A Bag of Hurt Heading for Samsung

You have all probably seen those desperate TV commercials by Samsung that attack the iPhone and claiming the next big thing is here.  Companies that are doing well never need to resort to mentioning their rival at all as it makes them look weak and desperate.  For quite a long time Samsung has employed a strategy of throw everything at the wall and see what sticks. They have made every shape, size, color,  phone under the sun.  From practically disposable phones targeted to the third world selling around $75 to their premium Galaxy line at over $800 and everything in between. It seems every week they announce some new model.

For many years that seemed to mostly work for them. They were able to carve out a niche in the premium sector where nearly all the profits are found by offering a larger display. They were also able to dominate the mid and low range where there is very little profit at all simply by their scale of manufacturing. There were no other companies that could match Samsung’s scale to manufacture millions of cheap and practically disposable low-end phones. But recently things have changed.

Samsung is about to face their Waterloo. The modern version of the Duke of Wellington also known as Tim Cook and his army are about to introduce two larger iPhone models. One is purportedly 4.7″ and a second model will be 5.5″. Samsung will suddenly no longer have that protected niche to safeguard profits in that sector. In numerous surveys people have said one of their biggest reasons for choosing a Samsung or any large screen Android  phone over the iPhone was simply because they felt the screen was too small. The current 4″ iPhone 5s is already kicking the Galaxy S5’s butt all over the world in sales. Now imagine what two new larger models by Apple will do to sales of the Galaxy. It won’t be pretty.

HTC and LG also appear to be resurgent. The LG G3 and the HTC One M8 are getting a lot of love from many android fans and tech sites who have grown tired of Samsung. Even Sony seems to have woken up from a long slumber with their Xperia Z2. So not only will Samsung have to deal with three resurgent Android competitors that seemed to have got their mojo back, they will now have to face the behemoth Apple for the very first time with customers that demanded a larger display.

It is important to remember that the lion’s share of smartphone profits are derived from the premium phones. Selling tens or even hundreds of millions of those $100 phones to people in India, Russia, Brazil, and other countries may look good to android fans who mistakenly believe there is an iOS vs. Android war. But the actual war is not Android vs. iOS, it is instead of a war where Apple, Samsung, HTC, LG, Sony and others are all fighting each other. Who cares what the worldwide Android marketshare may be if you have to go to your board and stockholders and tell them you made negative or very little profit as has been happening for nearly every Android maker with the exception of Samsung for several years.

If Apple are the Brits at Waterloo, then who are the Prussians in this epic battle? Why the Chinese of course. Ever heard of a company called Xiaomi? (pronounced she-yow-mee) Chances are unless you follow tech news, you haven’t. Xiaomi is one of the fastest-growing tech companies in the world. It’s the fifth-largest handset maker on earth and they have only sold their phones in China so far. Their charismatic CEO is known for fashioning himself as the Chinese Steve Jobs in presentation and dress.  He is the perfect version to represent Gebhard Leberecht von Blücher that routed Napoleon and sent him into permanent exile. Lei is no longer content with just selling in China. He is about to expand globally. Xiaomi is not the only Chinese manufacturer looking to spread their wings. Watch out for Lenovo and Huawei as well.

Lenovo is also able to compete at the low and mid range and also in the premium range. Lenovo just introduced their first LTE phone known as the Vibe-Z. Lenovo could be the biggest threat to Samsung because they are big enough to compete with them in every segment and have the expertise to do so. The Chinese government is also no friend to South Korean companies, so don’t be surprised when Samsung faces legal and other economic barriers in China soon. They like to protect Chinese companies in China.

Another recent Chinese startup called OnePlus is now selling a very powerful 5.5″ Snapdragon™ 801 processor with global 4G LTE Cynagogen Android phone for $299 off contract. Besides the amazing price, it is actually a very decent phone with specs that rival the Galaxy S5. They also don’t bloat it with manufacturer crapware like Samsung which slows it down and also takes up space. It uses CyanogenMod which is a leaner, meaner, and faster to get the latest updates of Android. No need to root or spend hours reading arcane thread on forums and risk bricking your phone to get CangenMod. To get the phone at the moment is by invitation only. They are not nearly as big as Xiaomi, but you can bet more startups are coming. I doubt this would tempt many iPhone faithful, but I can see a lot of potential Samsung customers choosing this “flagship killer” as they are dubbing it over a Galaxy S5.  The 64GB version is only $50 more than the 16GB one as well.

Samsung might currently be the biggest global player with 25.2% share of Q2 this year but with the Chinese looking to expand globally for the first time at price points that Samsung will have a hard time matching and still make any profit. Couple that with resurgent Android rivals at the high end. The coup de grace are the two new larger iPhone 6 models that will bring back many to the Apple fold along with just a lot of curious Android folks who only chose a Galaxy over an iPhone for the display size. Samsung will be forced to fight a two front war it can’t possibly win. They will be squeezed at the bottom and top with no safe harbor in sight. The iPhone 5c also proves Apple is now interested in the middle ground.

Slowly but surely the Chinese will steal market share for phones sold under $350 and in the high end sector Apple, LG, HTC, and Sony will continue stealing more of their high-end customers where phone cost over $500 off contract. Apple is already dominating this segment with a 4″ model, but with two new models they could easily capture another 20% or more potentially. Let’s hope Samsung has an exciting new microwave oven, washing machine, or refrigerator to make up for the inevitable continuing decline of their smartphone profits. Too bad for Samsung their smart phone profits represent around 75% of the entire companies profits last quarter. If you think their most recent weak earnings guidance was bad, you ain’t seen nothing yet. If you want a good South Korean stock tip I suggest investing in market leading companies that manufacture products like alka-seltzer, Xanax, and liquor because I think a lot of Samsung executives will be having some heartburn and panic attacks very soon.

Like Napoleon, Samsung is about to find out that world domination against a coalition of very nimble and clever foes rarely ends well. I wonder which South Korean island will become the Elba for these disgraced executives…..

References:

Samsung Smartphone Market in Deep Trouble

Is Samsung in Trouble?

The Apple of China’ is Eating Samsung’s Lunch

Samsung Electronics faces falling Profits as Succession Looms

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