Have Asian handset makers reached a saturation point in terms of growth?

In recent years since the launch of IPhone by Apple (AAPL) in 2007, there has been quite a significant jump in initial smartphone sales as those earlier versions of the smartphones provide more functionality, touch-screen capabilities, higher pixel camera shots, etc. than a regular mobile handset. However, lately, with the lack of new product introductions by AAPL, several handset makers including Samsung, HTC, and Blackberry (BBRY) have come out announcing weaker than expected handset profit growth figures, most notably Samsung Electronics which released its earnings on July 05, 2013 showing dismal sales and operating profit (OP) growth for their June quarter. According to a Bloomberg Online news article published on July 05, 2013, Samsung reported sales of 57.0 trillion won during the June quarter from 47.6 trillion won a year earlier, but fell short of consensus expectations of 58.6 trillion won in a poll conducted among 38 estimates. On the operating profit growth for the June quarter, it came in at 9.5 trillion won, missing estimates of 10.0 trillion won in a survey conducted on 34 estimates. The company estimates OP for the June quarter will come in at approximately 9.3 trillion to 9.7 trillion, which will be in line with the actual OP figures for the June quarter.

Smartphone shipments from Samsung for the June quarter came in approximately 74.0 million or 2.0 million less than expected. One of the main causes for the larger than expected earnings disappointments came from its handset division, which accounts for more than half over the company’s overall business. Shipments for its newest S4 smartphone series in April 2013 fell short of expectations, which registered unit sales of approximately 10.0 million within the first month of the launch, and half the time it took the previous version, the S3 to reach that mark. The S4 phone is equipped with a 5-inch screen and a 13-megapixel camera. One of the motivations by Samsung to launch the S4 was to outbid their main competitor, Apple, which failed to release any new handsets in 2013. Samsung was also trying to capitalise on the empty void left by Apple in terms of the handset introductions. An interesting quote by an industry analyst, Mr. Neil Mawston, an executive director at Strategy Analytics, where he wrote an email before the release saying that,” Apple is suffering from IPhone fatigue, while Samsung is suffering from Galaxy fatigue.” The dismal S4 handset sales is part of the phenomenon that one will typically see from the industry nowadays, with intense competition, low prices, the lack of appeal as status symbols due to the smartphone’s widespread adoption in many countries, most notably Singapore, Hong Kong, South Korea, etc.

On the other end of the smartphone competition, HTC Corp., another leading handset manufacturer listed on the Taiwan Stock Exchange (TAIEX), which came out on July 08, 2013 to report dismal earnings figures for the quarter ending June 2013. Net income from the company fell to New Taiwan Dollar (NT$) 1.25 billion, which is down by approximately 83.0 percent from a year earlier and missing consensus expectations of NT$2.17 billion. The HTC One, one of the company’s newly launched handsets released in April coincides with the launch of Samsung’s Galaxy S4, and was partly impacted by the competition and timing. Revenue for HTC during the quarter came in at NT$70.7 billion but failed to meet consensus estimates of NT$72.8 billion, and its own forecast of NT$70.0 billion. According to data obtained from Bloomberg Industries, and telecommunications research firm, IDC, HTC Corp’s market share fell to ninth in global smartphone rankings in terms of the market share which stands at approximately 2.4 percent, One of the main causes for the earnings shortfall in earnings by HTC Corp. was not only due to the intense competition coming from Samsung’s Galaxy S4 handset product, but also other component shortages which caused the company to delay shipments.

Based on the dismal earnings reports released by the two Asian smartphone companies, it does provide some picture of the level of product competition, along with changes seen in both the corporate and retail renewal trends. Nowadays, handset manufacturers such as Samsung, and HTC Corp. have to juggle with research and development (R&D) spending, along with the sophistication seen by many of their customers in areas such as product functionality, tastes, price points, etc. The smartphone consumers are increasingly spoilt for choices particularly when it comes to upgrading patterns. Telecommunications (Telco) service providers which form the bulk of the smartphone manufacturers’ main channels of distributions are increasingly offering promotion packages to entice smartphone customers to switch phones regularly, and there tends to be less brand loyalties when it comes to the choice of service packages, as long as the quality is good, and prices are reasonable. In addition, with so many smartphones out in the market, there seems to very little differentiation among the products offered such as screen size, pixels, functionality, etc. The level of interest among the high-end smartphone consumers did not exhibit any significant changes in their purchasing behaviours as smartphones have increasingly become more like a commodity, with few or little features, if any, that will be regarded by this group of customers as high-end, exclusive, status symbols, etc.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc