Samsung Finds It Costly to Keep Up with China

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By Bruce Einhorn

We were warned.  Samsung Electronics is facing tougher competition in the No. 1 market for smartphones—China—and has made it clear that no one should expect much from its latest quarterly results. The world’s largest maker of smartphones expected earnings to be “not that good,” Chief Financial Officer Lee Sang Hoon said last month. With that sort of downbeat news coming out of Suwon, South Korea, analysts responded by cutting their estimates. At least 25 downwardly revised their takes on what Samsung’s earnings would be for the quarter.
The results were worse than many expected. Operating profit fell about 24 percent to 7.2 trillion won ($7.1 billion) for the quarter, the third consecutive quarter of declining profits for the Korean electronics giant, on sales of about 52 trillion won. An average of 34 estimates compiled by Bloomberg had placed the company’s operating profit at 8.1 trillion won and sales at 53.2 trillion won.
Mehdi Hosseini, an analyst at Susquehanna Financial Group in San Francisco, had already cut his quarterly estimates twice in the face of pricing pressure from Chinese brands. Still, the result “was a lot worse than we thought it would be,” he told Bloomberg Television today. The Chinese brands “are very aggressive in pricing,” he added, and this has forced down Samsung’s margins. “Samsung has been cutting prices, but still it wasn’t enough.”
While Samsung has to contend with such popular Chinese brands as Lenovo, Coolpad, and Huawei, the biggest threat may be Xiaomi. The Beijing-based company has enjoyed a fantastic run with Chinese consumers. Just a few days before Samsung reported its disappointing results, Xiaomi announced it had shipped 26 million smartphones in the first six months of the year, up from 7 million in the same period the previous year. Revenue is still small compared with Samsung’s—Xiaomi’s sales hit 33 billion yuan ($5.3 billion) in the six-month period—but that’s an increase from 13.3 billion yuan. And Xiaomi is likely to become an even bigger challenger as it expands, not just in China but around the world.
And if today’s news wasn’t bad enough, Samsung also is coping with the fallout from a daring attack by a gang of thieves in Brazil. About 20 bandits invaded a Samsung factory in São Paulo and held about 50 Samsung workers hostage while the thieves loaded about $6.4 million worth of smartphones, tablets, and notebook PCs onto trucks. “It is regrettable the incident took place,” Samsung said in a statement, adding that insurance would cover losses from the theft. Unfortunately for Samsung, in the fight against Xiaomi and other low-cost Chinese brands, no insurer will come to the rescue. (Bloomberg)