include consumer electronics department, semiconductor business and panel business, but the mobile phone business has always been the sole support for Samsung Electronics' overall profitability.

Data from Samsung Electronics' 2014 semi-annual report showed that the IM department contributed 69.2% of its current operating profit, while Samsung's mobile phone business revenue accounted for nearly 97% of the IM department's current revenue.

The mobile phone is the reason for success or failure.

Samsung Electronics also said in a statement, "Due to fierce competition, the growth of smartphone shipments was limited. At the same time, the operating profit margin declined due to increased marketing expenses, a decrease in the proportion of high-end mobile phones and a decrease in the price of old mobile phones, resulting in a decline in average selling prices."

It seems that the huge expenditure on advertising and marketing has become a burden for Samsung Electronics.

According to Reuters data, Samsung Electronics' marketing expenditure in 2013 is expected to reach $14 billion, accounting for 5.4% of its annual revenue. Apple's marketing expenditure in that year only accounted for 0.6% of its revenue. However, this figure has not been confirmed by Samsung.

The simultaneous squeeze in the high-end market and the mid-to-low-end market is also an important reason for the decline in Samsung's mobile phone business.

Wang Yang, research director of Isuppli China, told reporters that the global high-end market can be understood as being divided equally between Apple and Samsung, and that Apple's push for large-screen mobile phones is having the most direct impact on Samsung.

But he emphasized to reporters that the more important reason is that in emerging markets such as China, Huawei and Xiaomi are growing very rapidly.

In addition to the weak mobile phone business, Samsung Electronics' other businesses are also relatively weak.

The 2014 semi-annual report shows that the consumer electronics division, which mainly produces flat-panel TVs, accounted for 6.1% of the total operating profit. The biggest decline was in the operating profit of the panel business, which accounted for only 0.8%. The figure for the same period last year was 10.3%.

Liu Buchen, a senior home appliance industry observer, told reporters that the decline in Samsung panel profits was due to the suspension of the original LCD panel production line for renovation, which led to a reduction in total supply. On the other hand, after the Chinese government's panel tariff increased to 5%, Chinese home appliance companies, including Samsung's companies in China, reduced their purchases of Korean panels.

Samsung's way out

Samsung has to face the fact that the entire smartphone market has become saturated and slowing growth has become the norm. How to find new growth points has become the focus of attention for Samsung.

The semiconductor business from upstream has become a new choice for Samsung Electronics. In the 2014 semi-annual report, the contribution of semiconductors to operating profits accounted for 24.3%.

On October 6, Samsung announced that it would invest 15.6 trillion won (about 14.7 billion U.S. dollars) to build a chip factory in Pyeongtaek, South Korea. This is Samsung's largest investment in the chip field. Previously, Samsung's largest investment in the chip field was a chip factory built in Xi'an, with an investment of about half of the current investment.

According to the reporter's understanding, after two years of integration, the semiconductor industry is basically reduced to a few companies such as Samsung and Hynix, and their product profit margins are relatively high.

Wang Yang told reporters that there will be a big gap in memory in the future, and Samsung's semiconductor business will be more profitable next year. But he also told reporters that Samsung is only in the leading position in semiconductors in terms of memory chips, and the rest are not very strong.

In fact, Samsung Electronics, which controls the upstream industry chain, is gradually weakening its control over its competitors. Competitors are reducing their use of Samsung-related upstream products.

For example, Samsung used to supply Apple with the A7 processor, but now Apple's A8 processor is produced by TSMC . Wang Yang told reporters that although Samsung now has 20% left, it will gradually transfer all to TSMC. Samsung Electronics also said in its earnings forecast that its revenue from LSI has dropped sharply.

In addition to specific business, the power transfer among Samsung’s senior management, which has always been shrouded in mystery, has added uncertainty to the development of Samsung Electronics.

Although the relevant person in charge of the public relations department of Samsung China headquarters told our reporter in July this year that the current mergers and IPOs of affiliated companies of the group are all for the purpose of strengthening the core competitiveness of the company, which is purely a business consideration, how to ensure that Lee Jae-yong, who is 46 years old this year, can take over smoothly has become an inevitable topic for Samsung.

Liu Buchen told reporters that there are also questions about whether Lee Jae-yong can fully control Samsung and grow the company like his father.

As to whether the continuously declining performance means that Samsung is on the decline, Wang Yang is more inclined to believe that Samsung's poor performance is a reflection of the market's rise and fall.

Liu Buchen believes that Samsung has reached a critical stage, and its strong upward trend in the past seems to be coming to an end. But he also believes that the current situation faced by Samsung is different from that faced by the three major Japanese consumer electronics giants.

He told reporters that the decline of Japanese brands is a general decline, a manifestation of the overall sluggishness of the Japanese economy. In addition, Samsung, with a full-year net profit of more than $20 billion, is still very strong overall.

It seems that the giant Samsung has not yet reached the moment of life and death. But the fate of those former giants that slowly passed away in the quiet crisis cannot but make people alert. Lee Kun-hee once said, "Except for my wife and children, everything must change." Perhaps it is time for Samsung Electronics to start changing again.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.