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China’s smartphone price war is eating into Samsung’s profits

Samsung can thank falling phone prices in China in part for what’s to be its weakest year of profit growth in its mobile phone business since it began in 2007. On Jan. 7, the company said that operating profit fell 18% in the quarter ended in December to 8.3 trillion won ($7.8 billion) from a year earlier. Analysts predict the division will either grow by a low single digit or shrink in 2014.

Competition to win over the Chinese smartphone market, the world’s largest, is devolving into a price war that is shrinking the profit margins of smartphone makers like Samsung. Sales in China account for 20% of the company’s total shipments and its mobile business makes up almost two thirds of Samsung’s operating profits.

Because of emerging markets like China the global average price of smartphones has fallen about 16% since 2011 to $372 in 2013. Today, most low-to-mid-range smartphones in China—where most can’t afford a $700 iPhone—cost below 1,000 yuan (about $165), and companies are racing to go lower.

At the end of 2013, Huawei priced its new budget smartphone, the Honor 3C, one yuan lower than its rival Xiaomi’s similar phone, the Hongmi, priced at 799 yuan. Last week, Xiaomi announced it’s selling the Hongmi for 100 yuan cheaper. Samsung is shifting phone production from China to cheaper Vietnam and has said it’s investing in more mass market smartphones for emerging markets. (At the high-end, Samsung will face more competition from Apple’s iPhone that China Mobile, the country’s biggest carrier, will start offering later this month.)

The situation isn’t likely to get better for phone makers. Chinese handset manufacturers like ZTE, Lenovo, Coolpad as well as Huawei have reportedly piled up huge inventories of phones that need to be sold. At least Chinese shoppers can expect a deluge of promotions this Chinese New Year.

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