Is Samsung in Bigger Trouble Than You Think?

Samsung  (NASDAQOTH: SSNLF  ) is under attack. It's facing intensifying competition on both the low end and the high end of the smartphone market from the likes of Lenovo (NASDAQOTH: LNVGY  ) and Apple (NASDAQ: AAPL  ) . Lenovo is making big strides in improving the quality of its smartphones, which are becoming increasingly popular with consumers. That's making life difficult for Samsung on its home turf.

Globally, Samsung continues to be pressured by Apple on the high end of the market. The pressure stands to heat up even further, since Apple is on the cusp of releasing its next-generation iPhone. Making matters worse is that Apple's iPhone 6 will likely include a new product feature that threatens what was once a key advantage for Samsung.

Add it all up, and there are plenty of reasons to be skeptical about what the future holds for Samsung.

Samsung has reason to worry
Samsung recently unveiled extremely weak earnings guidance, stating that its current quarter could produce the worst results in two years. This is especially problematic since smartphones accounted for approximately three-quarters of Samsung's profits last quarter. The key contributing factor to this is weakened demand caused by intensified price competition and the looming threat of the next iPhone.

Essentially, Samsung's fundamental strategy is being challenged. It took for granted the consumer willingness to pay premium prices for its devices, even though the Galaxy S5 didn't offer enough innovations to command high prices.

In turn, rivals in China, such as Lenovo, are competing with their own devices that offer many of the same features at a much lower prices. One such device is the Lenovo Vibe Z, which is Lenovo's first LTE smartphone and includes gesture controls and photo-enhancement software.

For evidence of this, look no further than Lenovo's results over the past few months. Its smartphone shipments soared 59% last quarter. Its mobile Internet and digital home-operating segment, which includes smartphones, tablets, and televisions, soared 71% last quarter. Much of this is due to the company's success with smartphones. For four consecutive quarters, Lenovo has sold more smartphones and tablets than personal computers.

Will Samsung lose its competitive advantage?
There are rumors all over the financial media that Apple's iPhone 6 will threaten what had been Samsung's key competitive advantage: a larger phone screen. Several outlets, including Forbes and CNet, have speculated that Apple is preparing to increase the size of the iPhone screen. In the past, Apple was reluctant to build larger phones because it believed that smaller screens held an edge for consumers who didn't want an overly cumbersome phone to carry.

But now, Apple may be reconsidering its position. The size of the iPhone 5 screen was bigger than the iPhone 4, and another increase is likely. Reportedly, Apple will release two separate iterations of the iPhone 6, with 4.7-inch and 5.5-inch screens. It seems Apple is coalescing around the idea that buyers want a larger screen to better enjoy content and enhance the user experience.

This means trouble for Samsung, as it instantly wipes away Samsung's key competitive advantage. While Apple previously held steady on smaller screen sizes for the iPhone 4 and iPhone 5, Samsung carved out a sizable chunk of the market for itself by appealing to those who wanted a bigger phone. Now Apple understands that it should also offer large screens to consumers who want one.

The bottom line
Samsung is getting squeezed on both sides. On the lower end, it's under assault from Lenovo, which is making huge gains. That's because Lenovo found a way to increase the attractiveness of its smartphones while still offering lower prices than Samsung.

Looking ahead, smartphone titan Apple will be releasing the iPhone 6, presumably later this year. When it does, it's likely to include a larger-screen option, which spells even more trouble for Samsung. The big screen was a key advantage Samsung was holding onto that it will no longer enjoy.

The bottom line is that Samsung is truly between a rock and a hard place, and could see its dominant market position fade.

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  • Report this Comment On July 19, 2014, at 8:23 AM, mds wrote:

    If anyone bothered to look at Samsung's business starting long ago; they would realize that you cannot make comparisons on market share, or profit; unless using the same metrics.

    Samsung spends much more than AAPL on advertising, because it takes more to market an inferior product. Samsung also, and most importantly, DOES NOT REPORT SALES.

    All they report is shipments, most of which are on consignment. Between advertising and piles of merchandise in stores it creates the illusion of a business picture that in reality is completely distorted. In the end all unsold products are returned and Samsung eats it; or pushes it to emerging markets. But there too, Samsung is being shunned for local brands; who are eating their low end.

    Samsung will be gone in this arena within a year;; unless they continue to fund a losing business, using appliance sales profits, just to save face.

    Sony hardware is a dead business. Samsung is next.

  • Report this Comment On July 19, 2014, at 1:13 PM, never2dull4u wrote:

    As someone who's background is in supply chain management (me), it's not just the marketshare that Samsung should be worry about on 5S vs iPhone 6, it's the excess capacity that Samsung will face when Apple COMPLETELY remove their business from Samsung. Samsung WILL have a HUGE hole in their capacity to keep their operations 'profitable'.

    I fault Steve Jobs for sleeping with the enemy by making Samsung as big as they are today.

    When TSM and other contract mfgrs can pick up the volume on the ICs and chipsets, say good night to Samsung.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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9/1/2015 12:17 PM
AAPL $110.89 Down -1.87 -1.66%
Apple CAPS Rating: ****
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SSNLF $875.00 Down +0.00 +0.00%
Samsung CAPS Rating: ***