Android Devices Financials

Samsung appoints new leader for mobile unit

KD Jin brings expertise in software R&D to the smartphone challenge, as the division faces lowest profits since 2011

Two years ago, Samsung set out its strategy to retain leadership in smartphones by investing more heavily in software and its own chips. Its plans have been only partially successful, as highlighted by a reshuffle at the top of the mobile business unit, with the elevation of a software-driven executive, Koh Dong Jin. Shin Jong Kyun, or JK Shin, steps back as head of the division, though he retains his co-CEO role for Samsung Electronics.

The changes reflect growing desperation about Samsung’s smartphone business, which faces its lowest operating profit in four years in 2015, according to analysts. While the semiconductor business has been a source of growth and profit in recent quarters, and enabled Samsung to differentiate its Galaxy range while reducing its reliance on Qualcomm, its handset unit still faces erosion of its market lead and its margins. The key reasons have been rising competition from low cost Chinese brands, as well as a revival of the iPhone at the high end, but another factor has been the limited impact of Samsung’s attempts to become better at software.

Group vice chairman Lee Jae Yong has recognized that much of Apple’s strength comes from its integrated hardware/software/content experience and has created teams to emulate this at Samsung. Some well-regarded products have emerged – the Knox enterprise security platform, and Samsung Pay, both the brainchilds of new mobile chief KD Jin, being two examples. The Galaxy’s user interface, an overlay for Android, has been much improved – especially in the pen-based models – and the most recent launch, the S6, featured far less ‘bloatware’ and some genuine software differentiation.

But Samsung, despite experiments with its own operating systems, such as Bada and Tizen, is largely saddled with Android, an OS it can only partially control under the terms of its Open Handset Alliance membership. It has not delivered an integrated, addictive experience like that of the iPhone, and it remains easier for users to migrate from Galaxy to another Android device than to leave the walled garden surrounding the iPhone. In 2013, vice chairman Kwon Oh-hyun admitted to analysts that “even though we’re doing the software business, we’re not as good as we are in hardware”.

CFO Lee Sang-hoon acknowledged, at the same analyst event, that though Samsung had spent about $1bn investing in 14 companies between 2010 and 2013, this was “somewhat conservative” especially when set against the start-up M&A acquisition programs of Apple, Google or Cisco.

There have been more acquisitions since then, including that of LoopPay for the strategic m-payments offering, but the progress remains gradual rather than dramatic. KD Jin, then, has a tough job ahead as president of mobile communications. His elevation indicates that this year’s annual management reshuffle is a particularly important one, and also reflects JY Lee’s determination to stamp his mark on the corporation he now effectively leads, since the illness of his father, still officially the chairman.

As well as the new mobile leader, he has announced an inhouse incubator for engineers and a multibillion dollar investment in R&D related to the smart home. This indicates an intensification of Samsung’s 2014 move to shift the balance of development resources away from smartphones and towards the internet of things, particularly platforms to connect all its hardware products (access points, TVs and washing machines as well as mobile gadgets).

But that will also be a software game, as Apple’s HomeKit and Google’s Thread and Weve strategies show. “Based on Koh’s career background, it suggests Samsung will put more weight on its software focus instead of hardware,” Greg Roh, an analyst at HMC Investment Securities, told Bloomberg. “The change shows that just the new cycle of hardware offerings won’t do much to revive growth. The new leader will try to boost software power and foster new innovations.”

Koh, who is 54, has spent most of his Samsung career in R&D and ran the Technology Strategy team from 2007 to 2014, with the launches of Knox and Pay, and close alliances with Qualcomm, Google, Microsoft and Wacom all to his credit. He is no stranger to handset hardware, or the attempt to create an integrated experience, having overseen the newest Galaxy flagships, S6 and Note 5. By contrast, JK Shin has hardware in his blood, and while he will always have Samsung’s meteoric rise – from the also-ran days of the original Galaxy to the lofty heights of its 2012/13 market lead – on his CV, he has also struggled to adopt sufficiently radical solutions to the recent challenges.

Samsung is still the biggest handset vendor in the world (though no longer in the largest market, China) and its shipments have risen from 94.2m, when Shin took over the division in 2011, to 318.2m last year. But profits have fallen – the telecoms business, which includes handsets, saw its operating profit peak in 2013 at KRW25 trillion on revenues which doubled between 2011 and 2014, to KRW111.8 trillion. But this year, earnings are expected to fall by 8.2% year-on-year to the lowest since 2011.

In its most recent quarter, Samsung reported net profit of KRW5.31 trillion ($4.7bn), but this fell short of analyst expectations, partly because of high marketing costs in a competitive landscape, and the Korean giant warned of a profit decline in the current fourth quarter. “In the fourth quarter, the company expects earnings to decline from the earlier quarter, as it does not expect the foreign exchange rate to have a positive effect in the fourth quarter,” Samsung said in a statement. Q315 sales were ahead of forecasts at KRW51.7 trillion.

Although the firm saw strong smartphone sales, these were concentrated heavily at the low end, with price cuts on premium Galaxy models failing to light a fire under the flagship products. “Samsung’s lower end smartphones under $150 sold well, but it didn’t help lift the margins at all,” Lee Seung Woo, an analyst at IBK Securities, told Bloomberg. “Aggressive marketing in the US can help Samsung expand its Galaxy share of the high end space, but it’s giving up a substantial profit margin for it.” Operating margin in the mobile devices business has fallen to about 9%, less than half of the leve in the first quarter of 2014.

Nevertheless, Samsung said it planned to increase capex spending by 14% this year, to KRW27 trillion, as it builds up its chip and display businesses. It is digging into its $50bn cash mountain to support this, and to buy back and cancel $10bn worth of shares, in a surprise move to boost shareholder value. Earnings at the chip unit rose to KRW3.66 trillion from KRW2.26 trillion a year earlier.

VPS hosting