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Samsung group, whose 2010 sales were equivalent to one-fifth of South Korea’s gross domestic product, is looking all set this year to take on rival Apple (NASDAQ: AAPL) on its own turf of iPads and iPhones. In fact, the Korean giant was able to overtake Apple for the top spot with a year-over-year change of 267% and 29.1% of the total smartphone market. Samsung (LSE: SMSD) also took the top spot of global mobile phone market share from Nokia (NYSE: NOK) for the first time since 2004. That 20% of Korean GDP is reflected in the holdings of the iShares MSCI South Korea Index ETF (NYSEMKT: EWY), where they are the fund’s biggest holding at nearly 20%.
Though they had already overtaken Nokia's sales volume and profitability last year, it was only last quarter that Samsung beat Nokia in total phone shipments. Nokia’s well-documented troubles in switching to Microsoft’s (NASDAQ: MSFT) Windows Phone platform from their Symbian OS are only part of their problem, as they are getting squeezed on the low-end of the candy-phone market as well. For Nokia and Microsoft, however, the worst seems to be over, and the latest smartphone market share numbers have Windows Phone stabilizing and heading higher in some markets.
While Samsung is a conglomerate, with a very successful engineering division that has announced expansion into Thailand as their ASEAN hub, it is their electronics division that generates all the revenue and the headlines. They are planning on spending in 2012 more than 70% of the group’s capex on electronics, with a focus on mobile-phone chips and next-generation displays for phones and TVs. The company plans to issue its first overseas bonds since 1997 to expand production capacity at its Austin, Texas chip factory where they manufacture the A5x and, most probably, the A6 mobile processor for Apple.
Even with record quarterly profit of $5.9 billion at Samsung Electronics, driven by the soaring sales of the Galaxy Smartphone, they are not immune to the situation in Europe, as weak pricing in other consumer electronics is plaguing everyone.
While their growth has been universal, it is in the rapidly emerging markets where things are really interesting. In India, Samsung has a 44.7% share in the smartphone segment and 34% of the total mobile phone market. India is the second country, after Singapore, where they have their own brand store. In China, Samsung has a big lead over Apple with a 30% market share in the world’s biggest smartphone market compared to Apple’s 10%, but Apple still commands more than two-thirds of the profits in the smartphone industry. The challenge for Samsung will be whether they can leverage their brand to higher margins over time, truly competing with Apple at their own game.
Currently China accounts for 9% of business revenues, and that proportion is expected to rise 20% by the end of this decade. To achieve this, Samsung’s CEO in China has been pushing for localizing Samsung’s operations. 70% of the total staff are now locals compared to only 20% two years ago. They have also announced plans to invest $7bn (£4.4bn) to build their first chip factory in China, expanding on their world-leading chip manufacturing capacity.
Samsung’s gains have truly been at their competitors’ expense; the same day that Samsung announced record earnings, largely aided by the sales of its Galaxy Smartphone, rival HTC announced a third consecutive quarter of losses, though the latest figures from Digitimes suggest hat HTC has stopped the bleeding in China and India. Despite facing part shortages and a number of patent disputes, the flagship Galaxy Smartphone is likely to have stretched its lead over rivals from Apple and Nokia, at least until the iPhone 5 and Windows Phone 8 versions of Nokia’s Lumia come out. For now the Galaxy, in all of its iterations, is selling at astounding rates.
But, even if the next iPhone results in slowing Samsung’s handset growth, it pushes Samsung’s semiconductor revenues as Apple’s sole supplier of not only SoCs, but also mobile memory chips, NAND flash memory and display screens. At a time when Samsung is planning to boost its investment, its very close rival, South Korean LG Group, has announced plans to reduce spending by 15 percent this year.
Samsung’s Mobile division recorded explosive 86% growth Y/Y and was the highest contributor to the revenues. Their LCD division also recorded impressive growth of 17% Y/Y as they move into the smart TV segment. There are very few questions going forward that impressive market share and revenues, with the moats they represent, cannot answer. Like Apple, Samsung is now a giant in the electronic supply chain, causing competitors to either use them for their business or work around their needs.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple, Microsoft, and Nokia. 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.