Jul 6, 2014

Is Samsung Doomed? No Innovation Price Trap

I love The Street. The Street is the investment site of Jim Cramer of Mad Money.  If you don't know who Cramer is - you are missing out.  The show is a blast and is useful for investors.

A piece on The Street entitled Samsung has an Innovation Problem - Its Not Apple is very enlightening on the future of Samsung.

A few interesting clips from the article.
"Samsung used to have a few strengths it flexed against Apple in the smartphone space:
  • Bigger screens in the Galaxy phones and the Note Phablets 
  • Its carrier relationships 
  • Its high/mid/low market phone offerings 
  • Vertical integration - which it used to lower its chips and DRAM costs 
Let's take those in turn: 
Apple has bigger screens coming this Fall. The iPhone 6 is expected to have a much larger screen. It now has the iPad Air and Mini. Apple may be looking into other types of phone/tablet form factors as well. What's Samsung going to do to counter this? Make even bigger phone screens? 
Samsung has been selling phones for a long time so it has had a lot of carrier relationships -- just as Nokia (NOK) did. Apple's always been the new kid on the block trying to build these up. But it really broke through in a big way in the last year. Apple now has well over 200 carrier relationships globally, including DoCoMo (DCM) recently in Japan. Apple's footprint is now extremely extensive -- and still growing. Samsung's is at its ceiling. 
Many once argued that Apple needed to have a mid-tier and low-end version of the iPhone. Apple seems to disagree, preferring the high margins of the upper end of the market. Besides, its older phones have effectively become their "free" offering on the low-end. Samsung's ability to offer phones to all these markets is part of the reason why its profits have been eroding. It's a market share vs. profits tradeoff. Samsung -- the whole conglomerate and not just the smartphone division -- had $4.6 billion in net incoming in the March quarter. Apple, by contrast, had $10.2 billion in that same quarter. 
Samsung can still benefit from vertical integration. However, Apple's profits still vastly surpass Samsung's. Apple is becoming more and more vertically integrated. Apple's move into chips give it both a cost and performance advantage in certain products relative to Samsung. Apple has also been creative in the way it's used its cash to develop relationships with suppliers of certain strategic components like sapphire glass covers."
So is Samsung's Competitive Advantage Dead?

The article goes on to note that:
"So, when you look forward, how exactly will Samsung differentiate itself from Apple? Will it be through greater innovation, as the mainstream business press suggests? Innovation how, exactly? Like with the new Samsung Gear watches that it pushed out the door to beat Apple to the punch? The ones that have not been well received? 
Through wearable devices? Through its Tizen mobile OS? 
The truth is Samsung has never been an innovative company. It's not in their DNA. It's always been a vertically integrated conglomerate. What do vertically integrated conglomerates do? They compete on price and volume. . .
Maybe the company's best hope for turning around its profits is to double the size of the screen of Apple's iWatch when it eventually copies it."
Is Samsung doomed?  The majority of the Korean economy is based on companies that compete, mainly, based on price.  Samsung has been criticized for years for being nothing more than a follower that competes based on dumping products on foreign markets.

With the cost of doing business in Korea increasing and competitors like China being nearly as capable manufactures as Korean companies - will the Korean economy falter.

Who will step up and create innovative products/services in Korea?  Will the Korean government protect the big boys to the detriment of more innovative small companies?  All these questions are at the very top of the present Korean government.  The government is eagerly trying to promote start ups, while balancing conglomerate realities.

No simple answers to these questions.  I know I wont be buying Samsung stocks, but I am happy to be holding onto a good deal of Apple and Microsoft stock.

The full article may be found at: The Street.
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Sean Hayes may be contacted at: SeanHayes@ipglegal.com.

Sean Hayes is co-chair of the Korea Practice Team at IPG Legal. He is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. He is ranked, for Korea, as one of only two non-Korean attorneys as a Top Attorney by AsiaLaw.