The disappointing quarterly results continue to flow in from the smartphone makers, indicating that even a well received and eye-catching device like the Galaxy S6 Edge cannot guarantee growth any more. That is seeing the handset majors racing to build up alternative sources of revenue. Inevitably that means creating devices for new categories such as wearables, but for some of the more powerful players, it means an entire shift of the balance of business from finished products to components for the gadgets of others.
That has been most obvious at Samsung and Sony, which are increasingly shifting development resources towards their chips, particularly sensors, and their displays. Samsung says it has begun volume production of a 1.0μm-pixel-based 16-megapixel CMOS image sensor, which can help makers of slim smartphones to improve the quality of photos.
As the pressurized handset makers reach out for any small way to differentiate their offerings, such components can be very valuable. This S5K3P3 sensor reduces the size of an image sensor module so that it can be incorporated in smaller devices. It also uses Samsung’s Isocell technology, which the company says adds physical barriers between each pixel to increase light sensitivity and improve color fidelity.
This is just one example of the sort of product which can help offset Samsung’s falling market share and revenue in smartphones, allowing the Korean giant to offer an increasingly large percentage of the components of a handset or other mobile device – the memory chips, processor/modem, display and many sensors and connectivity options.
As expected, Samsung reported its fifth profit decline in a row in the quarter to the end of June and said it would adjust pricing of its flagship S6 and S6 Edge smartphones to drive sales growth.
Its net income, excluding minority interests, fell to KRW5.63 trillion ($4.9bn), missing analyst estimates, despite the availability of its much-vaunted S6 Edge. Observers said it misread demand for the newest Galaxy models, producing too few of the distinctive curved screens of the Edge. While it could have sold more of those devices, the regular S6 sold poorly, especially with the larger-screened iPhone to contend with. “Poor sales of S6 only proved that it can’t beat Apple in brand loyalty among users and just ended up being one of the many Androids,” Yoo Eui Hyung, an analyst with Dongbu Securities, told Bloomberg.
Operating profit at the mobile phone unit fell to KRW2.76 trillion. Samsung sold 89m handsets, over 80% of them smartphones. It plans to develop more midrange and low end models to boost volume in emerging markets and challenge Chinese vendors, while cutting spending in the phone division over all, shifting marketing and R&D investments to higher growth product lines. It also plans to increase its manufacturing capacity for curved screens early next year, both for its own devices and those of other customers.
The components supply chain is also under intense pressure from the slowing growth in smartphones, the largest device category in terms of sales. A firm with a large number of products can achieve scale and a larger share of an OEM’s spend, but companies with fewer offerings are struggling. Sharp is one example – as well as struggling with the decline of its TV screen business, it also has excess inventory of smartphone screens, despite being a key supplier of LCD panels to Apple, which is also an investor.
The Japanese firm is likely to post an operating loss of ¥19.4bn ($157m) for the quarter to June 30, according to analysts, which would make it tough to hit its full year profit target of ¥80bn for the year to March 2016. Yet another missed earnings target could spark another major restructuring at Sharp, which has reduced its operating income target six times in the past five fiscal years and, for its most recent fiscal year, reported a ¥48bn operating loss, despite guidance of ¥50bn profit.
Sharp already announced a recovery plan in May, which involves slashing its workforce by 10%, pulling out of some markets and selling buildings. Now investors may demand that it sells whole business units, especially as growth is slowing in the smartphone sector, which previously cushioned it somewhat from the collapse of TV revenues amid tough competition from China and Korea.
Sharp has reduced factory output of smartphone screens because of excess inventory left over from the previous quarter, according to Kazunori Ito, an analyst at Barclays.
“Demand in this market is weakening, but competition is getting more and more brutal,” Ito told Bloomberg.
Meanwhile, some players are acting against smartphone doldrums in more radical ways. Sony has, like Samsung, launched more advanced sensors, but now it has gone a step further and founded a drone company to offer enterprise solutions based on unmanned aircraft. The firm, Aerosense, has been set up in partnership with Japanese robotics company ZMP and will use image capture and cloud-based data processing to support services such as surveying and measurement. Sony will provide its camera, sensing, telecoms and robotics technology while ZMP will offer automated driving and robotics systems, plus some enterprise customers in this area.