To Halt Smartphone Slide, Samsung Rewrites Playbook

by admin September 11, 2016 at 7:08 am

From the way it chooses smartphone components to the models it brings to
market, Samsung Electronics has undergone a painful process of breaking
from its past to reverse a slide in its handset business.

For
example, the world’s largest smartphone maker agonised over camera specs
for its flagship Galaxy S7 (Review) until the last moment – ultimately defying
industry convention by opting for fewer pixels in exchange for improved
autofocus features and low-light performance, a move that contributed to
early success.

It also pared back its product line-up, overcoming internal resistance, enabling it to streamline production, an executive said.

The
handset business has now stabilised, and had its best profit in nearly
two years in January-March, though historically low smartphone industry
growth still leaves Samsung looking for the “next big thing”.

“We’ve
now gotten to a point where we can secure a baseline profit even if the
market stagnates, so long as we don’t make a bad mistake,” said Kim
Gae-youn, vice president in charge of Samsung’s smartphone product
planning. “I’m confident we can hold our ground.”

After peaking in
2013, a sharp drop in mobile profits exposed Samsung as slow to adjust
to the changing market: its budget devices were overpriced and
unappealing versus Chinese offerings, and the 2014 version of its Galaxy
S flopped.

That prompted a cull among executives and stoked
investor worries Samsung might not be able to recover as rivals
including Apple and China’s Huawei Technologies and Xiaomi gained market
share at its expense.

There was no sweeping, across-the-board
fix. Rather, Samsung embarked two years ago on an overhaul that included
a shift from a phone-for-all-needs approach towards a line-up that
emphasized economies of scale.

It revamped design, using metal
frames and curved screens, and gave high-end features such as organic
light-emitting diode (Oled) screens to its low- and mid-tier products.

Camera conundrum
As
Samsung prepared to launch its Galaxy S7 phones this year, executives
went back and forth over whether to use a 12-megapixel rear camera that
shoots better in the dark and has improved auto focus, or stay with a
16-megapixel count. At the last moment, they opted for 12-megapixels – a
rare step down in an industry fixated on higher numbers.

This
meant a change in approach for a company known to tout the highest specs
for its flagship products, and executives required convincing, Kim
said. They were swayed by data showing consumers want more than just a
high pixel count.

samsung_galaxy_s7_camera_pure_flickr.jpg

“In the past, based on our past decision-making
process, we never would have gone back,” Kim said in an interview at
Samsung’s headquarters campus in Suwon, south of Seoul.

The move
worked. More than half of US S7 buyers surveyed cited camera quality
as a key selling point, compared with a third of all smartphone buyers
in the first quarter, according to Kantar US Insights.

The same
mindset shift gave Samsung confidence to release a Galaxy 7 series that
looks similar to its predecessor. This incremental upgrade drew initial
scepticism, but the S7 phones have beaten expectations and could set a
new first-year sales record for the South Korean firm.

Samsung
must still convince investors its recent improvement is sustainable, and
that innovative products are in the works to grow revenue. Some
attribute its rebound partly to Apple’s weaker performance, and
cost-cutting.

“I think they will try to imbue the Note (phone)
with a more transformative change such as new technology under the new
leadership, than the fine-tuning we saw with the Galaxy S7,” said Kim
Hyun-su, a fund manager with IBK Investment & Securities, which
holds Samsung shares.

Long-time mobile chief J.K. Shin ceded
day-to-day management in December when Dongjin Koh became president of
the handset unit in the biggest leadership change to date under the
conglomerate’s heir-apparent Jay Y. Lee.

Samsung’s operating
profit is expected to be flat this year and grow just 3 percent next
year, according to 43 analysts polled by Thomson Reuters I/B/E/S.

Less is more
Slimming
down its product portfolio was another departure from the past, when
Samsung launched variations to soak up as much demand as possible. As
market growth stalled, that approach was no longer cost effective.

It
phased out unpopular models and created common platforms, with more
phones using the same parts. Researcher Counterpoint says Samsung has
shed close to a third of its product portfolio.

That move also had to overcome internal resistance.

galaxy_s7_vivid_flickr.jpg

“If
you’re in the trenches, you want to have a machine gun, a grenade, a
mine on hand,” Kim said. “There are also different needs depending on
individual markets, so regional sales staff naturally can’t be happy
when the company moves to rationalize and restructure from a global
structure. The transition process is painful.”

The product cull
paid off; the revamped models helped Samsung recover in big markets such
as India. “There was a feeling the sheer number of phones in the market
was confusing for customers,” said a Samsung India executive, declining
to be identified as he was not authorised to speak with the media.

Despite
a solid first quarter, analysts remain cautious about Samsung’s
outlook, with researcher Gartner predicting global smartphone sales
growth will slow to 7 percent this year.

Samsung has also yet to
recover in China, the world’s top smartphone market, where it ranks
sixth with 7 percent market share, according to Strategy Analytics, well
behind local rivals such as Huawei, Xiaomi and Oppo.

Samsung’s
Kim says his focus now is on premium-end smartphones – those costing
$600 and above – where not all industry players have the muscle to
compete.

“There’s still room for growth in the market,” he said.
“This segment wants innovation, which has turned it into an area that
requires huge capital equipment investments.”

© Thomson Reuters 2016

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