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Samsung: Striving to salvage its market leadership position

September 09, 2014
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Samsung recently released its earnings for the quarter ended June 2014, reporting a decline in profits from the its mobile business from KRW 6.28 trillion during April-June 2013 to KRW 4.42 trillion during the same period in 2014. The handset manufacturer has attributed this fall to intensifying price competition in the global mobile market. The company has also issued a negative guidance for the third quarter of 2014, noting that the mobile business environment remains challenging and the average selling price of handsets may drop, affecting profitability going forward.

The company’s financial performance reflects a decline in global smartphone shipments. According to research firm IDC, Samsung’s global smartphone market share declined from 32.3 per cent in April-June 2013 to 25.2 per cent in the same quarter in 2014, despite significant growth in the smartphone market. This is not surprising as the company has ceded its share in large markets such as China and India to home-grown players. Not only that, Samsung is also feeling the heat from incumbent companies like Microsoft (erstwhile Nokia Devices and Services) and BlackBerry, that are witnessing improved sales, and established players like Apple and Sony that are increasingly focusing on emerging markets, which offer significant growth opportunities.

But all is not over for Samsung. The company has a series of smartphones lined up for launch in 2014, through which it intends to regain its market share. Among them, the most anticipated is its flagship handset, Galaxy Note 4, on which many analysts have pinned their hopes for the company’s fortune revival. Samsung is also expected to launch smartphones with new design and materials, primarily metal rather than plastic, to change consumer perception about its smartphones.

The company is also looking at opportunities in the network equipment space, especially in 4G long term evolution, to drive growth. Whether these measures will revive its telecom business depends on the success of these models and how well its network equipment business pans out in major markets, especially China and India.

Slowdown in its Indian mobile business

After being in the driver’s seat in India for several years, the company seems to be losing steam. Not long ago, Samsung’s smartphones were the first choice of many potential buyers. In the Indian market, which was dominated by Nokia, Samsung increased its sales rapidly in the last decade. According to industry estimates, its market share stood at 31.5 per cent in 2012-13, bettering Nokia’s 27 per cent share.

Several factors led to the improvement in Samsung’s market share. Rising adoption of smartphones, rapid product launches across customer segments, effective advertising and marketing campaigns, and a well-built distribution network enabled Samsung to establish itself as a strong player in the market. The company also benefited from Nokia’s decline in India. While Nokia was a leader in the mobile phone market a decade ago, owing to its large portfolio of feature phones and customer loyalty, it failed to realise the potential of smartphones, which subsequently became the primary driver for growth in this market. Samsung, on the other hand, capitalised on this situation through its aggressive product launch strategy in the smartphone segment. This was a smart move, given that Indian consumers are price-conscious and prefer a wide variety of options. Samsung launched smartphones for every customer category at various price points, which allowed it to gain considerable market share. The primary factors that supported this strategy were the company’s expertise across the value chain in the handset manufacturing business and the low time-to-market for new products. Samsung also benefited from its decision to adopt the Android operating system for its smartphones rather than its in-house developed Tizen, as the former had gained popularity among both users and developers. An aggressive marketing push for its flagship smartphone series, Galaxy, was another valuable move, as the product witnessing significant traction.

While Samsung was expanding its smartphone portfolio, several local players were trying to establish their products as low-cost alternatives. Rather than setting up a manufacturing facility in India, these players decided to assemble mobile handsets, especially in the low- and medium-end smartphone categories, imported from Chinese manufacturers. Consequently, these companies were able to lower their costs and offer similar products, though with cheaper materials, at more modest prices. Given the price-sensitive nature of Indian consumers, these low-priced handsets started gaining acceptance in mass numbers, pushing up local players’ sales numbers and revenues.

Meanwhile, Samsung continued to launch new smartphones in the market. But with little or no differentiation, its smartphones did not offer any incremental value relative to the products launched by the local players. With the commoditisation of smartphones in the Indian market, the only difference between the products of Samsung and local players was their price. Consequently, demand growth for Samsung’s phones started subsiding.

Not only that, Samsung was increasingly facing competition from other foreign manufacturers, especially in the high-end smartphone market. Apple decided to sell earlier versions of its iPhone at lower prices and Sony too focused on the high-end smartphone market, where it was witnessing considerable demand. Both companies saw their market share grow to double-digit figures.

Meanwhile, another set of foreign players has forayed into the market. Among them, the most notable has been China’s Xiaomi. The company, which has taken the pole position in the Chinese smartphone market, is targeting the Indian market now. Its flagship product, Mi 3, reportedly sold out within a few seconds of its launch, highlighting consumer interest in new brands. Consequently, the customer and brand loyalty market continues to shift in the competitive smartphone market environment, as is being witnessed in the case of Samsung.

Regaining its market leadership

Samsung is still the leader in several customer segments of the smartphone market. Therefore, it would make commercial sense to focus more on these segments and maintain its leadership, rather than compete with local and foreign players in each segment. Else, the company may find itself in a price war, which may affect its profitability in the long term. Also, focusing on developing new technologies would be crucial for Samsung, given the commoditisation of smartphones.

When Samsung had displaced Nokia at the top, the Indian smartphone market was relatively less competitive. Today, however, the market is highly fragmented with the presence of several players. Although the market size has increased, the competition too has risen manifold, resulting in reduced market shares for incumbent foreign manufacturers like Samsung. Considering that more foreign and domestic players are likely to enter the fray, Samsung would have to adopt a different approach if it wants to regain its market share. Product differentiation through research and development (R&D) should be a priority. While consumers still look at low-price options, they are ready to pay extra for additional features and new technology in smartphones. Samsung is rightly moving in this direction by committing more financial resources to R&D rather than to marketing in order to bring innovative products into the market.

Another issue that needs immediate attention is the company’s strained relations with its distribution channel partners in India. They are miffed with the wide gap in the prices of smartphones offered at multibrand and single-brand stores and those offered through e-commerce websites, with the latter giving discounts of up to 20 per cent, hurting the sales of the former. The channel partners have contended that they will reduce their stocks of Samsung’s smartphones if the situation does not change as it is affecting their profitability. Therefore, Samsung’s priority should be to address its channel partners’ concerns related to pricing.

Meanwhile, Samsung is diversifying into new telecom segments such as network equipment to improve its revenue base and reduce dependence on the mobile business division. The company has already won a contract from Reliance Jio Infocomm Limited for the manufacture and supply of about 70,000 4G-enabled base transceiver stations. The move is well timed as service providers are expected to launch their 4G networks soon and augment their 3G infrastructure, thereby generating substantial demand for network equipment. Although this market is dominated by Huawei, Nokia Networks, Ericsson and Alcatel-Lucent, Samsung may gain from its expertise in electronic manufacturing to deliver high-quality equipment at lower prices.

In all, while Samsung is not expected to go down the path of Nokia in India, it may find itself registering low growth rates as seen with companies at the maturity stage. But introducing innovative smartphones and targeting niche segments will enable Samsung to deliver the growth rates witnessed prior to the emergence of competitive local players.

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