Dark clouds gather over Samsung

These aren’t easy days for Samsung Electronics.

The company may be the world’s dominant smartphone maker and the most powerful member of Google’s Android partner ecosystem, but massive market share is no insulation against accelerating shifts in a sector already known for consuming its own.

Samsung this week released advance performance estimates for its most recent quarter they fell short of analyst projections. In the final three months of 2013, Samsung Electronics Co., a subsidiary of the Samsung Group conglomerate, booked 8.3 trillion won (US$7.8 billion) in revenue, down 18.6 per cent from third quarter 2013 results and off 6.1 per cent from Q2 2012, when the company took in 8.84 trillion won, or $8.3 billion.

Investors had expected flat results, but the published estimates were worse than anticipated and prompted a continuation of a sharp selloff that began last week with weak analyst projections. The company’s shares trade on the Korean KRX exchange, and have lost almost 6 per cent of their value since analysts first released their own estimates last week. Projected Q4 revenues of 59 trillion won ($55.4 billion) are flat compared to Q3, and highlight a number of critical problems at the root of growing investor concerns:

Handset weaknesses
Increasingly aggressive Chinese handset makers are flooding the market with low-margin offerings in price-sensitive emerging markets that have traditionally been strong performers for Samsung. Weaker smartphone component sales and flatlining overall demand for smartphones are adding additional pressure.

Display margins
As the world’s largest flat panel display manufacturer, Samsung is particularly vulnerable to price fluctuations in the organic light emitting diode (OLED) market. OLEDs are seen as a more energy efficient and higher-performing follow-on to conventional LED-backlit LCD-based technology, but faster-than-anticipated price erosion is causing investor concern for future margin growth.

Exchange rates
A surging won is challenging the company globally as it is forced to shave prices – and eat the difference – to maintain market position. The won last week soared to its highest level since mid-2008, and is expected to continue to rise amid strengthening signs of economic recovery in South Korea. Samsung is particularly exposed because its component business largely uses U.S. dollars, but the company is not the only Korean outfit to feel the currency-induced pain, as automakers Hyundai and Kia have seen their stocks take a hit, as well.

Compensation
The company sparked investor restlessness by dipping into its $50 billion cash pile and giving its 240,000 employees a special $1 billion bonus to celebrate Chairman Lee Kun-hee’s “New Management” strategy. The payout, which will impact Q4 results, prompted calls from investors for greater dividends or stock buybacks.

Operationally, Samsung Electronics is threatened by its reliance on relatively mature handsets, tablets and flat panels – lines that are vulnerable to competition from lower-cost producers. Its flagship Galaxy S4 smartphone, for example, was introduced last March and was quickly eclipsed by a raft of competing Android devices with ever more consumer-friendly features. Its major announcements at the Consumer Electronics Show in Las Vegas this week include a giant curved television and a 12.2-inch tablet, both essentially supersized versions of existing products. For Samsung to move itself out of the margin-pressured commoditization game, it needs to move more quickly to establish leadership in emerging categories.

Not good enough

Its Galaxy Gear smartwatch, introduced last autumn, points the way toward a more innovation-driven future, but its engineering and marketing need further refinement before consumers view the company as a true leader worthy of premium pricing. A lacklustre feature set and cringeworthy marketing won’t move the needle fast enough for investors.

To drive new growth, Samsung Electronics plans to diversify its interests, including a 600 billion won ($564 million) partnership with holding company Samsung Everland in Samsung Biologics, a biopharmaceutical manufacturer. The company is also doubling down on its core businesses, with a 2.25 trillion won ($2.11 billion) expansion of its mobile system chip plant in Hwaseong, south of Seoul, and completion of a chip plant in Xian, in central China.

Samsung Electronics will release its detailed earnings report on Jan. 24. With the electronics unit accounting for over half of the revenues of its parent company, change can’t come soon enough.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca