Market Insight

Samsung on the defensive embarks on cost cutting initiatives

November 19, 2014  | Subscribers Only

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Samsung has announced two moves aimed at reducing its cost base.

Firstly, it is moving more of its manufacturing to Vietnam; investing $3bn to build a new factory in addition to a $2bn facility which opened earlier this year.

Secondly, Samsung intends to simplify its device portfolio in coming years. It will reduce the number of different devices it produces by between 25% and 30% next year in an effort to reduce costs, and also drive economies of scale for its remaining products by sharing design elements.

Our analysis

Samsung has long been an outlier in the Android smartphone market. Not only is it the market share leader by a substantial margin, but Samsung has been the only Android handset manufacturer able to consistently generate significant profit margins. Samsung’s Mobile unit reported an operating profit in excess of 17% each quarter between Q1 2012 and Q2 2014. During this same period, virtually every other Android brand did well simply to break even.

Now the sheen is coming off Samsung’s financial performance. Mobile operating margin slipped to 11.4% in Samsung Electronics Q3 2014 reports while shipments have also stagnated.

Samsung is under pressure at both ends of the market. The new larger iPhones take away the key unique selling point of Samsung’s Android smartphones at the high end of the market. At the low end Samsung finds itself in a dog fight with low cost brands such as TCL Alcatel, other Android brands moving down market in an attempt to win market share such as Motorola and a whole host of local players such as Xiaomi in China, Micromax in India or Fly in Russia.

Samsung has clearly identified scale as the key strength it can bring to fight the battle at the low end. These two moves are aimed reducing costs in all stages of production by reducing design spend, simplifying its supply chain and of course benefitting for lower cost manufacturer in Vietnam.

Removing Samsung’s TouchWiz UI overlay on Android could make as big an impact as either of these moves. Not only does developing TouchWiz for each low-cost product add extra development cost, but it also takes up device memory, meaning Samsung’s lower end devices either need increased RAM, or face reduced performance relative to competing devices.

TouchWiz also slows down updates for handsets, assuming of course Samsung even chooses to provide an update. This approach is rapidly becoming uncompetitive in a marketplace with several phones either running stock Android (Android One range), very light skins (Motorola), or have a relentless updating philosophy (Xiaomi).

With Samsung under pressure, operators now have greater leverage in negotiating on handset supply contracts. This threatens to compound Samsung's existing market challenges.

Samsung must find a way now to avoid the fate which previous mobile handset market leaders such as Motorola, SonyEricsson and Nokia suffered: A sudden decline in profitability followed by a steep slide in handset shipments. Rationalisation of the handset models should be just a first step, it wasn't sufficient for previous leaders, and it won't be enough on its own to help Samsung.

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