Samsung (NASDAQOTH:SSNLF) will start selling the Galaxy Note 4 in China on September 30 through all three state-run carriers, launching a preemptive strike on Apple's (NASDAQ:AAPL) iPhone 6 Plus across the country. The device will cost 5,199 RMB ($848) at China Mobile (NYSE:CHL), China's largest carrier, although subsidized pricing plans have not been revealed yet.
In my opinion, this earlier than expected launch should be considered an act of desperation, rather than confidence, for the South Korean tech giant. Samsung has lost considerable market share to Chinese rivals like Xiaomi over the past year, while Apple recently reported record sales of 10 million iPhone 6 and 6 Plus handsets within their first three days on the market. With this in mind, let's take a closer look at the Note 4, and two key reasons why it could fail in China.
There's only room for one high-end player in China
Samsung's reputation is built on launching high-end smartphones priced slightly lower than Apple's iPhones.
However, Samsung users generally exhibit less brand loyalty than Apple ones. Research firm WDS recently conducted a survey of 3,000 smartphone users in the U.S., U.K., and Australia, and discovered that 76% of iPhone owners planned to stick with Apple, compared to 58% for Samsung owners. That trend is also reflected in emerging markets. A recent survey from Upstream of over 4,500 smartphone customers in five emerging markets found that 42% of Chinese smartphone buyers planned to buy an iPhone, compared to 32% for Samsung.
There is huge pent-up demand for the iPhone 6 models in China. Preorders at Apple's Hong Kong website were sold out within two hours. Before that, China Mobile reported 33,000 preorders within its first day of availability in early September. Grey market demand is also high, with mainland Chinese smugglers marking up the prices of Hong Kong units (normally $720 to $1,040) by over $1,000 apiece. Even legitimate stores in Hong Kong and Shenzhen are reportedly selling the phone for double or triple the suggested retail price, according to Reuters.
That frenzy is sending Samsung a loud and clear message -- that the iPhone 6 is quickly becoming one of the most desired status symbols in the country.
If Samsung can't outgun Apple, it will die in the mid-range market
Another problem for Samsung is that it isn't directly competing against Apple in China anymore. Instead, it is losing market share to Chinese companies like Xiaomi, which dethroned Samsung as the country's top smartphone maker in August. Xiaomi now controls 14% of China's smartphone market, compared to 12% for Samsung, according to research firm Canalys.
Xiaomi is a tough company to beat, because it sells phones at razor-thin margins. Its previous flagship, the Mi 3, offered compared specs as Samsung's Galaxy S5 for roughly a third of the price (approximately $230 vs. $750 unlocked). Xiaomi can sell these phones at such low prices because it doesn't spend any money on marketing and brick-and-mortar retailers. Instead, it relies entirely on online retailers, word of mouth advertising, and selling phones in small batches to inflate demand and avoid amassing large inventories.
When we look at the Galaxy Note 4, we see a similar problem. Another troublesome Chinese competitor for Samsung is Oppo, which sells the comparable OnePlus One phablet for $379 unlocked. In a side-by-side comparison, the OnePlus One is lighter, has a better front-facing camera, the same amount of RAM, a slightly slower quad-core processor (2.5 Ghz vs. 2.7 Ghz), and a comparable battery (3,100 mAh vs. 3,220 mAh). The Note 4 is waterproof, has a better rear camera, fingerprint sensor, and a few other perks -- but it costs more than twice as much as the OnePlus One.
If the Note 4 isn't seen as a status symbol like the iPhone 6, customers will simply choose the phones with the best price-to-performance ratio. When push comes to shove in that department, Samsung simply can't compete with the likes of Xiaomi or Oppo. The global outlook is also dire -- Barclays expects Samsung's global market share in phablets to fall from 73% in 2012 to 58% by 2016.
A Foolish final word
Over the past few years, Samsung squeezed HTC and Sony out of the smartphone market with aggressive product launches and marketing. While that worked well in the past, Samsung now faces the double threat of Apple's first phablet and competitors like Xiaomi and Oppo, which aren't afraid to sacrifice margins to gain market share.
Therefore, Samsung is stuck in a catch-22: If it wants the Note 4 to compete against Chinese phablets like the OnePlus One, it must lower its price. But if it lowers its price, it loses its high-end branding, and surrenders that market to Apple. That's why Samsung is desperately launching the Note 4 earlier in China, but I believe it won't make much of a difference in the long run.
Leo Sun owns shares of Apple and China Mobile. The Motley Fool recommends Apple and China Mobile. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.