Samsung spending US$21b to supply rivals as Galaxy slides

[SEOUL] Samsung Electronics Co will spend more than US$21.4 billion this year to help supply chips and displays to Apple Inc and Chinese competitors eating away at its Galaxy smartphone sales.

Capital expenditure will top the 23.4 trillion won spent last year in an effort to boost processor chip output, the Suwon, South Korea-based company said Thursday as earnings fell for a third straight quarter. The spending plan comes as Apple surged into a tie with Samsung as the biggest smartphone maker with about 20 per cent of shipments.

Apple's move to larger screens and competition from Chinese producers for budget buyers combined to end Samsung's dominance of smartphone sales. As Vice Chairman Lee Jae Yong tries to fight back with high-end features, including wraparound screens and metal cases, a focus on components may ensure he gets a slice of sales even when consumers choose an iPhone.

"It's getting harder to make a killing from smartphones competing head on with the rivals, but competitors including Apple will have more Samsung chips inside," said Ko Jung Woo, a Seoul-based analyst at BS Securities Co Ltd.

"Smartphones are highly commoditized. Samsung can no longer monopolize the market."

Shares of Samsung fell 1.3 per cent to 1,360,000 won in Seoul. The stock has risen 2.5 per cent this year after dropping 3.3 per cent last year.

Both Apple and Samsung shipped 74.5 million smartphones in the December quarter, Strategy Analytics said in an e-mailed statement Thursday. Both had 19.6 per cent of the market, which for the Galaxy maker was 10 percentage points lower than a year earlier.

Apple's iPhone 6 and 6 Plus have gained in the world's largest market of China, where consumers want a bigger device to perform the role of a phone and tablet computer. The company posted 70 per cent revenue growth in China last quarter and may get another boost from the Lunar New Year shopping season in February.

With Xiaomi Corp and Lenovo Group Ltd winning customers with feature-packed devices at lower prices, Samsung's earnings have fallen for three straight quarters.

Net income, excluding minority interests, slumped 27 per cent to 5.29 trillion won in the fourth quarter, according to a regulatory filing. The company, which has more than US$60 billion of cash, also announced a boost of its dividend to 19,500 won a share, up from 13,800 won a year earlier.

Operating profit at the mobile-phone unit slumped by almost two-thirds to 1.96 trillion won from 5.47 trillion won a year earlier. The business was overtaken by chips in the third quarter as Samsung's biggest profit driver.

Samsung is cutting its smartphone lineup to focus on products where it has a competitive edge. It will start selling a smartphone in India using its own homegrown Tizen software rather than Google Inc's Android operating system.

The next version of its marquee Galaxy S range will be critical to turning around earnings from smartphones. Samsung shipped 317.2 million smartphones last year, compared with 319.8 million the year before, according to Strategy Analytics.

"The Galaxy S6 smartphone is a very important phone for Samsung this year," said Lee Seung Woo, an analyst at IBK Securities Co in Seoul. "Although they are increasing the number of lower-margin smartphones globally, that's not where they are making a living."

On Tuesday, Apple posted the biggest quarterly sales increase in three years as new products such as the large-screen iPhones and refreshed Macs spurred demand.

"Samsung's profits were never going to reach the same heights as Apple's," Dan Wagner, the London-based chief executive officer at Powa Technologies Ltd, said in an e-mail. "They remain the main competitor to Apple, but with so many potential successors in the market, it is now or never for the company to differentiate itself in the sector."

Profit at Samsung's chip business, which makes both memory chips and application processors, was 2.7 trillion won, compared with 1.99 trillion won a year earlier.

The world's second-largest semiconductor maker is said to be switching to its own processors in the next Galaxy S smartphone after Qualcomm Inc chips overheated during a sample testing, according to people with direct knowledge of the matter.

Qualcomm cut its 2015 forecasts for sales and profit Wednesday, reflecting lost semiconductor orders at a major customer and more competition in China.

"Qualcomm's Snapdragon problem will benefit both Samsung's mobile and processors divisions," said Song Myung Sup, a Seoul- based analyst at HI Investment & Securities Co. "It may roll out the next Galaxy S device as early as March, when there will be no new rival devices on store shelves to compete with."

Samsung's most advanced chips, which consume less energy than existing semiconductors, should win the bulk of orders for Apple's next iPhones after losing out to Taiwan Semiconductor Manufacturing Co last year, according to Lee Min Hee, a Seoul- based analyst at I'M Investment & Securities Co.

Profit at the consumer-electronics division, which oversees TVs and home-appliances, dropped to 180 billion won in the quarter, and the display division had earnings of 470 billion won.

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