Samsung reaps huge profits from smartphones—but look out below

Quartz

Samsung has gone all-in on mobile phones, which now generate three-quarters of its profits.

Operating profit from mobile phones and telecom equipment rose 56% to 6.51 trillion won ($5.86 billion) in the first quarter. Profits at Samsung’s consumer electronics division, which includes TVs and household products were down 54% to 230 billion won, and its semiconductor unit’s profits rose 52% to 1.07 trillion won.

At first glance, it looks like happy days in smartphone land: Samsung is rolling out its new flagship phone, the Galaxy S4, this week, and initial orders have been better than expected, leading to reports of shortages at some US retailers. And its global smartphone market share has climbed to 33% versus Apple’s 18%.

The problem is that Samsung’s mobile strategy, driven by high-end smartphones like the S4, may not be sustainable.

“We may experience stiffer competition in the mobile business due to [the] expansion of the mid- to low-end smartphone market,” warned Samsung investor relations head Robert Yi.

“The real battle starts from the third quarter when many lower-end smartphones will be on the market and eating into margins,” Mirae Asset Securities analyst Doh Hyun Woo told Bloomberg. “The mobile business may peak in the third or fourth quarter.”

The smartphone market, currently at about 1 billion handsets, is expected to double by 2015. And most of that growth will come at the low end of the market. ABI Research expects cheaper smartphones to account for 46% of smartphone sales by 2018, up from 28% in 2012.

The future of smartphones looks to contain fewer high-profile launches and $4 billion marketing budgets, and more of the brutal competition and infinitesimal profit margins that have come to epitomize the PC industry.

In China, the world’s biggest smartphone market, Samsung currently has the biggest market share with about 18 percent. But as TechRice has reported, “other” manufacturers—hundreds of no-name brands with razor-thin profit margins and commoditized hardware—collectively control far more of the market, and the trend is accelerating.

Samsung isn’t standing idly by while its competitive position is undercut. The company launched a lower-specification range of phones called the REX series in February, aimed at emerging markets including India, Russia, Africa and South America. Partly due to the success of this range, Samsung has just overtaken Nokia in India.

Apple, Samsung’s main competitor in smartphones, is also lagging behind in the low-end market, although it has been happy to sacrifice market share for profit margins so far. The Wall Street Journal reports that Apple may release a less expensive iPhone this year, and in China it has pinned its hopes on the relatively ancient iPhone 4.

But as Quartz reported last month, emerging economies can be tough nuts to crack, particularly as domestic brands assert themselves. Samsung has shown that it knows how to excel in today’s smartphone economy, but preserving its market share and profits will require more than just high-end gadgetry.



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