Dialing for Dominance in Korea

Korean phone makers are gaining on the heavyweights

If you make mobile phones and your name isn't Nokia (NOK ), chances are you're having a miserable year. But there is one set of players doing quite nicely: the South Koreans. In the first three months of this year, Samsung Electronics Co. (SSNHY ), LG Electronics, and smaller Korean producers boosted their exports of cell phones by more than 10%, to $1.5 billion. During the first quarter, Samsung's telecom-equipment business made an operating profit of $177 million on sales of $1.46 billion.

How have the Koreans sidestepped the carnage? Mostly via their early adoption of CDMA, a digital standard originally devised by San Diego's Qualcomm Inc. (QCOM ) that is gaining popularity in the U.S. As a result, Samsung has emerged as the top supplier of digital phones to the U.S.: It sold 5.8 million there last year. That CDMA expertise also positions the Koreans for 3G, the next generation of wireless communication that will allow users to transmit such broadband applications as video. Versions of CDMA will underpin 3G networks around the world. "CDMA is our biggest asset," says Park Sang Jin, Samsung's marketing chief. "We hope it will serve as a springboard to vault into the top tier."

Then there are Korea's hot-selling handsets. Last year, Consumer Reports conferred its No. 1 rating on Samsung's SCH-3500, a $149 Web-surfing model that lets users switch between analog and digital transmission. In a break with the past, Samsung is going upscale, avoiding the cheap phones that service providers practically give away. Samsung is launching eight CDMA phones in the U.S. this year. One is the SPH-I300, at $500, which doubles as a PDA running the popular Palm operating system. What makes this phone special is a speaker function that leaves hands free to take notes--directions or diary entries, say--while having a conversation. LG isn't far behind. The $200 Internet-enabled DM510 helped propel its U.S. sales to 1 million handsets during the first quarter.

"CAN DO." An ability to innovate on demand has made the Koreans popular with such leading mobile operators as Sprint PCS Group (PCS ) and T-Mobil of Germany. "When we want to put in certain browsers for text messages, they're very fast to design a new handset for it," says Brian Finnerty, Sprint's senior director for new products. "They're the only ones who say: `We can do that. No problem."'

Having established itself as a global player, Samsung needs to keep up the momentum. "What has kept Samsung from breaking through to top-tier status is that they don't make handsets for all the digital standards," says Bryan Prohm, an analyst at the Gartner Group research firm. For instance, Samsung phones do not yet work with TDMA, a standard that competes with CDMA in the U.S., Canada, and Latin America. Still, this year, the Korean company plans to start selling phones based on TDMA. At the same time, Samsung is boosting its presence in GSM, the standard widely used in Europe. That should lift its sales there.

The Koreans also are gearing up for another battleground: Generation 2.5--the interim phase of the mobile Net before 3G. Samsung and LG are in a good position to pick up share in 2.5G. Both groups have the experience in consumer electronics to build the multifunction gadgets that will navigate the wireless Web. Moreover, last October, SK Telecom (SKM ), Korea's largest mobile operator, rolled out the world's first 2.5G service, giving local handset makers an early chance to test their products. Hence, Samsung has time to establish itself as a global player before 3G arrives. And when it does, Samsung says it will be out in front: The CDMA 2000 standard that will float 3G in the U.S. is a descendant of the technology the company dominates.

For Samsung, the immediate target is to unseat Ericsson (ERICY ) as the world's No. 3. "By the end of the year, we'll have moved a step closer to the goal," claims Samsung's Park. "The full-fledged war will soon begin." Part of the battle will be fought in the GSM stronghold of China, which is reviving much delayed plans to build a CDMA network.

Knocking off Nokia and Motorola is another story, of course. Both have potent brands and marketing muscle to match. Still, help may be on the way there, too. Such U.S. mobile carriers as Sprint (FON ) and Verizon Communications (VZ ) increasingly are selling handsets that carry only their brand names. In other words, says Kenneth Dulaney, a senior analyst for Gartner Group consultants, the maker's imprint is becoming less crucial. "Now, the important technology comes from a commodity chip," he says. "And that plays right into the hands of Asians." Especially the Koreans.

By Moon Ihlwan in Seoul, with bureau reports

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