Motorola's Pain Is Samsung's Gain
Samsung Electronics is confronting bad news on many fronts. The South Korean company is facing probes into an alleged bribery scheme implicating powerful sectors of the country's society, and its money-spinning memory-chip business is in the worst slump in five years. That's why Samsung executives must be thrilled to have their mobile-phone business. There, executives can get a very upbeat view of Samsung's future.
The numbers tell the story. With Motorola (MOT) struggling for more than a year, Samsung overtook its American rival in 2007 to become the world's second-largest handset maker (BusinessWeek.com, 11/30/07) after Nokia (NOK). Its global market share is up about three percentage points from last year, at 14.5% in the third quarter, compared with Motorola's 13.1%. And for every quarter this year, Samsung set a new sales record, with the 115 million phones sold in the January-September period exceeding the 114 million sold during all of last year.
Samsung believes its record-breaking run is just beginning. This year, its sales are expected to top 160 million phones, up 40% from last year, and executives are confident the pace of its growth will be about double that of the rest of the industry next year, when they expect sales of 200 million. "The growth momentum is accelerating, and there's no reversal in the trend," says Samsung's Executive Vice-President Chu Woo Sik.
Building on Cheap Handsets
The big question is whether Motorola can rebound and stop Samsung. New Motorola chief Greg Brown, who was chief operating officer before being named CEO last month, has spent the past few months tackling the company's problems to try and restore the glory it had just after the Razr's sensational debut in 2004. "Samsung will face challenges," says mobile communications analyst Tina Teng at market researcher iSuppli.
Samsung's top brass believe the company's recent run is sustainable. That's because Choi Gee Sung, a marketing expert who took over as Samsung's telecom chief in January, has targeted the fast-growing market for cheap handsets, which wasn't a priority for his predecessor, Lee Ki Tae, a former engineer.
The strategy shows that Samsung grasps just how difficult it is to create a global mega-hit product like Motorola's Razr. It's also a sign that Samsung has learned from its mistakes after losing market share in 2005 and 2006 to Nokia and Motorola, which were faster at embracing the low end of the handset market. (Samsung's global share fell from 12.7% in 2004 to 11.6% in 2006.) "Now we are really tracking market data and being driven much more by the numbers in the market," says David Steel, Samsung's vice-president in charge of marketing strategy.
Lessons from the Flat-TV Business
Cheap cell phones for China, India, and other emerging markets are where the biggest growth opportunities—and challenges—lie for handset makers. Samsung made the transition by drawing on the experience Choi and other executives gained in selling flat TVs. There, they made big strides by putting more emphasis on design (BusinessWeek.com, 10/4/07) and directly surveying customers to find out which TV features were absolutely necessary and which ones could go.
Taking a similar approach in handsets, the company rolled out basic phones costing around $40 as well as affordable, Internet-enabled handsets. The result: In the first nine months of this year, the company sold 46 million units in emerging markets, up 12% from 41 million in all of 2006. Profit margins for the telecom business are expected to top 10% this year, from 9.5% last year.
Another Choi initiative has been to revamp the supply chain. He changed it to provide real-time information on which products are selling and where, so marketers could redirect shipments to the markets where demand is strongest. Company officials figure productivity has improved by 15%, and the company's factories are operating at 90% of their capacity, compared with 78% last year. Handset inventory has dropped to just three weeks, a 35% improvement from last year. "The improved visibility has quickened our decision-making process," Steel says.
Beating Nokia in France
That helped Samsung double its share of the Indian market from 3% in January to 6.3% in October. Still, the company has a lot of catching up to do if it wants to challenge Nokia's 76.4% share in India.
Samsung is benefiting from the cell-phone product-management shift in other markets. In the U.S., Samsung increased its share to 18.3% in the third quarter of this year, from 15% last year. It trailed Motorola's 32.6% share but beat Nokia's 10.7%, according to researcher Strategy Analytics. In Europe, Samsung is closing the gap as well, and it even rose to No. 1 in France in October, with a 33.9% share vs. Nokia's 22.6%. It also chalked up gains in Britain, Germany, and Italy from the beginning of this year, data from researcher GFK show. If Choi keeps going, Samsung's challenge of Nokia's dominance might not be far off.