Samsung and Apple are rivals in the smartphone market, but the bottom line of both tech companies are feeling the effects of market saturation and an economic downturn in China, according to analysts in Seoul.
The World Bank projects the world's second-largest economy to expand at just 6.7 percent in 2016, China's weakest GDP in 26 years. That's a tough environment for any business, but the IT rivals also face a saturated smartphone market in China, as mobile handsets become more of a commodity than ever before.
"The smartphone industry is almost saturated. I have found that China's smartphone market in the fourth quarter of 2015 decreased 4 percent year-over-year," said Lee Seung-woo, a securities analyst with IBK Securities. "The two sides of the story behind this grim outlook are smartphone saturation and an overall weak economy."
Smartphone shipments destined for the Greater China market were 118 million in the October to December quarter, 4.72 million fewer phones than last year, according to the IBK figures.
"That means the biggest market for smartphones is saturated, and 2016 numbers will only decrease more. The first half of 2016 has a dismal outlook for the smartphone industry," Lee said.
Chinese market takes bite out of Apple
Since the second quarter of 2015, Apple has relied on Greater China -- mainland China, Taiwan and Hong Kong -- for about a quarter of the Cupertino-based tech behemoth's total revenue.
Now Apple is bracing for its first sales decline in 13 years, despite selling a record 74.8 million iPhones in the final quarter of 2015. Expectations for shipments were 75.5 million for the same period.
Apple projects a revenue decline of 8.6 percent for the January-March quarter year-over-year. Executives have put on a brave face, but forecast a decline in the coming January-March quarter, as sales traditionally drop after the holiday shopping season and the introduction of new models.
Apple's forecast sees revenue between $50 billion and $53 billion in the first three months of 2016, lower than analyst expectations and a significant drop from the $58 billion in sales Apple reported for Q1 2015.
That would be Apple's first year-over-year sales decline since the January-March quarter of 2003. "We're seeing extreme conditions, unlike anything we've experienced before, just about everywhere we look," Apple CEO Tim Cook told analysts on the company's fiscal first quarter earnings call last Thursday.
"We began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong," he added. .
China's annual GDP has been softening since a high of 9.5 percent in 2011, to 7.8 percent in 2012, 7.7 percent in 2013, and 7.3 percent in 2014. China's economic growth in 2015 was at 6.9 percent, its lowest since 1990 when GDP was 3.9 percent.
China slips between Samsung's fingers
In the mobile phone business, Samsung continues to suffer from stiff competition from low-cost Chinese brands that have squeezed Samsung's mobile margins and eroded its market share. That challenge is only compounded by smartphone market saturation and an economic downturn in China.
On the same day of Tim Cook's dour forecast, Samsung reported a disappointing net profit for the fourth quarter, down 40 percent to 3.2 trillion Korean won ($2.7 billion), short of market expectations.
In a call with analysts that day, Samsung mobile executive Lee Kyeong-tae warned that "competition among smartphone players will intensify even further as a consequence of market growth slowdown".
In December, Lee replaced Samsung stalwart Park Jae-soon, who was dispatched to global sales and marketing for home appliances.
Although the company was able report an increase in operating profit of 16 percent to 6.14 trillion won, its revenue was little changed at 53 trillion won, contributing to a grim picture for profitability.
"In the smartphone market China is number one in terms of volume, and then the US and Brazil is number four, and those markets altogether have some risk in 2016. So, that means the smartphone manufacturers' performance in 2016 will be weaker than market expectations," Lee said.
But the crisis over Samsung's disintegrating smartphone market share in China was obvious throughout 2015.
Samsung was pushed out of the top five smartphone sellers in terms of market share, according to a recent report by Strategy Analytics.
Xiaomi clinched the top spot for the fourth quarter with a 15.4 percent share of the Greater China market based on shipments; Huawei took the number two spot with 14.2 percent; and Apple dropped to third with 11.3 percent thanks to the popularity of its iPhone 6S.
"This year room for growth is limited. The semiconductor outlook for 2016 will also be very limited for growth," Lee added.
Samsung had been number one since 2011 in China, but lost its spot to Xiaomi in the third quarter of 2015, and then the number two spot to Apple in the following fourth quarter. Local makers Vivo and Oppo muscled Samsung off the top five list, taking the fourth and fifth places respectively.