Samsung’s dismal earnings are an omen for the entire smartphone industry

From Samsung’s rumored “phablets for giants” line.
From Samsung’s rumored “phablets for giants” line.
Image: Reuters/Edgar Su
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When the world’s biggest smartphone maker posts ugly financial results, you can be sure that the whole industry is feeling some pain. Samsung Electronics said today that its second-quarter earnings would fall $1.4 billion short of analysts’ expectations, citing low demand for its devices in an increasingly saturated global market, and increasing cannibalization of tablet sales by ever-larger “phablet” phones.

Samsung expects to post Q2 profits of $7.1 billion, down 24.5% from the same period last year. The company is in the unenviable position of suffering from cutthroat competition—Apple at the high end, Xiaomi and Huawei at the low end—and from an industry-wide slowdown that is hurting its wholesale display unit. Quarterly profits at the display unit, which supplies Apple and many other major manufacturers, are expected to fall 76%.

In a break from the norm, Samsung tried to explain its disappointing forecast. Looking closely at its statement, there is bad news for just about every smartphone and tablet maker:

Weak smartphone demand in China…

The world’s biggest smartphone market is increasingly crowded, which is pushing down prices. Meanswhile, consumers are waiting for an expected 4G rollout to buy new phones. That spells trouble for Xiaomi, Lenovo, Huawei, ZTE, Coolpad, and the other Chinese manufacturers, along with Apple, which just signed a major distribution deal with telecom carrier China Mobile.

…And also in Europe

As in China, the European smartphone market is slowing down, even as more competitors enter into the market. Samsung, which has a 40% market share in Europe, said weaker demand there led to increased inventory.

Phablet are eating into tablet sales

As a manufacturer of device screens, Samsung has an unusually good vantage point to observe industry trends related to phone and tablet sizes. The verdict: slower replacement cycles and consumers shifting to 5-to-6 inch “phablet” devices are reducing sales of tablets.That has important implications for Apple, which is reportedly set to launch a larger version of the iPhone that could cannibalize sales of the iPad, which still make up 16.7% of the company’s total revenue.

Spending money to flog commoditized products

Samsung is one of the world’s biggest advertisers—but that was not necessarily a good thing, at least in the second quarter. The company was forced to boost marketing expenditure to reduce “existing inventories in sales channels.” Translation: The company had a glut of devices that weren’t selling, and it had to take a bath on promotions to unload them—like Verizon Wireless’ “Buy one Galaxy S5 and get one free” deal. The lesson for companies like Huawei and Lenovo, which have aspirations to become global brands beyond China, is that a big ad budget doesn’t automatically translate into success if your products don’t stand out from the crowd.

But on the bright side…

At least in some quarters, demand for Samsung smartphones is still high. A band of about 20 thieves held hundreds of employees hostage at a Samsung factory in Campinas, Brazil yesterday as they stole about 40,000 tablets, mobile phones, and laptops worth an estimated $36 million. No one was hurt in the robbery.