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SEOUL – The decline in earnings at Samsung Electronics has exposed a series of challenges that threaten to dethrone the world's largest smartphone maker.
The South Korean conglomerate announced Friday that its operating profit had dropped more than 60% in the first quarter, penalized by lower prices for billboards and memory chips. Profit margins remain high, but three major factors may hinder the company's ability to rebound: an excessive focus on quality and complex functionality, high costs and the lack of a leader to mobilize.
Samsung's future Galaxy Fold symbolizes the company's obsession with the latest and most advanced technologies. The phone, which will come out in April and includes a foldable OLED screen, costs $ 2,000, which is out of reach for many consumers. The conglomerate has not only devoted resources to a phone that may appeal to a limited market, but has also insisted that the screen retreats inland.
Chinese rival Huawei is closely following his own pamphlet, due out in June. His phone folds outward – a design decision that many believe is less than ideal, but technically simpler to achieve.
Samsung's determination to aim high is one of the reasons for the rapid erosion of its market share in China. This was the best player with 20% in 2013, but it was only 1% last year.
Local competitors such as Xiaomi and Oppo have gained ground by launching phones that combine low prices with attractive features, such as decent cameras.
Samsung's high cost structure – including high salaries – is another hurdle.
South Koreans thirst for job security in a fragile economy. The people who manage to stay at Samsung remain: The average duration of employment of the company has increased from 7.8 years in 2010 to 11.5 years in 2018. As a result, the average annual salary has increased from $ 60 000 in 2009 at about $ 90,000 last year.
In comparison, Xiaomi pays an average of less than $ 45,000, according to local media. The time when cost competitiveness was at the root of Samsung's growth is over.
Samsung's president, Lee Kun-hee, has also contributed to the growth of the company. Recognized as a bold decision maker in areas like capital investment, his slogan was "change everything except your wife and kids". But Lee has not appeared in public for more than four years, for health reasons. And his eldest son and de facto successor, Vice President Lee Jae-yong, faces charges of corruption.
When Lee Jae-yong was arrested in February 2017, the prevailing view was that Lee Kun-hee had made Samsung so powerful that there would be nothing to fear for at least three years. This optimism did not last long.
The turnover was down 14% in the first quarter of 2019, indicating that the company was not able to make the most of its balanced portfolio including semiconductors, smartphones and screens. In the past, these operations have complemented each other, forming a powerful money-making machine.
Profits in the semiconductor segment have halved, while the panel market, including liquid crystal displays and organic electroluminescent displays, is expected to be at best negative or balanced.
It is hoped that this week's launch of ultra-fast fifth-generation wireless services in the United States and South Korea will offer a new upswing. But Samsung is trying to capture this wind with a different strategy than its enemy, Apple. The former continues to focus on production, while the latter reinforces services such as video distribution.
The question is whether Samsung's approach will be enough to eliminate the three big obstacles that have now appeared.
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