Samsung (NASDAQOTH:SSNLF) could soon lose its home market of South Korea to its rival Apple (NASDAQ:AAPL). A recent report from Counterpoint Research claims that Apple captured a record 33% market share in the country last November, compared to 46% for Samsung. A year before that, Samsung controlled 60% of the market.
With a 73% smartphone penetration rate on a population of 50 million, South Korea is a much smaller market than China, which has a population of 1.36 billion and a 43% smartphone penetration rate. However, the loss of its home market -- where Samsung appealed to the "patriotic duty" of Koreans to support it instead of Apple -- would be a humbling blow indicating that sales might never recover across Asia.
Samsung's symbiotic relationship with South Korea
Samsung accounts for around a fifth of South Korea's GDP. Due to its importance to the country's economic health, the Korean government grants Samsung tax breaks and hefty subsidies. Last year, South Korean newspaper The Hankyoreh estimated that the government paid $155 million in subsidies to Samsung in 2012.
However, the South Korean government is often accused of feeding the media with glowing stories about Samsung and negative ones about Apple. Schoolchildren are taught that buying Korean, just as American consumers are told to buy American, is an act of patriotism. Unfortunately for Samsung, none of those efforts -- government sponsored or otherwise -- have slowed Apple's march across its home market.
Why Samsung is falling behind
Samsung's problems in South Korea mirror its issues elsewhere in the world. It's losing the lower-end market to cheaper competitors, while its flagship devices are being crushed by the iPhone's appeal as a status symbol.
Two trends in the South Korean luxury market are also disrupting Samsung's business. First, demand for luxury goods among men is rising, which has created a fertile market for status symbol gadgets. Second, South Korean consumers are shifting away from premium luxury brands like Louis Vuitton and Chanel to "super premium" brands like Colombo or Hermès. This shift benefits Apple, since it's generally considered a "super premium" smartphone in comparison to Samsung's "premium" S5 and Note 4.
Apple is also a master at masking inferior hardware with a sleek exterior, a smooth operating system, and carefully crafted marketing campaigns. This gives Apple its magic mix of high margins and unit sales. To keep up, Samsung installs expensive hardware like 16-megapixel cameras and quad-core CPUs in its flagship devices, yet sells them at a lower price than Apple's iPhones, resulting in substantially lower margins.
Lower margins, higher customer satisfaction
Despite selling cheaper devices at higher prices, Apple ironically crushed Samsung in customer satisfaction polls across South Korea. Last May, South Korean research firm Marketing Insight compared Apple's iPhone 5s to Samsung's Galaxy S5, LG's G Pro2, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) /LG's Nexus 5, and several other devices.
Apple was ranked "above average" across every category -- including design, display, processing speed, multimedia playback, speed, size, weight, touch response, and UI design -- with an overall satisfaction rate of 88.2%. Samsung's S5 ranked "below average" in every category, with a satisfaction rate of just 52.3%. Therefore, Samsung may have the mightier hardware, but its overall package simply isn't as refined as Apple's.
The carrier subsidy crunch
Controversial subsidy rules in South Korea, which prevent carriers from subsidizing phones with over 354,000 won ($322) of their own money, could also hurt Samsung as the final prices on their premium phones rise. To exacerbate that problem, many carriers are offering much lower subsidies than before.
For example, Samsung's Galaxy Note 4 has a maximum carrier subsidy of just 110,000 won ($100), which leaves the customer with a bill for over $800. That hefty price tag might convince consumers to consider buying cheaper Chinese Android phones with comparable specs. OnePlus One, a popular Chinese phablet with comparable specs to the Note 4, only costs around 320,000 won ($291) unlocked. Xiaomi's Mi 4 costs about 445,000 won ($403) unlocked on Korean e-commerce site Auction.
Simply put, Samsung is stuck in the middle again. Lower subsidies might not impact more affluent iPhone customers, but they'll hit Samsung's flagship and mid-range devices.
Samsung is clearly in trouble. IDC reported that its market share declined from 29% to 20% between the fourth quarters of 2013 and 2014, while mobile profits plunged 64% year-over-year last quarter.
Last year, Samsung was toppled by Xiaomi in China, and it might lose South Korea to Apple later this year. If that happens, Samsung could be forced to retreat further into the low end market -- which could be a very tough hole to climb back out of.
Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). 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.