A smartphone comeback is an expensive exercise, especially when the market is led by two of the world’s biggest marketing heavyweights. LG Electronics is learning that lesson, seeing its profits hit by the cost of promoting its new handsets, even as its new flagship device, the G2, is leading a genuine recovery in handset volumes and market profile. Meanwhile its larger compatriot, Samsung, has borne much of that investment and now has a distribution and marketing machine that will be hard to beat in terms of volume.
LG sold 12m smartphones during the third quarter but its mobile business swung back into an operating loss, having been in the black in Q213. The deficit was KRW79.7bn ($75.5m) on sales of KRW3.05bn ($288.8m). Mobile revenues were up 24% year-on-year to KRW3.045 trillion, indicating the gradual recovery in LG’s smartphone fortunes after a multiyear process of refocusing its efforts on high end devices, sporting features such as 3D screens.
Although the 12m shipments figure was down slightly on Q2’s 12.1m, LTE devices were up 31% compared to Q213, highlighting the hefty proportion of sales that are delivered by the G2.
This helped drag the group’s Q3 net income down by 34% year-on-year to KRW108.5bn ($103m). The main factor, the company said, was price competition in the handset space, which had forced it to make price cuts in order to remain in the running against Samsung and Apple ‘ whose scale gives them greater price flexibility. The other big factor was the cost of the launch, in August, of the well reviewed G2.
The company as a whole reported third quarter sales of KRW13.9 trillion ($12.5bn), up 5% on the year-ago quarter, while operating profit was up 27% to KRW 217.8bn ($196.34m), boosted by operating profit growth at the home entertainment division, despite the continuing difficulties of the TV segment.
For the holiday quarter, LG aims to focus even more strongly on premium, LTE devices, since the price war, and consequent decline in average selling prices, has mainly affected 3G so far. However, while it plans to ramp up distribution and marketing of the G2 ‘ essential, since it will be up against the new iPhone and other holiday bighitters ‘ that will come at further cost.
Samsung has the same idea, adding more premium and new-category devices to offset the margin squeeze from the shift of growth to emerging market handsets. For now, however, its economies of scale are ensuring that its sales growth, even when driven by lower end models, is still delivering strong profits. As predicted, the firm turned in another record quarter, with its third quarter profits boosted by the Galaxy smartphone range, especially in emerging markets, as well as rising memory chip prices.
Net income was up 25% year-on-year to KRW8.05 trillion ($7.6bn), above market expectations, and Samsung credited rising sales in China with much of the result. To sustain growth in the coming quarters, it plans to pursue its usual strategy of broadening its range as much as possible, to address every imaginable user segment and region. New additions already include a smartwatch and a handset with a curved screen, and the firm is expected to add a rival to Google Glass next year too.
This is all about building reach, and economies of scale, which rivals cannot match, even when they launch high profile, well received devices. Samsung knows that the market is fickle and today’s hot device can be easily eclipsed by the next big thing from a rival, so it focuses on building a huge base, wide channels and a strong umbrella brand. As Lee Seung Woo, an analyst at IBK Securities, told Bloomberg: ‘In the smartphone race, we should categorize Samsung differently from the minor league, second tier players.’
Operating profit in the quarter was KRW10.2 trillion on sales of KRW59.1 trillion won, in line with figures published in Samsung’s preliminary, unaudited report earlier this month. The mobile unit, responsible for about two-thirds of Samsung’s earnings, posted operating profit of KRW6.7 trillion, up from KRW5.63 trillion a year earlier. Smartphone shipments rose in the ‘mid-10%’ range, said the firm, but there may be concerns for future profit growth, since all the increase came from lower end models, while high end Galaxy products stayed at a similar level to that of the June quarter. ‘It vacuumed up most of the lower end market share, which most of the second tier players were fighting for,’ said Park Kang Ho of Daishin Securities.
That pattern makes it vital that Samsung also continues to turn out higher margin offerings, and the biggest premiums and differentiation will increasingly come from non-phone form factors, hence the new focus on wearables. In Q3, tablet sales were up in the ‘mid-20%’ range year-on-year.
Kim Hyun Joon, VP of the mobile unit, expects the pace of year-on-year handset growth to fall slightly in the current quarter, as holiday season competition intensifies, and predicts shipments will rise by a ‘low single digit’ while profit margins will be stable as sales of high end products like Galaxy Note 3 rise during the present-buying period.
Another important factor in Samsung’s results was rising memory price ‘ its benchmark DDR3 2Gbit DRAM is selling at $2.05, up from $1.60 on September 4, when a fire hit the Chinese plant of key rival SK Hynix. Samsung continues to benefit from Apple’s success, despite the latter’s efforts to reduce its reliance on its rival ‘ as well as having to buy some of its memory from the Korean firm, Apple has failed to transfer all its processor production to TSMC, and the A7 CPUs in the new iPhone 5s is still being manufacted by Samsung, according to a teardown by iFixit.
Profit in the consumer electronics division was down by 12% on last year because of poor demand for TVs, while the display division saw its operating profit fall amid price wars.