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Samsung's Q2 results: A sign of smartphone slowdown?

Posted: 31 Jul 2015 ?? ?Print Version ?Bookmark and Share

Keywords:mobile market? smartphone? China phone? Galaxy S6?

Samsung Electronics seems to have lost its top form when it reported weaker second quarter results. The South Korean giant also offered a bleak output for the second half of the year.

Samsung's overall revenue in the second quarter declined 7 per cent to $41.8 billion. The company's operating profit decreased by 4 per cent to $5.9 billion, compared with the same period a year ago. In particular, the company's operating profit at the mobile division, compared with Q2, 2014, fell by a whopping 38 per centdown to $2.4 billion.

During the call, Samsung Electronics warned of "mounting challenges" ahead as its mobile unit again depressed the quarterly results, despite strong growth in the company's semiconductor business.

Samsung's revelation didn't exactly give the financial community much confidence either in Samsung's potential for the second half of 2015 or in the overall global smartphone market.

A bigger question is whether this dip is an isolated incident (specific to Samsung), or a harbinger of an inevitable slowdown in the smartphone market.

Income statement

(Source: Samsung Electronics)

Negative growth?

Ominously, TrendForce, a market research firm in Taiwan, recently revised downward its 2015 forecast for smartphone shipment growth from 11.6 per cent to 8.2 per cent. Avril Wu, TrendForce's smartphone analyst, blamed the revision on "the negative global economic outlook for the second half of this year and weakening demand."

In contrast to the high 26.5 per cent growth of 2014, "this year's smartphone shipment growth is entering a plateau period," said Wu.

Linley Gwennap, founder and principal analyst of The Linley Group, told EE Times, "In the overall smartphone market, we are seeing little to no growth in most developed countries, where saturation has already occurred."

"The danger," Gwennap continued, "is that developed countries could see negative growth if the smartphone replacement cycle gets longer. This is what has happened in the PC market over the past several years. To avoid this problem, premium smartphone makers must continue to add new and compelling features to convince users to upgrade."

Will Strauss, president of Forward Concepts, agreed. "The U.S. marketalready saturatedseems to grow only with hot new versions (iPhone 7?)."

Most industry analysts agree that smartphone saturation has yet to hit emerging markets. But what's changing is "the dynamics of the market," said Jim McGregor, founder and principal analyst at TIRIAS Research.

McGregor noted, "Everyone likes to talk about the next two billion users and the growth of the middle class through the next two decades, but they fail to analyse the impact of these trends on prices and the total addressable market."

He added, "Yes, we still have plenty of growth in terms of units, but the average income of these users is much lower than the typical iPhone user. As a result, average selling prices of smartphones will continue to fall and the overall revenue opportunity for the market will level out over time."

The Linley Group's Gwennap noted the existence of still a large number of users with basic phones (not smartphones) in developing countries.

"As the price of smartphones and data service continues to drop, most of these users will convert to smartphones," he said. "We estimate that 70 per cent of all cell phones sold worldwide today are smartphones, and this portion will rise to 83 per cent by 2020, resulting in an increase from 1.5 billion smartphones sold this year to 2.1 billion sold in 2020."

Presumably, that's good news. However, "most of this growth will be in very low cost smartphones," he cautioned.

Samsung's dilemma

Samsung's smartphones are stuck between a rock and hard place. A number of growing Chinese smartphone vendors such as Huawei Technologies, Xiaomi, Lenovo, Oppo and Vivo are nipping at the heels of Samsung's low-to-mid end phones.

The rapid ascent of Huawei is particularly telling.

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