A Blog by Jonathan Low


Apr 30, 2016

Smartphone Makers Are Getting Squeezed By Global Market Saturation

It's not just Apple. There are too many smartphones chasing too few consumers. And they keep adding new models every year without appreciably improving the devices. JL

Jonathan Cheng reports in the Wall Street Journal:

Saturation in developed economies and rising competition in emerging markets like India, Indonesia and Latin America is squeezing out weaker players and pressuring the profits of those that remain.The pain has spread to component makers."We have overestimated demand."
Market saturation in developed economies and fierce competition weighs on companies
Earnings reports this week may toll the bell for the decadelong smartphone bonanza.
LG is counting on its new flagship G5 smartphone, which went on sale earlier this month, to drive market share and earnings gains, but makers are running into a new reality: For the first time, the global market is shrinking, according to research firm Strategy Analytics, which puts first-quarter smartphone shipments at 335 million, down 3% from a year earlier. Calculations by another firm, IDC, show growth, but barely -- 0.2%.
Saturation in developed economies and rising competition in emerging markets like India, Indonesia and Latin America is squeezing out weaker players and pressuring the profits of those that remain.
The pain has spread to component makers. Sony Corp.'s device unit, whose products include image sensors for smartphones, on Thursday posted an operating loss of Yen28.6 billion ($264 million) for the year ended March, after a year-earlier profit of Yen89 billion. The company now regards the smartphone business as "a low-growth industry," Chief Financial Officer Kenichiro Yoshida said.
"We have overestimated demand," he said.
While the Samsung mobile unit's first-quarter operating profit was up 42% from a year earlier -- the biggest jump since the second quarter of 2013 -- and its margin rose to 14% from 11%, analysts seemed unmoved. In the medium term, Samsung will struggle to keep up its earnings growth, said Shelley Jang, Seoul-based director of credit-rating company Fitch Ratings.
"Smartphones are now commoditized," she said in a note to clients. "Everyone has one, even in developing countries." Samsung's smartphone recovery "is likely to be short-lived," she added, pointing to "ever-increasing competition and narrowing product differentiation as lower-cost competitors' handsets improve."
Investors were similarly skeptical, pushing Samsung shares down 2.7%, its biggest one-day decline in nearly a month.
Samsung pushed up the release of its well-received flagship Galaxy S7 smartphone, boosting its first-quarter impact. Last year's release of the Galaxy S6 came nearly a month later.
Carrier partners promoted the Galaxy S7 aggressively -- particularly the curved-screen variant the Galaxy S7 Edge, which was "sold out almost immediately upon arrival" in the U.S., China and the Middle East, according to Lee Kyeong- tae, Samsung's vice president of mobile communications.
More-sobering results could come as soon as the next quarter or two for Samsung as the market becomes crowded with more rival products and it lacks a new flagship phone to drive excitement. And the South Korean won, whose weakness benefited Samsung's first-quarter export earnings, is expected to continue strengthening.
Unlike in recent quarters, Samsung won't get a reprieve from its semiconductor business; fears of an industrywide glut of memory chips and cooling demand sent it to its first year-over-year decline in more than three years. The chip business's contribution to the company's bottom line fell to its lowest level in nearly two years.
Overall, net profit for the first quarter was up 14% from a year earlier to 5.3 trillion won ($4.6 billion), after a drop of 40% the quarter before. The mobile division's operating profit was 3.9 trillion won.
The chip unit's operating profit was off 10% to 2.6 trillion won, with margins squeezed to 24%. At their peak, the unit's margins ran as high as 30%.
In a separate statement Thursday, Samsung said that it would start the third phase of a previously announced 11.3 trillion won share-buyback program. Over three months starting Friday, the company will purchase and cancel 2 trillion won worth of shares.


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