Lessons from Samsung’s declining mobile business

After 10 quarters in which the company’s IT and Mobile (ITM) division recorded operating profit margins of at least 15%, the margin had plunged to 7.1% at the (third) quarter ending 30 September 2014. This level of revenue-to-profit conversion of the mobile business is the lowest that Samsung has seen since 2008, which is way […]

After 10 quarters in which the company’s IT and Mobile (ITM) division recorded operating profit margins of at least 15%, the margin had plunged to 7.1% at the (third) quarter ending 30 September 2014. This level of revenue-to-profit conversion of the mobile business is the lowest that Samsung has seen since 2008, which is way before the Galaxy smartphones surfaced. The following are a few of the lessons that can be learned from this situation.

Lesson 1: No IT condition is permanent!
The first lesson might as well be that “no IT condition is permanent.” We can certainly do a lot of research to predict trends, but we can only predict so far into the future. Even in the smartphone business, we still can cross bridges only when we get to them, not before. The IT business has evolved quite rapidly in the past decade, giving us gadgets upon gadgets that allow us to connect with people, get excited, and sometimes be more productive. It also creates billionaires upon billionaires in the process. But we really haven’t been where we are now in human history as far as IT is concerned, and so we may not be able to predict the future very accurately. It’s almost like weather forecasting – we still can’t predict accurately beyond a few days, in spite of our (hopefully) more accurate meteorological equations governing weather patterns and the humongous available supercomputers in Japan and the U.S. for solving those equations. Samsung’s business evolution in the past 5 years might be telling the same story. The ITM division accounted for 76% of Samsung’s operating profit as at the first quarter of this year, with the remaining components accounting for most of the balance (22%). However, as at the end of last quarter, ITM accounted for just 43%, and components, 57%. In the pre-Galaxy days, say at the end of the second quarter in 2010, components accounted for 76% of Samsung’s profits while ITM accounted for 13%. A nonlinear business evolution is evident here.
Lesson 2: Population does matter
Samsung’s recent predicament has been attributed to the effective competition from Chinese low-end smartphone manufacturers; particularly Huawei, Lenovo, and Xiaomi. The increasing IT lot of these companies in the past few years is obviously not due to better technology or products by the Chinese companies, since most of these technologies came from the U.S. This is particularly true for IT. China’s population is simply being exploited by Chinese companies. Even though the products being developed in China may be of inferior quality compared to those from more developed countries, there is the market volume for them in the over one billion people in China. Because the average Chinese has less disposable income (they are poorer) compared to the average westerner, the Chinese consumers do not mind the cheaper, but less than perfect, smartphones produced in China. A few weeks ago, China overtook the U.S. as the world’s largest economy. This event was obviously brought about by the huge population of China, vis-à-vis, the improving lots of the people (education, awareness, better technology, more disposable income). In fact, a friend of mine made the statement that with China’s population what it is, something must be terribly wrong if China were not the largest world economy.
Lesson 3: Have Plans B, C, D…
A common piece of advice is that businesses focus on what they do so they can be the best at it and therefore reap tons of dough in the process. But then, when a line of business goes belly-up, what is a company to do? This speaks to the need to have backup plans to absorb vagaries and even failures in other lines. For Samsung, when profits from smartphones dip, those from the components (semi-conductors and displays) better rise to compensate. This scenario is supported by the Samsung profit data stated earlier in this article.
Lesson 4: A call for a new IT strategy
To be able to compete with the Chinese companies, Samsung plans to tweak the design and user interface of its lower-end devices, to set itself apart from the rivals. It also wants to explore ways of producing devices more economically, and be more efficient in its production methods. Samsung also shuffles its executives toward the end of every year. The management changes may help Samsung to be generally more aggressive in fighting rivals. There will also be significant cost-cutting. Will this strategy work for Samsung in dealing with the company’s low-cost rivals in China? I am not quite sure. In fact, the company’s best days for smartphones may be over, if it doesn’t do the right things. There is significant value in sticking with a working business model. Remember what happened to iPhone 5C by Apple? It flopped, just as I predicted when it was launched. The device was intended as a low-cost alternative to Apple’s otherwise pricy phones. However, consumers basically said they knew Apple for quality products and were ready to dole out the cash for them. So they bought the pricier iPhone 5S, not the cheaper, lower-quality 5C. Just imagine what is happening to iPhone 6 Plus that was launched in September 2014. With tens of millions of orders already, today, people are still waiting in line for two weeks to buy a phone that costs almost $1000. Samsung can learn a lesson from this: “get better, not cheaper.” Can Samsung really afford to provide something for everyone? I doubt it. Samsung makes good phones – may be the high end product might suit its business better. Moreover, with time, it might get pretty crowded in the Chinese low-end smartphone market.