Samsung's smartphone business sees a huge drop in profits

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Rob Schultz

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Samsung Electronics’ operating profit in its mobile business slid 64 percent in the fourth quarter of 2014, the result largely of competition in the Chinese market where it struggles against rising brands like Xiaomi.

The South Korean company sold 95 million handsets and shipped 11 million tablets in the quarter, it said during its earnings conference. The company did not disclose the number of smartphones sold globally, but it is expected to be around 75 million, according to Lee Seung-woo, an analyst at IBK Securities in Seoul.

The drop in profit is expected to have been the result of poor showing in high-end phones and a not so successful move to introduce smartphones targeted at mid-range and low-end markets, to fend off Chinese rivals including Xiaomi, Huawei and Lenovo. Samsung launched the Galaxy A3 and A5 in China in November and the Galaxy E7 and E5 in India this month, in the $300-$400 price range.

These new products may not have stopped the bleeding for the company. “Samsung is under pressure in Chinese market, because at a same price point, Chinese brands like Xiaomi is offering competitive specs, compared to [Samsung] models like A3 or A5,” said Jessica Kwee, a Singapore-based analyst at research firm Canalys.

Rival Apple sold a record 74.5 million of the bigger-sized iPhone 6 series, the company said during its earnings call this week. Research firm Strategy Analytics said Samsung and Apple had tied for the top position in smartphones in the fourth quarter.

“This quarter, it’s quite clear a lot of people went for iPhone 6 and iPhone 6 Plus, because of untapped demand for a larger screen iPhone, that boosted Apple’s market share in the Chinese market,” Kwee said, indicating growing competition for Samsung in high-end smartphones as well.

As the world’s largest phone maker scrambled to retain its market share globally, the operating profit from its mobile division dropped to 1.96 trillion won ($1.78 billion) in the quarter from 5.47 trillion won in the same quarter a year earlier.

The only upturn was in its semiconductor business, which saw operating profit rise 36 percent to 2.7 trillion won compared to 1.99 trillion won in the same period a year earlier.

Samsung is likely to focus more on its component business as is seen from its recently improved relationship with Apple, said Will Cho, analyst from KDB Daewoo Securities, in a research note. The company announced last October that it will invest 15.6 trillion won in a chip manufacturing factory in Pyeongtaek, south of Seoul.

“In 2015, DRAM growth is expected to continue into the first quarter, led by server DRAM for data centers and mobile DRAM for new smartphones,” Samsung said in a statement.

Samsung is the largest supplier of DRAMs, which are used in smartphones and personal computers. It is likely to transition from using the low-power DDR3 to the newest low-power DDR4 3GB for its next flagship Galaxy S6, scheduled for release at the end of the first quarter, said Tae-young Kim, a Seoul-based analyst at Nomura, in a research note. Apple will also likely adopt DDR4 2GB for the iPhone 6S by the end of the third quarter this year, Kim said.

“Samsung is still a component supplier for Apple and is expected to increase its partnership, supposedly in supplying the ‘A9’ chips, because it has the leading technologies than the competitors,” said Lee of IBK Securities.

Samsung reported a total operating profit of 5.29 trillion won in the October-to-December quarter, a drop of 36 percent, from 8.31 trillion won in the same quarter a year earlier, the company said. Revenue was 52.73 trillion won in the quarter.

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