​Samsung's real challenge is sustaining mid-tier growth in China, India

Samsung's second quarter shows their phones' power in developed markets, especially the US. But continued growth from its mid-tier in developing countries, especially China and India, remains the big challenge and a successful Note launch is needed for sustainable growth this year.
Written by Cho Mu-Hyun, Contributing Writer

All hail the Android king. Despite concerns, Samsung has posted its best profits in nearly two years for the second quarter of the year, backed by strong sales of its flagship phones Galaxy S7 and S7 Edge, continuing the strong streak it achieved for Q1.

Samsung's situation seems markedly different from other Android vendors, such as BlackBerry and LG, which are scrambling to stay relevant.

But truth be told, the South Korean tech giant's strong numbers were achieved by ruthless reorganisation. Many in the mobile division were laid off. There were cost cuts. China's operation was revamped and streamlined, with stronger emphasis on online phone distribution and the promotion of mid-tier phones.

And the pressure will not likely abate, if ever, for Samsung in the second half of 2016 and the coming years.

Note series almost a saviour

Samsung has been pushing launches for its flagship phones since the Note 5 to protect its bottom line.

Up until the Galaxy S4, flagship phones tended to show sustained sales through two quarters, but since the S5, the average life of sales is around a quarter and a half, prompting the South Korean company to push for early launch for the Note (August) and Galaxy S7 (March).

This trend will likely continue, though pushing for an earlier launch again next year will devalue the worth of the flagship phones. But Samsung may have no choice. The deadline is also a huge pressure on the product design team at the mobile division in an already creativity stifling environment.

Despite being a strong seller, the Note series has never matched the volume of its smaller cousin, the S series. The upcoming Note 7 will indeed be a big boost for profits in the third and fourth quarters, thanks to its comparatively higher price tag than the S series, despite the expected, smaller volume (ratio of sales has been consistently 3:1 for the S and Note). But for the third quarter to match that of the second, a sustained sale for the S7 is needed, plus the initial opening sales of the Note 7.

The good news is that the tech giant has resolved the production problem for the edged display. Yield rate has improved substantially since the S6 Edge and S6 Edge+ and there will be no bottleneck in supply this time for the Note.

Therefore, even if the Note 7 is the best Note ever with a dual-edged display, it still needs help from its lesser siblings, the mid-tier and low-tier phones fighting in China and India.

Mid-tier in China, low-tier in India

It is often noted that the "global" smartphone market has become a true duopoly of Samsung and Apple. This was true a couple of years ago, when Samsung and Apple would steal the top spot in market share, back and forth in the US whenever either one released the new flagship phone.

The US still accounts for the majority of sales for Samsung, as its recent sustainability management report shows, and it is good news for the firm that it is performing well there.

Generally speaking, what was happening in the US was happening in every other market back then. But not anymore. "Global" doesn't include China and India, where the consumer buying pattern has nearly completely changed to favour local manufacturers. China is the more important market here, and local vendors Xioami, Huawei, OPPO, Viov, and OnePlus are extremely competent competitors.

A senior Samsung executive, who declined to be named, insisted earlier this year that the firm's "economic of sales" strategy will allow it to maintain a strong foothold in China. But this doesn't seem to be the case when there is no question over whether Chinese-designed phones are good; as shown in the P9 Plus and P9, they are actually pretty awesome. And they have a strong, if not stronger, distribution channel within their home country than Samsung and a just-as-heavy purse.

A strong regulatory environment and anti-Chinese sentiment in the US will likely prevent Chinese vendors -- even the seemingly unstoppable Huawei -- from entering or succeeding there for quite some time, which will translate into more and more good products in China. China's market is perhaps saturated, but not in the degree of Europe or the US.

India is in more of pickle than China. The problem is that despite its size, India is not that much of a robust market compared with China. Samsung's lower tier there is doing well, and Tim Cook has visited India to make overtures, but it is questionable how much in profits, not revenue, these sales are contributing.

Flagship phones will continue to contribute the lion's share to Samsung's profit, but when it is so sure to fall in the coming years with the market saturation, the company needs to find the right balance from its mid-tier for sustained leadership.

And Samsung's crown has always been more precarious than Apple's because it runs Android. Huawei seems already comfortable suing Samsung, so it could be much earlier than everyone expects when they're competing in a market outside of China. There will be no rest for Samsung Mobile then.

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