You can't say you weren't warned. After preannouncing its results would miss expectations, Samsung (NASDAQOTH:SSNLF) reported a shocking 60% drop of operating profit in the third fiscal quarter. In addition, the South Korean company reported sales falling nearly 20%. While Samsung is considered a hyper-conglomerate with its hands in many pies, the main culprit was in its mobile division: The company reported an astonishing 74% drop in mobile profits.
After years of being the top-selling handset vendor by employing its bifurcated phone strategy -- with Galaxy at the high-end and a host of cheap models at the low end -- Samsung's strategy appears to be reaching its limits. Attacking Samsung at the high-end is arch-nemesis Apple (NASDAQ:AAPL); at the low end the company is running into issues in developing markets, particularly China, due to uber-hot upstart Xiaomi.
Apple continues to perform, is ready to battle in China
At the high end, Samsung continues its long-standing battle with Apple for high-end supremacy. And if last quarter is any indication, these companies appear to be moving in opposite directions. Samsung's newest version of its Galaxy phone -- the Galaxy S5 -- sold 5 million units in its first month, versus 7 million of the previous iteration. In a recent interview, Kim Hyun-joon, Samsung's Sr. VP of Mobile Communications, said, "High-end smartphone sales result [sic] was somewhat weak."
Compare that to Apple's results when it reported iPhone 6 and iPhone 6 Plus sales. The company reported its highest sales numbers ever by moving 10 million units in its first weekend. And that figure doesn't include China; after securing deals with China's three mobile providers (China Mobile, China Unicom, and China Telecom), Apple's newest iPhone iteration looks to mitigate Samsung's key advantage in China: its large screen size.
That said, Apple isn't even the biggest challenge to Samsung in China...
Xiaomi is competing in the developing markets
Although Samsung appears to be struggling in the high end market, the company should be more worried about low-end competitor Xiaomi. Since its founding in 2010 the company has grown aggressively, and is now the third-largest smartphone vendor according to both Strategy Analytics and IDC, with a 5.3% share of the worldwide smartphone market; Samsung and Apple posted market share percentages of 24% and 12%, respectively.
However, Xiaomi grew its smartphone shipments an astonishing 211%, albeit it from a smaller base than either Apple's or Samsung's. Apple posted respectable year-over-year growth by posting a 16.1% increase. And Samsung? Well, the company actually reported an 8.2% decrease in units shipped. So you can see how Xiaomi is quickly becoming a huge player in the smartphone market. And the amazing thing is that the vast majority of these sales are in China.
A bifurcated strategy that's simply not working
All in all, this has been a rough year for Samsung's mobile division. Although the company is still the No. 1 smartphone maker with that aforementioned 24% share, that's down from a 32.5% share in the same quarter last year. Not only that, Samsung is the only top five vendor that saw its shipments fall during that period. This points to a bifurcated strategy that's simply not working.
Samsung appears to have gotten the memo; in the same interview Mr. Hyun-joon stated, "We will fundamentally reform our product portfolio." To that end, the company is considering revamping its lineup to focus on efficiency. Specifically, the company plans to offer fewer products in an attempt to focus on each unit and lower costs.
And while this strategy should lower costs, the question is: Will this renewed focus help the company better compete against Apple and Xiaomi? Unfortunately, I think the answer is no, and Samsung's mobile division will continue to lose market share.