Samsung Says Increased Competition Led to Fallen Q2 Profits

Samsung, citing aggressive pricing competition and a strong South Korean won, said Q2 profits will be down to approximately $7 billion.


Even market leader Samsung isn't immune to the stresses of a highly competitive smartphone market.

The Korean company, which leads the global industry in both mobile phone and smartphone sales, offered early earnings guidance July 8, telling investors that earnings are likely to be below market expectations. Samsung's second-quarter 2014 profits fell by possibly as much as 26.5 percent year-over-year, it said, to between 7 trillion and 7.4 trillion won—or just above or below $7 billion U.S.

Apple, in April, posted a fiscal 2014 second-quarter net profit of $10.2 billion.

Samsung blamed its weak earnings on a strong Korean won (which is at a six-year high) and increased competition, particularly "intensified price competition" from other phone makers in Asia.

Further, heightened competition forced it to substantially increase its marketing efforts for new smartphones and tablets, which cut into profits

Tablet sales were also "cannibalized" by a growing demand—encouraged by Samsung—for smartphones with 5- and 6-inch displays.

Weak demand for smartphones, Samsung added, in the unusually explanatory note, also affected its System LSI (large-scale integration) and display businesses, which led to decreased shipments and "lower-than-expected profitability."

Looking ahead to the third quarter, Samsung said that it expects appreciation of the won to be limited, compared with the second quarter; marketing expenses related to "inventory reduction" to be "marginal"; for its memory business to contribute more to its overall earnings, thanks to favorable seasonal conditions; and that its smartphone shipments will increase, encouraged by the release of a new lineup.

Competition From All Sides

Samsung has dominated the phone market by offering a variety of devices and at multiple price points, and by meeting consumers' interest in large displays, while Apple continued to limit the size of its iPhones. That's expected to change this fall, when Apple will reportedly introduce iPhone 6 models with screen sizes of 4.7- and 5.5-inches—a considerable increase from the 4 inches (on the diagonal) of the iPhone 5S.

On the lower end of the market, Samsung today has no lack of competition, particularly in China, the world's largest smartphone market. There, Lenovo, Xiaomi, Huawei and other local brands have strong followings—and the support of the Chinese government, which owns the wireless carriers.

For months, the government has been pressuring the carriers to cut back on expenses, such as marketing, which it's expected would have the greatest impact on high-end devices.

China's Assets Supervision and Administration Commission has since told China Mobile, China Telecommunications Corp. and China United Network Communications to reduce their spending on subsidies and advertising by approximately $6.4 billion over the next three years, Bloomberg reported July 8, citing people familiar with the matter.

China Mobile, the world's largest carrier, finally began selling Apple iPhones in January.

Samsung most recently introduced the Galaxy Tab S—the thinnest and lightest tablet in the industry—and pushed further into the growing mobile health industry with the introduction of a health-related and cloud-based open software platform and the announcement of a $50 million Digital Health Challenge, meant to encourage developers to innovate around its wellness and sensor innovations.

Like Apple and BlackBerry, Samsung understands that its future will hardly be sustained by smartphones alone.