Samsung Electronics predicts 60% drop in third quarter profits

Samsung Electronics predicts 60% drop in third quarter profits

Samsung Electronics is predicting a 60% fall in third quarter profits from a year ago due to slowing sales of Galaxy smartphones in the face of increased competition from Chinese handset manufacturers.

The Korean manufacturer said profits from July to September would be the lowest in more than three years and said short-term prospects for smartphones were uncertain.

The company said it expects an operating income of 4.1tn won ($3.8bn; £2.5bn) for the three months to September, significantly below analysts' expectations for earnings of 5.2tn won.

The firm said quarterly sales amounted to 47tn won, which was below analyst estimates for 50.3tn won.

The announcement comes ahead of Samsung publishing full financial results later this month.

The company’s mobile division, its biggest business, has been hit by competition from rivals such as Apple and Chinese smartphone-makers Xiaomi and Lenovo which are offering cheaper models with more features, hitting Samsung’s Galaxy smartphone sales.

The company said in a statement: ‘Smartphone shipments increased marginally amid intense competition.

‘However, the operating margin declined due to increased marketing expenditure and lowered average selling price.’

The company is preparing to fight back, announcing plans to launch ‘new smartphone line-ups featuring new materials and innovative designs, as well as a series of new mid-to-low end smartphones.’

Reacting to the news Warwick Business School’s Aleksi Aaltonen, an Assistant Professor of Information Systems, said: 'Samsung is being squeezed at the top of the smartphone market by Apple that is fully focused on providing high-end mobiles, while at the bottom Chinese manufacturers such as Huawei and Xiaomi are driving the margins down. A large part of the growth in smartphones comes in countries where these manufactures are strong. The change in the market dynamics has been coming for a few years. Why has Smasung not been able to adapt?
 
'It is important to understand that smartphones have matured as a technology remarkably quickly. A few years ago, it was an engineering marvel to put together a fairly usable smartphone whereas today it is common practice. Most consumers don’t really need more megapixels and gimmicky features. The screen size has reached its usable limits. Therefore, it will require more marketing to convince people to buy a new smartphone apart from replacing a broken one. This means that the competitive advantage from being able to manufacture relatively affordable, yet very capable smartphones, is vanishing.
 
'Samsung’s phenomenal success across the whole spectrum of smartphones has put it into a position where it now has to fight on two very different fronts. This can, for instance, make it more difficult to fully develop and leverage your brand. On the one hand, you are not as good value for money as your competition because you put a lot of money into advertising, but, on the other hand, you are not as cool as those who focus exclusively on the premium segment. Giving up one of them, either the low-end, that is, market share, or the high-end, that is, profitability, is not easy but may be an unavoidable strategic choice that Samsung needs to make.
 
'Smartphones in general and Android in particular cannot be understood without Google, who wields considerable power to shape the market. Google needs device manufacturers with enough profits to stay in business to populate markets with handsets. However, it also wants to make sure that the majority of profits are done by showing advertisements to smartphone users. The pattern bears similarity to the relationship between Microsoft and computer hardware manufactures. The former has been a money-making machine for years while the latter are generally suffering.'

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