Sept. 4. (provided by Samsung Electronics)
By Lee Jung-ae, staff reporter
“The global television market is worth 120 trillion won (US$117.05 billion) a year. There‘s 200 trillion won in personal computers, and around 300 trillion won for refrigerators, washing machines, and other household appliances. But the market for smartphones is worth 400 trillion won. It took the television market around 100 years to reach its current size, but smartphones have become a 400 trillion won market in less than 10 years. Could we create a product that would create a huge market in a short amount of time the way that smartphones have? That is what we are trying to figure out,” said an executive at Samsung Electronics, which holds the largest share of the global smartphone market.
Since Samsung released its tentative second quarter results on July 8, worries have been increasing about a crisis at the company. The rapid growth driven by the smartphone market could be starting to slow. Of course, some say there is nothing to be concerned about, comparing the company to a .400 hitter that only hit .300 this year.
They point to LG Electronics, a rival that used to be neck and neck with Samsung Electronics. LG’s total operating profits in 2013 were 1.285 trillion won, less than a quarter of operating profits for Samsung Electronics. The drop in Samsung Electronics’ performance paradoxically illustrates just how well the company had been doing until now, according to this view.
Nevertheless, there is little disagreement among the experts in viewing the dip in performance as a sign of a crisis. The issue, they say, is that growth in the smartphone market - the main thing propping up Samsung Electronics - is starting to stall. The internet and mobile category (of which smartphones are a part) accounts for 68% of the company’s operating profits, as of 2013.
It’s true that Samsung is on the verge of becoming the world’s largest company in the household appliance category, and that profitability is improving in the semiconductor sector, which is falling into Samsung’s hands as rival manufacturers go under. But still, it would be difficult to fill the void that would be created if the smartphone growth engine sputtered out.
“The slowing growth in smartphones is an issue that is facing all ICT companies around the world. In South Korea, however, concerns are bound to be greater, since the electronics industry is excessively concentrated on smartphones,” said Shin Dong-hyung, a senior researcher at the LG Economic Research Institute. Shin explained that the smartphone slump is not just a problem for Samsung Electronics, but could also lead to a general crisis across the South Korean electronics industry.
“We underestimated Xiaomi,” said a high-ranking executive at Samsung Electronics to explain the drop in the company’s second quarter performance. The executive said that, though Samsung had predicted the increasing intensity of competition in the smartphone market and the possibility that growth would slow, it had no idea that a Chinese company would pick up its game so quickly.
Xiaomi, known as China’s Apple, is a newcomer to the smartphone market, only in its fourth year. Thanks to outstanding service and performance for the price, Xiaomi has been growing quickly, soaring to third place in the Chinese smartphone market, the largest in the world.
Chinese manufacturers - which include Huawei and Lenovo, as well as Xiaomi - currently have close to a 20% share of the global smartphone market. “After 2016, it is expected that a Chinese company will have a chance at becoming number one in the overall global smartphone market, including distribution models,” said a report by the Korea Institute for Industrial Economics and Trade (KIET).
The sudden emergence of Chinese companies also means that competition in the mobile phone market is shifting from technological competition to price competition. “It is becoming clear that after the Galaxy 5, there will not be any more big innovations in smartphone technology. Ultimately, it’s a matter of price, and in terms of price competition, it’s hard to beat China,” said Yun Deok-kyun, professor of industrial engineering at Hanyang University.
Yun thinks that we could see a repeat of the PC industry, which surrendered the market to China, unable to find a source of new innovation. “Nokia gave up on smartphones only two years after the hints of a crisis were first seen,” he pointed out.
The titles of lectures delivered recently at a meeting of Samsung group CEOs - “Preparing for the Next 10 Years in the Age of the Internet of Things” and “The Dilemma of a Pioneering Company and Strategies for Overcoming It” - reflect the sense of crisis felt at Samsung Electronics about “life after smartphones.”
Samsung Electronics is busily trying to locate a new dynamo that can give the company a soft landing after smartphones. In the short term, Samsung will use its “notable” line of products (a portmanteau word combining “phablets,” or large screen devices of which the Note is the best-known example; tablets; and wearables) to compensate for the slump in smartphone sales and open up markets to which it has paid little attention in the past, such as B2B (business-to-business). Looking further ahead, it will prepare for smart homes and the internet of things. Another part of Samsung’s efforts is building up what it regards as five new growth industries: solar energy, automobile parts, LEDs, biotech, and medical devices.
As this indicates, a number of ideas are on the table, but the problem is that none of them appear to be the silver bullet Samsung is looking for. “Instability throughout the global ICT industry is higher today that any time in the past,” said one industry source on condition of anonymity. “There is no choice but to try to minimize the shock of the slowing growth rate by balancing the three areas of home appliances, semiconductors, and smartphones while getting ready for a new market to open.”
“The fortunate thing is that Samsung Electronics has a vertical structure of affiliates dealing with both parts and finished products, which gives it the ability to adapt swiftly to smart homes or the internet of things,” the source added.
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