Samsung and the Two Bears - The Hindu ~ Electronic Gadgets

The company reported its first profit decline in two years this January.

It was only a year ago that Korean giant Samsung could do no wrong. The company was firing on all cylinders: great Android smartphones, creative and prolific marketing campaigns, and a supply chain that wouldn't quit. The South Korean chaebol's prowess was sending tremors all the way up to Mountain View.

Murky future

Today, however, clouds are gathering on the horizon. The company reported its first profit decline in two years this January. With its differentiation slowly disappearing, pressure on its margins increasing and its average selling price (ASP) dropping, Samsung appears to be on the path towards losing its 'only Android smartphone maker to make money' crown.

In India, the story is same: various analysts estimate that a decent portion of the phones sold by Samsung are in the low-to-mid end. This, of course, implies that the high-end segment isn't doing as well.

So, what are the bear arguments that are disrupting Samsung's bull run? The first argument is that Samsung is being squeezed both at the differentiated high-end and the low-cost, low-end. It doesn't take a genius to realize that in the last year, both Apple and the rabid, fermenting Chinese-Android OEM bunch have made great strides in the Indian smartphone market. Apple, for instance, has pulled all sorts of marketing rabbits out of its hat— buyback offers, EMI schemes, credit card cash-back—which have allowed it to take a bite into Samsung's high-end sales. (The incoming larger-screen iPhone will only add to Samsung's woes.) At the low-end, companies such as Micromax and Karbonn are starving. The problem in tackling OEMs such as Micromax is that not only do you have to fight over margins down to a fraction of a rupee, but it's almost impossible to keep up with their go-to-market strategy. When Micromax co-founder Rahul Sharma talks about how they can push out a phone—from the ideation stage to manufacturing—in less than 70 days, you know the race-to-the-bottom has begun. Chinese OEMs can exploit the smallest of demand windows, without worrying over product rotation and over-inventory the way Samsung must.

The second bear argument is the technology bear. This scenario points out that it isn't just an issue of Chinese scale, supply chain and margin, but that the smartphone bubble is close to popping.

No bad phone

What this means, quite simply, is that it is becoming harder and harder to make a poor-quality smartphone. Advances in technology have made it such that a consumer can now be satisfied with a Rs. 15,000 phone—when earlier he or she would have been satisfied only with a Rs. 30,000 phone. The lines between quality and price category are blurring: a Rs. 18,000 Nokia Lumia 720 or a Rs. 23,000 Moto X is now good enough for a customer who might have earlier purchased a flagship Samsung smartphone.

Both these bears have had significant consequences for Samsung, who, when you think about it, doesn't have a brand differentiation of the likes of Apple. On a global scale, Samsung's average selling price dropped by $30 last year, and its share of the premium market slipped from 40 per cent to 21 per cent.

When smartphone companies can appear out of nowhere, with "good enough" Android smartphones, what does it mean for Samsung—whose build quality and software aren't too different from Lenovo or any other Android competitor?

The Indian Android smartphone market—where one can no longer distinguish the high-end from the medium-end—is very much like the FMCG market. It's no coincidence that Samsung India's head Vineet Taneja can trace his roots back to Hindustan Unilever.

Unilever is the king of consumer packaged goods, and plays in a market where brand-building helps to sell a relatively undifferentiated good at a premium. Sounds familiar? The conditions in the domestic smartphone market are such that selling an Android smartphone isn't radically different from selling a bar soap or a toothpaste.

The problem in adding a little bit of extra differentiation, which is what Samsung tries to do, is that Apple has captured most of the consumer base that is willing to pay a lot more for a little more differentiation. The number of people who prefer Android and Samsung will only drop as the quality distance between a Samsung Galaxy S4 and a Rs. 20,000 Motorola or Micromax phone decreases.

anuj.s@thehindu.co.in