For Samsung Electronics, 2019 was a terrible year, with the company lurching from one bad news story to another.
First there was the fiasco that accompanied the launch of the Galaxy Fold. Mobile division boss DJ Koh had to publicly admit his embarrassment after rushing the £1,800 handset to market only for review models to break as soon as they were tested.
Then there was the issue of the company losing market share. In the fourth quarter Apple stole Samsung’s number-one spot for global smartphone sales while Huawei just pipped it to the post as the leader in full-year 5G hardware sales.
On top of that, Samsung continued to be dogged by scandal: executive after executive was arrested on suspicion of accounting fraud; vice-chairman Lee Jae-yong was threatened with more jail time after being retried in a corruption case he had been incarcerated over in 2017; and chairman Lee Sang-hoon was sentenced to 18 months in prison for sabotaging labour union activities.
Then there were the financials. Samsung cautioned at the start of last year that things were going to be tough, but it wasn’t until last month that the full extent of that was laid bare. Global sales for the period were down by 13 per cent to $193.7 billion (£149.7bn) while net profits, which have now fallen for five straight quarters, plummeted by 55 per cent, from $40.3bn to $18.2bn.
From the company’s point of view, the decline has been driven by a slump in its semiconductor business. Indeed, Ben Suh, head of investor relations at the firm, said the overall picture had been coloured by “unfortunate conditions” in its memory and large display business.
The figures certainly appear to bear this out. Having accounted for a quarter of overall profits in 2014, the semiconductor business - which makes the memory chips that drive Samsung’s own as well as most competitors’ consumer electronics - had grown to dominate the company. In 2018 it accounted for 76 per cent of total profits, generating a bottom line figure of over $30bn. But despite Samsung ploughing the vast majority of $20bn a year since 2017 into developing memory chips, last year the unit contributed just 50 per cent of total profits.
Daniel Gleeson, principal analyst for consumer technology at research business Ovum, says the main reason for the decline is that memory-chip profits had been artificially inflated in the years leading up to 2019. While Suh said that market conditions are this year “forecast to improve gradually on the back of data centre demand and increasing adoption of 5G smartphones”, prices are unlikely to return to their previous heights. The outlook for the semiconductor business therefore remains far from certain - and that’s before questions about the so-far lacklustre adoption of 5G handsets have been factored in (recent research from Gartner predicted that there will be zero increase to 5G phone sales in the coming year).
The bad news for Samsung is that these problems serve to highlight just how much its smartphone business has been allowed to decline in recent years. As recently as 2014 phones generated 58 per cent of its overall profits; by 2019 that had tumbled to 33 per cent. Rather than try to counter that with a marketing splurge, the company appears to have beaten something of a retreat - from the UK market at least. Marketing spend, once seemingly unlimited, appears to have dwindled in recent years.
Marketing matters, though, and the impact of that reduced spend is clear: between 2014 and 2019 while Apple’s share of the UK vendor market rose from 33 per cent to 50 per cent, Samsung’s nudged up from 22 per cent to 28 per cent. In light of this, at the start of this year the company attempted to kickstart sluggish sales of its Galaxy A90 5G handset by slashing its UK price by £180 just three months after launch. That the offer has been extended into February is telling.
In the US, where its hardware launches are still announced with a bang and where the company is seen as the only Android brand, Samsung has increased its market share by close to five percentage points since 2014 versus Apple’s three.
Despite this, Conor Pierce, corporate vice president of UK and Ireland at Samsung, argues that 2019 was an “encouraging year from our overall performance” in his region, and that the company had “record premium retention” of 81 per cent returning customers.
He concedes that 5G has not taken off in the way Samsung had hoped. “We had much higher expectations of 5G in 2019. If you look at the UK, we achieved 91 per cent market share in 5G last year, albeit in a much smaller market than we expected. But what’s important is that we are building that wave, not being part of that wave.”
Yet Pierce - who says his strategy is based on 5G, IoT devices and customer “loyalty” - claims he is not in a position to address the wider strategic concerns about the direction of Samsung.
“I can speak on behalf of mobile, because that’s what I’m responsible for,” he says. “We will continue remaining calm, focusing on our strategy and continuing to look for ways in which we can make 5G affordable. I have a very clear vision, to create the largest, most connected, most loyal fan base in the UK and Ireland. That's what I'm setting out to do.”
His hope is that Samsung’s new phone series, including the Galaxy S20 Ultra, will help to push the company ahead of the crowd on 5G – but the reviews depict the new device as mostly lacklustre in real innovation.
Against this backdrop Samsung has sought to spread its risk by testing the waters in a variety of different market segments; the fact that 90 per cent of its capital expenditure has been lavished on its semiconductor arm means none of these efforts have proved particularly show-stopping.
Take the Internet of Things. Despite pledging at the 2018 CES trade show to go all out on IoT technology, Samsung’s AI assistant Bixby has trailed behind Amazon Alexa and Google Assistant since its launch in 2017. At this year’s CES its yellow robot Baillie, a rolling ball that follows users round the house and responds to commands like a pet dog, failed to take the Las Vegas crowd by storm.
Underwhelming on their own, collectively these developments could have the potential to transform Samsung’s business, particularly given its strength in the consumer electronics space. Yet because it was not named a major player in an alliance led by Apple, Amazon and Google in the run-up to Christmas, Samsung’s potential in the smarthome sector is at risk of going unrealised.
The aim of Apple, Amazon and Google, whose grouping has been dubbed Connected Home over IP, is to come up with a protocol that will make smart home devices work better together. While Gleeson says there is a chance the standard they come up with will be non-proprietary there is equally a chance it will be; not having a seat at the top table could prove disastrous for Samsung.
As things stand, Samsung has been able to shrug off its shortcomings by trading on its former glories. With the spectre of 2019 hanging over it, it is unlikely it will be able to do so for much longer. Like Sony and LG before it, the company is running the risk of bombing out of the phone market completely. Unlike them it does not have the one monopoly - screens in LG’s case, sensors in Sony’s - that will save it, despite its efforts with semiconductors and IoT.
For now, Samsung has been insulated from the impact of all this because its cash reserves have been so high: at the end of 2019 it had cash resources of $95m. This war-chest has enabled it to keep its investors sweet, ensuring its woes have not been reflected in its share price, which surged by 44 per cent over the course of 2019 and fell by just 1.4 per cent when its full-year financials were revealed.
As Aberdeen Standard Investments fund manager Yoojeong Oh notes, investors have stuck with the company through all the scandals and all the disappointments with its tech because their returns have been nicely enhanced via progressive dividend policies and share buyback programmes. “Samsung has about a third of its market cap on its balance sheet; being able to share in that as a shareholder is important,” she says.
That’s all very well for the time being, but unless Samsung can come up with the key innovation that will bolster its profits - and fast - it is unlikely to last. Investors are not in the habit of remaining loyal once the cash has begun to dry up.
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