5 reasons Samsung is facing a massive profit slump

Samsung is busy putting out fires and dampening down expectations these days. Months after a 25 percent drop in quarterly profit, Samsung today warned of an approximate 60 percent profit slump for its upcoming Q3 earnings report.

Samsung’s note of caution points out that “declines in the mobile business due to intensified smartphone competition” are to blame. Since Samsung pulls in more than 60 percent of its profit from mobile phone sales, that’s where it hurts the most. (Update on October 30: Samsung has just issued its Q3 earnings, showing a 60.1 percent year-on-year profit drop, just as it had warned. Samsung’s mobile division saw quarterly profits of KRW 1.75 trillion (US$1.66 billion), down from KRW 6.70 trillion (US$6.36 billion) at the same juncture a year ago.)

Here are five specific reasons for the mobile onslaught that Samsung is facing:

1. New Asian smartphone makers are booming

Xiaomi Mi4

Samsung’s (005930:KS) woes are down to a number of hard-to-pronounce Chinese companies like Xiaomi and Huawei. These firms have realized they can make premium-feeling phones for about US$300, massively undercutting Samsung’s flagships like the Galaxy S5 and Galaxy Note 4.

The new Xiaomi Mi4, for example, sells for RMB 1,999 (US$325) in China, but packs specs and hardware quality largely on a par with the Samsung Galaxy S5, which sells for about RMB 4,500 (US$730) at present in China. Research firm Canalys says that Xiaomi shipped more phones than Samsung in Q2 in mainland China, which means Xiaomi could outsell Samsung for the first time this year.

This scene is being repeated in other major markets where Samsung is close to having its statue toppled, such as India. In India, homegrown phone brands like Micromax and Karbonn are cutting into Samsung’s lead with well localized phones at appealing, more accessible prices.

This trend first started in Asia, and it’s now spreading to other markets with the revitalized Motorola brand. Plus, new Asian brands like OnePlus and Xiaomi are exporting their affordable flagship phones globally. For Samsung’s all-important phone business, life will only get more difficult.

See: Xiaomi Mi4 is a bombshell in the $300 smartphone war – REVIEW

2. Samsung is easy to emulate

Samsung assumed the mantle of China’s most beloved smartphone brand from HTC. With little brand loyalty among mass-market Android users, it’s a title as long-lasting as being the Prime Minister of Italy.

That’s because Samsung’s smartphone business is easy to emulate. You make some hardware, slap a skin on Android, and try to corral users into a bunch of web services you’ve pre-installed on your phones.

It’s a lot like the PC market. And that isn’t working out for HP. Samsung’s phone business is in the same dilemma. Which brings us to prices…

3. Prices are going down

All those new Asian phone-makers know what people want, and they know that consumers want things to be cheaper. That’s why the likes of Xiaomi and OnePlus have settled on $300 as the new premium price-point – less than half the usual high-end price-tag of $700 to $1,000 favored by Samsung and Apple.

Increasingly, $150 to $350 is the new normal in emerging markets. While $100 smartphones still look rather rough, have small-ish screens and are plagued by quality issues, going up to $300 is sufficient to buy a great phone with a 5-inch screen or larger. You no longer have to go up to $600 or beyond.

4. Samsung’s high-end is not classy enough

5. Touchwiz needs a facelift