Samsung’s Woes

Samsung Electronic’s financial projections are out, and corporate officials are alarmed, again. For the second straight quarter, operating profits are down. The announcement has renewed the call for Samsung to find something new and move away from smartphones. Market watchers point out that the smartphone business is simply becoming too crowded by Chinese manufacturers on the low-end and Apple on the high-end. These same analysts say Samsung’s efforts to enhance its brand has been effective, but costly, contributing to the decline in operating profits. Moreover, Samsung’s marketers still cannot achieve the level of loyalty that has earned Apple users the name sheep. These watchers may be correct, but overcrowding and branding only scratch the surface of the trouble facing the world’s largest smartphone maker. After all, many companies continue to make gains in smartphone manufacturing, some, like Apple, are even making gains at Samsung’s expense. What’s the rest of the story behind Samsung’s decline? If you asked Apple, the answer would be simple: karma.

The bitter battle between the Apple and Samsung started in South Korea, a little before the endless patent litigation. The release of Apple’s iPhone 3GS in South Korea was late but highly anticipated. On Nov, 2009, Apple finally received permission to sell its phones from South Korean regulators. In an amazing display of salesmanship, Apple accounted for 23% of, not just smartphones, but all mobile phone sales for the first quarter of 2010. That honeymoon was short-lived. In June 2010, the Galaxy S came out, and Apple cried foul, suing Samsung for patent and trademark infringement in a series of international legal battles that continues to this day. By the first quarter of 2012, Apple accounted for only 2% of sales of smartphones, and Samsung had achieved a dominant position.

Apple has not, nor will it probably ever, recover the Korean market. However, the patent litigations are beginning to pay off. In San Jose, California, a district court validated the controversial 2012 decision against Samsung and imposed a USD1 billion-dollar payment for damages. Samsung appealed, of course. The patent wars have not been entirely one-sided; Samsung has countersued Apple and won some surprise victories. Apple at one point had to declare that Samsung tablets did not copy the iPad. In the most recent decision, in a USD2.2 billion case, neither side was truly victorious, with Apple receiving only about USD100 million from its original request. In addition, for a few months, older versions of the iPad and iPhone were banned in the United States. (A decision that the USTR eventually vetoed in a move that reeked of favoritism). Nevertheless, those minor victories do not change that Samsung will most likely have a huge bill to pay, and soon. In the most recent trials, Google played a bigger role in defending Samsung, the company even offered to pay some of the legal fees. On the other hand, Apple has friends too, like Japan’s Softbank.

Simply put, Softbank does not sell Samsung smartphones. They never have and, despite the diplomatic efforts by Samsung’s heir Lee Jay-yong, they have yet to announce plans to carry the Galaxy S5. Softbank remains the only major Japanese mobile operator not to carry Samsung smart phones. Instead, Softbank heavily promotes Apple products. And Softbank has been successful. As Softbank grows and gains subscribers at a faster rate than its competitors, Samsung finds it more difficult to compete in the Japanese market.

Softbank poses even more problems for Samsung. Softbank’s founder and current CEO, the prominent Masayoshi Son, has proven that he is ambitious. After successfully acquiring and turning around Vodafone Japan, he bought Sprint, the third largest carrier in the US. Observers have noted that a man who, for reasons that are unknown, has shunned Samsung in Japan, is likely undermining Samsung’s interests in the US in favor of Apple’s products. Now Mr. Son is attempting to persuade US regulators to let him buy another mobile operator, T-Mobile. The media in Japan likes pointing out that Masayoshi Son is of Korean descent and even hypothesizing that he it out to bolster Korea’s economy at Japan’s expense. Unfortunately for Samsung, those rumors are far from the truth.

Even in its home market, where it worked so hard to establish a near-monopoly position in smartphones, there are troubles for Samsung. Korea’s domestic mobile carriers, LG Uplus, KT and SK Telecom, have all been mired in scandals, the most striking of which is the implicit refusal to end deceptive, illegal handset subsidies. The situation reached the point where the government has imposed business suspensions on all three carriers. Those suspensions happen to coincide with the release of the Galaxy S5. KT sought to avoid the part of the sales distribution by releasing the Galaxy S5 early, without informing Samsung. Despite being the only Galaxy S5 seller in Korea, those sales were still lackluster. The real winner from the business suspensions are thrifty phones: cheap mobile phones that run on MVNO networks. In the short time, the business suspensions have been in effect, thrifty phones have managed to gain significant ground in the mobile phone market share, also at Samsung’s expense.

The most shocking of all of Samsung’s problems is that its relationship with the South Korean government might be cooling. Buying Korean products is part of being a proud Korean citizen. And no product is more Korean than a Samsung product. This consumer behavior, or ethnocentric consumer behavior as sociologists call it, has deep roots in Korea, and Samsung benefits enormously. However, buying Samsung products might no longer be truly good for Korea, breaking a central pillar of “Buy Korean” mantra. This is because Samsung has moved the production volume from Gumi (one of the largest industrial cities in Korea) Plant to its overseas plants in Tianjin and Huizhou of China and Yên Phong of Vietnam. In fact, Samsung is reducing the amount of domestically made smartphones every year, worsening Korea’s export figures and forcing the government to take notice. LG electronics, a latecomer to the smartphone battle, has been increasing domestic production. As one anonymous government official said, “From the perspective of export, we would like to see LG Electronics bound forward more actively in the smartphone market.”

With all of the problems against the electronics firm becoming more complex, the advice from market watchers becomes simple: get out of smartphones. Considering Samsung has only been a serious competitor in the smartphone world for four years, and in that time done remarkably well, that advice seems slightly premature. Nevertheless, Samsung is trying to answer the call. There seems to even be an arbitrary deadline to have a great moneymaking idea by the end of this year. So far, good ideas seem disappointing. There was Samsung’s Galaxy Gear, but that was hardly a revolutionary or even original idea. Until the next best thing comes around, Samsung will have to be content with a slow decline from dominance to merely very successful.

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