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July 8, 2014 4:31 pm
That argument was dented on Tuesday as the world’s biggest technology company by sales published an unusually gloomy earnings forecast: operating profit fell by about 24 per cent from a year earlier, with revenue down by almost a tenth.
This was Samsung’s third consecutive decline in quarterly operating profit, firmly closing the door on a two-year period of consistently impressive earnings rises, and underscoring the tough conditions facing the smartphone division behind that growth.
Samsung smartphones may be losing popularity in China to lower-cost Chinese rivals but they still appear to be coveted in Brazil – especially in a region known as the country’s “Bermuda Triangle” for cargo theft. Samsung said on Tuesday its factory in the electronics hub of Campinas was attacked by about 20 heavily armed bandits
Tuesday’s preliminary earnings guidance, ahead of detailed figures to be published later this month, was for the first time accompanied by an explanatory statement to address “investors’ concerns over uncertainties” about a performance that fell far short of some analysts’ expectations.
The statement focused on the challenges facing Samsung’s smartphone division, the world’s biggest producer of the devices by sales, which accounted for two-thirds of the company’s profit last year.
Among Samsung’s biggest headaches is the Chinese smartphone market, where it is under siege from lower-priced devices made by homegrown rivals such as Xiaomi and Lenovo. According to the research firm Gartner, Samsung’s market share in China has stabilised at about 18 per cent, down from a peak of 25 per cent late in 2011.
Analysts at Berenberg point to recent Chinese data that show how competitive the market has become. Xiaomi, which promotes its phones as high-end but low-cost, is expecting to increase its shipments from 19m units in 2013 to 60m this year and 100m in 2015, helped by drastic price cuts. Other producers such as ZTE and Coolpad have been slashing their gross margins in a bid for market share, and Samsung will be forced to do the same, warns Berenberg.
Samsung’s statement on Tuesday focused largely on factors beyond the company’s control. It stressed the impact of the stronger South Korean won, which has strengthened by 12 per cent against the US dollar over the past year. It said that the second quarter of the year was typically a slow period for the Chinese smartphone sector and that this was a low point in the cycle for tablet devices, while conditions in the smartphone market had been weaker.
Analysts agree that slowing growth in the addressable market for smartphones is a key factor behind the weaker results. Global smartphone unit sales grew 42 per cent last year according to Gartner, but lucrative developed markets are nearing saturation, with growth increasingly coming from sales of lower-margin devices in emerging markets.
Yet market conditions did not tell the full story, said Peter Yu, an analyst at BNP Paribas, saying that the loss of market share to Chinese rivals was also a key factor. “Samsung's growth is way below the industry growth this year,” he said. “It's not like Samsung’s shipment growth is slowing in line with the market, it's much more drastically slowing down.”
Samsung’s vertical integration – a key factor behind the success of its smartphone business, which has relied on components sourced internally – helped to exacerbate the impact of the downturn in smartphone sales, with the smartphone processor and display panel businesses both hurt.
Some analysts criticised Samsung for failing to react to the weaker demand for its smartphones, leaving it saddled with unsold stock in Europe and China, as revealed in its statement. The costs of offloading these devices had been a major contributor to the earnings shortfall, said Daniel Kim at Macquarie.
“This poor inventory management is not worthy of the Samsung name,” said Mr Kim, criticising the company for “overconfidence on their products, and misreading the market”.
Samsung says it expects a boost in the coming months from the launch of various new devices, with a new version of its Galaxy Note phablet rumoured for September. But the same month is expected to bring a fierce new challenge from Apple, which is rumoured to soon release an iPhone with the large screen favoured by Samsung’s high-end customers.
Moreover, the unexpectedly weak sales in Europe, where premium phones make up much of the market, may raise concerns about the early sales of the Galaxy S5 flagship smartphone, even after Samsung announced that it had shipped 11m of the devices to retailers in the first month after its April launch.
Samsung insiders admit that the changes to the phone have mostly been augmentations to hardware already highly developed in previous versions, such as a sharper screen and a higher-resolution camera. Some analysts say that the S3, launched in 2012, was the last truly innovative device from Samsung.
This reflects the broader struggle that Samsung faces to persuade investors that it can continue to develop the groundbreaking products needed to drive continued growth – and to justify its meagre returns of cash. It stressed on Tuesday its determination to develop new wearable devices, a field where Samsung stole a march on Apple with the Galaxy Gear smartwatch, but which analysts do not expect to make a significant revenue contribution in the near future.
Yet despite Samsung’s longstanding resistance to large cash returns, with chairman Lee Kun-hee (pictured) still hospitalised nearly two months after a severe heart attack, attention has focused on the implications of the succession of control to a new generation. Analysts speculate that Samsung will plough billions of dollars into share buybacks or dividends after a handover to help Mr Lee’s children pay inheritance tax and maintain strategic control.
Armed bandits take $6.3m worth of Samsung phones in Brazil
Samsung’s smartphones may be losing popularity in China to lower-cost Chinese rivals but they still appear to be coveted in Brazil – especially in a region known as the country’s “Bermuda Triangle” for cargo theft.
Samsung said on Tuesday its factory in the electronics hub of Campinas near Sao Paulo was attacked by about 20 heavily-armed bandits, who held workers hostage while robbing truckloads of smartphones, tablets and notebook computers worth about $6.3m.
The company said the losses were covered by insurance but the robbery raises concerns about the security of other multinationals in a region that has witnessed a sharp increase in such crimes.
Samsung said it was fully cooperating with the police currently investigating the case and will make all efforts to resolve it. “It is regrettable the incident took place. However, it is fortunate that there were no casualties,” the company said in a statement.
The crime follows another Hollywood-style heist at Campinas` Viracopos Airport in December 2012, when bandits armed with machine guns and pistols invaded a warehouse and stole R$4m of Apple products being shipped by jet.
According to the secretary of public security in Sao Paulo, the number of cargo robberies in Sao Paulo increased 45 per cent last year compared with a year earlier.
In the Samsung robbery, about seven armed assailants initially stopped a shuttle on its way to the factory and took over the vehicle with eight employees on board.
The assailants proceeded with two of employees to the factory, after setting five people free at a remote location. Then they disarmed security guards and gathered the rest of the plant’s employees, while allowing more culprits into the plant, according to the state civil police force.
More than 40,000 finished products were stolen while about 50 employees were taken hostage for about three hours. The thieves, dressed in black and wearing dark headgear, roamed about the factory, pushing crates of goods toward the trucks with pallet loaders, local news media showed images of the robbery.
Additional reporting by Song Jung-a in Seoul
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