Samsung sees 60 percent profit hit amid increased competition

Samsung is looking at a 60 percent drop in its operating profit for the third quarter of 2014 amid increased competition from Apple and China's Xiaomi Corp.
Written by Leon Spencer, Contributor and  Jaehwan Cho, Contributor

Samsung expects a 60 percent drop in operating profits for the third quarter due to a lowered margin rate of its smartphones.

The company said in its preliminary guidance that revenue for the quarter was expected to be 47 trillion won ($44 billion), a 20.45 percent decrease from a year ago and a 10.22 percent drop from the previous quarter.

The Korean smartphone manufacturing giant expects operating profits of 4.1 trillion won ($3.8 billion), a 60 percent decrease from a year ago and a 43 percent decrease from the previous quarter.

Samsung said that weakened profitability of its mobile business and weakened demand of its System LSI business and panel business were the main causes of the fall.

It said it sold more mobile devices compared to the previous quarter, but the average sales price (ASP) dropped due to lowered price of older and high-end models.

The company's TV business ASP also fell as the high-demand season ended much earlier than expected, Samsung said. It said that in the fourth quarter, Black Friday sales are expected to increase demand for both smartphones and TVs.

However, Samsung still expects uncertainty in its company's IM (IT & Mobile) division, with deepened competition of low-cost smartphones and new smartphone launches by competitors.

"We'll differentiate our smartphone models and enhance line-up of low-cost models," said Samsung. "We'll keep moving to secure the company's competitiveness by expanding our transaction of OLED panel and other components."

Samsung's profit difficulties are also expected to negatively impact its home country's economy, of which it plays a large part.

According to reports by South Korean securities firms late last month, analysts estimated that the company's operating profit for the third quarter would be as low as 3 trillion won ($2.8 billion).

While the company has since announced a higher quarterly operating profit of 4.1 trillion won ($3.8 billion), the marked drop from last year's record operating profit of 10.16 trillion won ($9.6 billion) in the third quarter is expected to hit the country's gross domestic product (GDP).

CEO Score, a business consultancy of South Korean companies, said Samsung's operating profit from 2008 to 2012 accounted for 25 percent of Korea's GDP.

Samsung's status also drives much of the local Korea Composite Stock Price Index (KOSPI) stock market. According to research by KDB Daewoo Securities, Korea's stock value has been relying heavily on Samsung since 2008.

As of September 26, Samsung's current price on KOSPI was 1.18 million won ($1,132), a 380,000 won ($364) decrease from three months ago. Current stock of Samsung has nearly reached its lowest price since July 2012. This led KOSPI to fall more than 0.3 percent.

According to the Korea Exchange, Samsung's total market value in December 2013 was 207 trillion won ($190 billion). But after 10 months, it fell by more than 16 percent. As of September 26, total market value was 174 trillion won ($160 billion).

In a press conference for Samsung's Galaxy Note 4 Seoul World Tour, DJ Lee, head of Samsung's mobile division, said that although Samsung is having a tough time, it is only a temporary crisis.

"We expect we can overcome this crisis by our own fundamental technology," said Lee. "We have a full line-up of smartphones from low cost to premium. We'll react actively based on product category and market situation of every country."

The new guidance comes as Samsung announces that it is investing 15.6 trillion won ($14.7 billion) in a new chip production plant in South Korea.

Construction of the new semiconductor fabrication plant in Pyeongtaek will begin during the first half of 2015, and it's expected to commence operations in the second half of 2017.

ZDNet Korea's Jaehwan Cho contributed to this report.

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