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Job Cuts Won't Solve Samsung's Smartphone Problems

By Jamal Carnette, CFA - Sep 12, 2015 at 2:00PM

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While it's a smart idea to "right-size" the company. Here's what the company needs to focus on going forward.

Source: Samsung.

If you haven't been paying attention to the smartphone industry, market share leader Samsung (NASDAQOTH: SSNLF) is struggling. On the high end, the company's premium Galaxy line is losing to Apple (AAPL) in developed markets as the company's larger iPhone 6 and iPhone 6 Plus units have received an enthusiastic response. In the developing markets, Samsung's struggling against various low and mid-range vendors -- most notably, Chinese competitors Xiaomi and fast-growing Huawei.

For example, although the company is still the largest vendor according to Gartner's recent data, the company is not on a positive trajectory. On a year-on-year basis, the company shipped 4 million fewer smartphones than it did in last year's second quarter -- 72 million versus 76 million -- and lost 4.3 percentage points of market share during that period.

As a result thereof, it seems Samsung is looking to focus on shareholders by its working on the expense side of the income statement. According to Bloomberg, the company is cutting up to 10% of its South Korean corporate headquarter workforce -- as the company is nearly 100,000 employees strong, these cuts could approach 10,000.

Will this affect future products?
For those following the company, this is the key question. And, if Bloomberg's reporting is accurate, the answer is probably not. According to the article, the bulk of the job cuts will be centered in human resources, public relations, and finance. These are important functions of any organizations, but shouldn't be directly related to research and development of future smartphone models.

For Samsung, this could be wise to "right size" the company. Although the two have different business models, there's a large disparity between its total employee headcount and Apple's. Although Samsung can best be thought of as an electronics conglomerate with semiconductors, display, and appliance-related businesses, its head count of 489,000 employees is over five times the amount of 93,000 Apple reported as of its last annual report.

On the other hand, Samsung is -- like Apple -- a mobile and smartphone-driven company with its mobile division responsible for more than 50% of sales in the first and second fiscal quarters. For Apple, that number has recently been higher, with the iPhone alone constituting greater than 60% of all sales over the past three quarters. Cutting overhead could be a wise way to enrich investors while the company continues to try to innovate against Apple.

But there's limits to this strategy
The problem with job and expense cuts are they are a temporary solution for investors. While slimming expenses to change the profit profile works in the short term, most investors want to see some type of top-line growth. According to data compiled by Bloomberg, it seems Samsung will fall short of that goal. Last year, the company booked 206.2 trillion won ($171 billion) in sales. This year, Bloomberg expects the company to report 200.2 trillion in sales ($167 billion) in the current fiscal year.

While I applaud the company's efforts to slim down its total workforce, the company will need to reverse its revenue trajectory at some point. And there's no better product to do so than its mobile division -- the company recently released its larger, phablet-sized Galaxy Note 5 and Galaxy S6 Edge+ models to compete with Apple's iPhone 6 Plus model. This alone probably won't change Samsung's struggles, but bringing a new phablet (or two) to market can't hurt either.

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