Samsung Dominance Threatened as Xiaomi Gains Traction

Samsung Electronics Co.’s reign at the top of the global phone industry has been defined by rising earnings and expanding market share. Not anymore.

Quarterly profit posted today by the Suwon, South Korea-based company was the lowest since it became the largest mobile-phone producer in 2012. That was compounded by stagnating sales as Xiaomi Corp. and Lenovo Group Ltd. led the charge by Chinese vendors against Samsung’s marquee Galaxy S series.

Samsung’s ascent was propelled by its ability to meet the needs of high-end customers, budget buyers and those looking for a hybrid of a smartphone and tablet computer. Now it’s fighting to win back users opting for cheaper devices packed with features by makers including Huawei Technologies Co. and for high-end smartphones by Apple Inc., which is said to be preparing new iPhones with larger screens.

“Samsung may be structurally vulnerable, with no sensational products in the pipeline that can stand out from rival devices,” said Lee Seung Woo, an analyst at IBK Securities Co. in Seoul. “With Chinese brands catching up fast, the second-half battle seems even tougher for Samsung.”

Net income, excluding minority interests, fell 18 percent to 6.18 trillion won ($6 billion) in the three months ended June, Samsung said today. The result missed analyst estimates for 6.83 trillion won.

Photographer: SeongJoon Cho/Bloomberg

Mockups of Samsung Electronics Co. Galaxy Note 3 smartphones are displayed at the company's flagship store in Seoul. Close

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Mockups of Samsung Electronics Co. Galaxy Note 3 smartphones are displayed at the company's flagship store in Seoul.

Shares of Samsung fell 3.7 percent to 1,343,000 won in Seoul, the biggest drop since January. Today’s decline wiped $7.4 billion from the company’s market capitalization and erased the stock’s advance for the year.

Shares Slump

Samsung boosted marketing spending for its cheaper smartphones to fend off the competition, while currency moves cut 500 billion won from earnings. The company gets about 90 percent of its sales from outside South Korea.

Samsung sold 95 million mobile phones and 8 million tablet computers in the second quarter, and it expects a 10 percent increase in shipments in the current quarter.

“We will more aggressively respond to the low- to mid-end smartphone market in China, which is growing rapidly,” Kim Hyun Joon, senior vice president of Samsung’s mobile strategic planning team, told investors today. “There is a concern that it may put further margin pressure on profitability in the short term, but we will expand our shipment and secure profit.”

The earnings come with Chairman Lee Kun Hee entering his third month in the hospital after a heart attack and as his family prepares to hold initial public offerings for other parts of Samsung Group. The Lee family controls the conglomerate through a web of cross shareholdings and may face more than $5 billion of inheritance taxes.

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A visitor plays a video game in front of a light wall at the Samsung Electronics Co. d'light showroom in Seoul, South Korea. Close

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A visitor plays a video game in front of a light wall at the Samsung Electronics Co. d'light showroom in Seoul, South Korea.

Market Share

Operating income at the mobile unit, which accounts for more than half of Samsung’s earnings, fell 30 percent to 4.42 trillion won, compared with the year earlier. That is the weakest profit since the second quarter of 2012.

Samsung’s market share fell 7.4 percentage points to 25.2 percent in the June quarter, with Apple retaining second place and Huawei, Lenovo and Xiaomi filling the next three spots, respectively, according to data from researcher Strategy Analytics released today.

The Galaxy maker was the only producer in the top five to post lower shipments. Xiaomi, which sells most of its phones online, more than tripled shipments to 15.1 million.

Samsung’s lead in the market for screens larger than 5 inches, which it pioneered with its Note devices, faces a new threat from Apple, which is said to be preparing iPhones with larger displays.

Larger IPhones

Samsung may include a three-sided display in its next Note device, enabling users to read messages from an angle, as it seeks to protect its market share for devices known as phablets because they combine features of phones and tablets.

“The bigger iPhones in the second half of 2014 are Samsung’s single biggest threat for almost five years,” Neil Mawston, executive director of Strategy Analytics, said before the earnings release. “Samsung should even consider accelerating the launch of the Galaxy S6.”

Operating earnings at Samsung’s display division, which dominates the market for screens using organic light-emitting diodes, fell 80 percent to 220 billion won in the quarter.

Profit from the consumer-electronics division, which oversees the TV and home-appliance businesses, increased 79 percent to 770 billion won, buoyed by soccer’s World Cup.

Earnings at Samsung’s chip unit, which supplies its own phones and those of competitors including Apple, rose 5.7 percent to 1.86 trillion won, helped by higher prices.

Samsung said it plans capital expenditure of 24 trillion won in 2014, including 14.4 trillion won for its semiconductor unit, the biggest maker of memory chips. The total amount is greater than the market value of competitors including Sony Corp.

To contact the reporter on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Robert Fenner

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