The Cheap Smartphone Market Battle
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I have to question why a company that has over 30% of the smartphone market in China would want to play around at the entry-level position, diverting resources to get involved in a fight with Motorola Mobility (*cough* Google (NASDAQ: GOOG) *cough*) and HTC over the sub 1,600 Yuan market. But, that is exactly what Samsung Corp. is doing. Normally when one has established themselves in a certain portion of the market one wants to solidify your hold on that niche and attack up the price curve, where the margins are higher.
But in China, with a potential market in 2012 of 60 million handsets to be sold below that 1,600 Yuan threshold, Samsung is hoping to capture one-third of it. They aren’t going to do it on price, as the others likely have slightly higher margins, but the brand presence that Samsung has as the market leader is what they are counting on to differentiate themselves.
Their main competition is Apple (NASDAQ: AAPL) with 25% of the market and when Apple finally moves the iPhone onto China Mobile and their greater than 500 million subscriber base, Samsung will have a real fight for dominance on their hands. The entry-level smartphone segment is projected to become more than 20% of the Chinese market by 2016.
Motorola has around 7.8% of the Chinese smartphone market and will begin to push under the Google brand a new line of entry level phones. Let’s add Lenovo, Baidu, ZTE and Huawei to this the sub-$200 smartphone market which is going to blossom from 5% of global sales to near 25% of global sales by 2016.
Samsung’s strategy has been to partner with everyone and blanket the carriers with a plethora of options, while, of course, Apple offers the iconic iPhone in a couple of different models. What is allowing Samsung, though, to attack the low end of the market, I think, is their existing relationship with Apple. As a supplier for them Samsung’s own internal operations have been pushed to a hyper level of competency, the trickle up effect similar to what has happened with Toyota’s suppliers over the years. In other words, in order to be a supplier for Toyota or Apple one has to improve substantially to handle the volumes. This improvement in efficiency, workflow and organizational competence gives them a huge advantage to move into whatever market they want, cf. FOXCONN. Lenovo is built similarly.
In this way Samsung can be all things to all consumers without hurting their position. They won’t make the money that Apple does, but they will be able to profitably move into the low end of this space and put serious pressure on the marginal players. Ironically, to me that means Google themselves. In the current smartphone market, Apple and Samsung account for more than 90% of the profit the industry generates and that does not look like it’s going to change any time soon. The beauty of this for Samsung is that if Windows 8 is a monster hit and Android loses its shine, it won’t take much for them to shift OS’s and continue as if nothing happened.
There is no ADR for Samsung, U.S. investors interested in exposure can look at the iShares MSCI South Korea Index ETF (NYSEMKT: EWY) where it makes up more than 19% of the AUM of the fund.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.