Samsung’s Profit Drops By 60%, Digs Deep To Remake Business Model


South Korean tech giant Samsung Electronics estimated its third-quarter operating profit to fall by almost 60 percent, as it faces stiff competition in the smartphone business from Chinese companies that offer alternative mobile devices at cheaper prices.

Samsung, the world’s largest smartphone maker by shipments, announced Tuesday that its operating profit in the third-quarter fell 57.8 percent to 61.8 percent from last year to between 3.9 trillion won ($3.6 billion USD) to 4.3 trillion won ($4 billion). After Samsung reported an operating profit of 10.2 trillion won last year, a poll of analysts expected that figure to be at 4.3 trillion won this year.

Investors are reportedly selling off their Samsung shares at an alarming rate over concerns about its foothold in the mobile market, which Samsung has dominated with Apple Inc. for the past decade. Samsung’s stock also fell by about 15 percent so far this year while competition with Chinese smartphone manufacturers, including Huawei, Lenovo and Xiaomi, continues to intensify.

Although Samsung’s product line ranges from memory chips to home appliances, more than half of its profits come from mobile devices.

Samsung’s signature smartphone, the Galaxy S5, has not sold at an expected rate, and last month, the company began selling its new smartphone-tablet hybrid, the Galaxy Note 4, a direct competition to Apple’s new iPhone 6. The Korean company sold about 18 million of its Galaxy S5 smartphones in the second quarter, but sales reportedly dropped to 11 million in the third quarter.

The sudden struggle for Samsung arises as its chairman Lee Kun-hee is suffering severe illness after a heart attack in May. Samsung has insisted that Lee’s health is slowly improving, but whether the man who revolutionized the Korean tech company can fully recover remains unknown as critics doubt the company’s potential to expand boundaries beyond its current capacity without a strong leader.

But weak smartphone sales is already forcing Samsung, currently led by Lee’s only son Jay Y. Lee, to lay the groundwork for a major restructuring in their business model. One of its plans is to invest 15.6 trillion won to build a high-tech chip-making facility in South Korea’s northwestern city of Pyongtaek to “improve” its memory chip business to compensate for the decreasing mobile phone sales.

The facility, scheduled to begin operations in 2017, is part of Samsung’s efforts to supply higher quality memory chips as there is a strong chip demand for various devices, including smartphones, tablets and robots. Samsung is no stranger to manufacturing memory chips as its chip profits once exceeded that of mobile devices in the second quarter of 2011.

To further make up for the loss in the mobile market, Samsung is strengthening its business areas in producing energy storage system for electric vehicles. Such an effort was evidenced by the recently improved partnership deal between Samsung SDI, the company’s batter maker, and the BMW Group. The deal allows Samsung to increase the quantities of its battery production.

In July, Samsung also formed a task force to specialize in providing various tech device components for growing Chinese companies, such as Huawei and Xiaomi.

More recently, Samsung’s de facto leader Jay Y. Lee scheduled a meeting with Mark Zuckerberg during the Facebook owner’s visit to Korea next week. South Korean media is speculating that Lee will seek a potential partnership with Facebook, proposing ways for the social media site to incorporate Samsung’s virtual reality headset Gear VR and its music streaming service Milk Music.

Photo courtesy of IB Times