When discussing the disappointing results for the second quarter by South Korean vendors Samsung Electronics Co. or LG Electronics Co. Ltd., one has to begin by noting the robust performances by Motorola Inc. and Nokia Corp., which together account for well over half the mobile phones sold worldwide.
The two top mobile-phone vendors wield globally recognized brands, broad product portfolios and economies of scale in their rivalry, not to mention global manufacturing and distribution networks, leaving fewer crumbs on the table to feed the aspirations of untold numbers of handset vendors scrambling for a seat at the global feast.
Samsung and LG, which ended 2005 as the third- and fourth-largest handset vendors in the world, may still retain those rankings after the second quarter—though LG may lose out to Sony Ericsson Mobile Communications L.P.—but the distance between second and third place has gotten greater. Where No. 2 Motorola has 22-percent market share, No. 3 Samsung has only 11 percent. It’s a two-way race with a pack of potential finishers far behind.
According to Strategy Analytics analyst Chris Ambrosio, both Samsung and LG are struggling to balance critical elements of success on a global scale that Nokia and Motorola today are merely fine-tuning: a balanced portfolio across all price tiers, distribution channels to match carrier relationships and the right level of market expenditures. Both are running into the buzz saw of Motorola’s success with the ubiquitous Razr handset, both domestically in Korea and abroad. Both Korean handset vendors are units of larger home appliance conglomerates, while Motorola and Nokia have increasingly focused solely on the wireless communications sector. And, to be sure, both Korean vendors have strengths that brought them to their respective positions near the top of the handset heap and that could keep them in the running as top-tier original equipment manufacturers.
In Samsung’s case, revenue from mobile-phone sales fell 4.5 percent to $4.2 billion from the year-ago quarter, on shipments of 26.3 million units, missing analysts’ reduced expectations for the company. Profit in Samsung’s telecommunications network division, the bulk of which rests on mobile handset sales, fell 24 percent from the year-ago quarter to $429 million.
Samsung attributed its problems to a delayed introduction of new handset models late in the quarter and suggested that if its “Ultra Edition” handsets gained market traction it would regain its footing in the second half of the year with improved sales volumes and higher average selling prices.
LG
In LG’s case, it stunned analysts when it announced a net loss of $10 million on static sales of $6.1 billion in the second quarter, based on lackluster handset shipments—15.3 million units, a 26-percent increase from the year-ago quarter, but lower than the previous quarter’s 15.6 million units—and poor performance in its liquid crystal display joint venture with Philips Electronics. The net loss stands in stark contrast to the vendor’s year-ago quarterly profit of $157 million. Sales in the second quarter were only marginally better—3.2 percent—than the $5.75 billion reported in the year-ago quarter.
LG said it is pegging its outlook in its mobile-phone business on its Chocolate phone series, which has not done as well in Europe as the company projected, and is reportedly launching in the United States in late third quarter at Verizon Wireless. “Harsh competition in W-CDMA is further anticipated,” the company noted in its earnings statement.
Neither company was able to respond to requests for comment by press time last week.
According to Ambrosio, Samsung has “staggered a bit” in its chosen emphasis on high-tier (greater than $190) and high-end mid-tier ($125-$190) GSM phones.
In Samsung’s home market in Korea, the analyst said, Motorola’s Razr and a Z-series slider phone have captured 11-percent market share, illustrating the nature of the new playing field. The analyst also credits Motorola’s gains in Europe and the United States, as well as Sony Ericsson’s Walkman phone sales, as contributing factors in Samsung’s slide.
While Samsung follows up on its recent decision to compete selectively in the low-tier, that will take a year or more to reach the market, let alone affect its results, Ambrosio said. Thus it will have to compete on price, which will further erode its average selling price, which has already dropped 10 percent from the year-ago quarter.
“Samsung’s ASPs have been all over the map in past years, which tells me that it is struggling internally to develop a global scale,” Ambrosio said.
“To their credit they can develop handset platforms very quickly. If they can apply the same expertise to joining the entry-level handset market, they’ll be OK.”
LG’s strength also lies in high-tier GSM phones and it does well in CDMA in the U.S. market, Ambrosio said, in addition to the vendor’s traditional strength in mid- and entry-tier GSM phones. The company’s main problem, according to the analyst, is that it has developed too many handset platforms to transform itself into a global player with economies of scale. Fewer platforms for more numerous phone models would allow it to compete more effectively. LG also has been spending to increase its brand profile and that has had a drag on profits as well.
Ambrosio dismissed the idea that strength in the Korean won relative to export markets such as the U.S. had a fundamental effect on both Korean vendors’ fortunes.
