Samsung’s troubles start in China, but could end up global

July 16, 2014
Gloomy skies over Hong Kong's harbor

Chris Zielecki Gloomy skies over Hong Kong’s harbor

Samsung is expecting a bad second quarter. In fact, it was so bad that, last week, the company felt the need to release a letter to its investors to prepare them before they read the earnings forecast. Among the problems Samsung mentioned in the letter are the increasing pressure from low-cost competitors, and the inventory buildup caused by waning demand for 3G smartphones in China as the country is switching to 4G.

These two points captured my attention. While China is now the world’s largest smartphone market, was China’s transition to 4G really the main cause why Samsung failed to sell enough entry-level and mid-range devices?

Recent reports show that, while Samsung is still the top dog in China, Xiaomi outsold it for the second time in April. Xiaomi has also sold considerably more phones in the first half of 2014 (26.1 million units) than throughout 2013 (18.7 million units). That’s a 271 percent growth in sales year on year.

According to Canalys, Xiaomi’s low-end line, the Redmi, made up 60 percent of its sales. More importantly, none of the current Xiaomi Redmi phones support 4G connectivity.

Some say that knowing the cause of a problem is half of the battle. Looking at its letter to investors, it’s hard not to think that the tech giant has missed a major cause of its troubles.

The value segment is changing, fast

When GigaOm’s Kevin Tofel told me last year that he was letting go of his prized 2007 Corvette for a Fiat 500 Abarth, I thought he’d lost his mind. Why would a performance enthusiast give up a 400 BHP monster for a small econobox that needs twice as much to hit 60 mph from a standstill?

His argument was that, while he loved the Vette’s performance, he rarely got to enjoy it. He only drove it around 2500 miles a year and the most he could get out of the car was to go 120 mph on fourth gear. The car still had two gears to go when he ran out of road to go any faster.

So he figured, why not go with something more economical, but with performance that could put a smile on his face more often?

Kevin’s argument above perfectly sums up today’s emerging market smartphone trends and the effect of the new breed of low-cost quality devices from companies like Xiaomi or Motorola.

Let me explain.

With models ranging from under $130 to $300, you'd expect the majority of Xiaomi’s customers to be people making minimum wage. That is wrong.

When Hugo Barra mentioned to me in an interview that one of the main reasons behind Xioami’s social-centric marketing is the fact that the company’s primary target are folks who are “tech savvy and internet active, people who read tech blogs, fluent on specs, and care about bang for the buck,” I have to admit, I was a bit skeptical.

With models ranging from under $130 to $300, you’d expect the majority of Xiaomi’s customers to be people making minimum wage.

However, recent numbers from Flurry prove that my skepticism was unfounded.

According to Flurry, the majority of Xiaomi users, by far, are “young business professionals who are likely to have college education.” The research firm adds that this fast-growing segment is one of the main growth engines of the Chinese economy, the second largest in the world.

Clearly this is a lucrative segment. These are the kind of people who use their phones for their advanced functions. People who are likely to spend money on their ecosystem of choice and influence their peers’ buying decisions.

So, how could folks who presumably earn multiple times the minimum wage be the primary consumers of a brand that focuses on value? Surely they could afford more expensive devices from established brands like Samsung or HTC if they wanted to.

The answer to the question is similar to the reason behind our friend Kevin’s decision to ditch the Corvette for the Fiat 500 Abarth.

Why spend more on something you’ll rarely enjoy, when there are options available for half the price, or less, that can put the same kind of grin on your face on a daily basis?

xiaomi-mi3-pic-2

The wildly successful Xiaomi Mi 3

China today, the world tomorrow?

Xiaomi is not the only one currently attacking the market with experience-focused low-cost models. Motorola has been doing the same with the Moto G and the Moto E. We know that these two Motorola phones are hits in India, which is the world’s third largest and fastest growing smartphone market.

Considering that Motorola uses the same online-only approach to distribute its phones in India that Xiaomi uses in China, I have little doubt that if Flurry were to conduct similar research on Motorola buyers in India, the results would be similar.

Plus, with Xiaomi quickly expanding into high growth overseas markets and Android One devices looming on the horizon, what is now a China-specific trend may soon happen throughout the world.

Xiaomi broke into top 10 global with China sales alone

Counterpoint Xiaomi broke into top 10 global with its China sales alone

To continue the auto metaphor, this new breed of low-cost models are no longer the equivalent of some boring diesel Volkswagen Lupo. What phones like Xiaomi Redmi and Moto G are offering in the value segment is the mobile equivalent of a Fiat 500 Abarth or Golf GTi.

In short, products focused on providing a delightful experience, regardless of their price tags.

Samsung should not ignore this problem

This is what Samsung needs to realize. In the era of Moto G or the Xiaomi Redmi, phones like Galaxy Fame, Galaxy Core, or Galaxy Grand are no longer adequate. This is particularly true in developing markets, the only markets that maintain high growth rates these days.

To avoid missing quarterly targets, and potentially getting overlooked by the segment of users that drives growth in emerging markets, Samsung needs to change its approach to the value segment.

Samsung needs to stop making uninspiring low-cost products, and start building value phones that delight users instead of reminding them that they should’ve worked harder on a daily basis. A phone that won’t go out of date once a new Android version is released. A phone which could hold its head up high next to its bigger, more expensive brethren.

Basically, what Samsung needs is the smartphone equivalent of the Fiat 500 Abarth.

Comments

  • J_Pod

    This could be said for HTC as well. To them both, quit making your mid tier phones stink so badly!

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  • systemic

    Author makes it seem like samsung is doomed when they will still make more profits than google and the other android oem this quarter. And why exactly is xiaomi hiding profit figures?

    • hhhh

      They will doomed if they not realize their future trouble.

  • systemic

    It’s funny when the grand is labeled as inadequate compared to say a moto but in the data (assuming it’s true come on 35 countries? Lol) the grand is in the top 10 while moto is not (again assuming the data is true)

  • Dimitar Gospodinov

    Can you please tell me the math behind the 271% increase! It seems like we are calculating things differently…. Hmmmm

    • MasterMuffin

      It’s actually slightly more.

      • Dimitar Gospodinov

        18.7 * x = 26.1
        X = 26.1/18.7
        X ~ 1.4
        1.4*100 = 140
        Unless they are talking about something completely different…

        • MasterMuffin

          Oops my math is a bit rusty. It’s about 279% then right?
          18.7 * x = 52.2
          x = 52.2/18.7
          X ~ 2.79
          2.79*100 = 279

          My brain wipes itself on summer vacations :/

          Edit. I’m about to look stupid, but I think your way of calculating it is wrong. I feel fairly confident about my 179% result

          • Peter

            Your math is correct. They sold 26.1 million in the first half of 2014 (only 6 months), so you have to compare it with only 6 months worth of sales from 2013, or 18.7 million x 1/2 (to equal the 6 month comparison), which is 9.35 million units.

            Therefore, the ratio becomes 26.1 compared to 9.35 million, or an increase of 279%.

          • MasterMuffin

            Yeah I knew that. Totally. Just ignore the striked part. Yup. Genius at work. ;D

          • MasterMuffin

            Now that I already look stupid, I must ask what went wrong with my own calculations. I calculated that 9.35 + 9.35 * 1.79 = 26.1. That’s how I got the 179% increase. I thought that was the right way of calculating it

          • Dimitar Gospodinov

            Oh I see… 18.7 for the whole 2013… Got it now thanks!

          • Dimitar Gospodinov

            Yeah I misunderstood that 18.7 was for three same period not for the whole year

  • MasterMuffin

    All Samsung’s cheaper phones are horrible abominations. Inbefore “all of their phones are” nah :D

    “was it really China’s transition to 4G the main cause why Samsung failed”
    “none of the current Xiaomi Redmi phones supports 4G connectivity.”
    “he’d lost his minds.”
    “most he could got out of the car was going 120 mph on fourth gear.”
    “people who reads”
    :P

  • westsucker

    Wow….I wonder how much Samsung enemy pay all the tech sites to make this the “Samsung In Trouble” theme week??? Are all you moron forget to check how many models and product Samsung make & sell? They don’t only depend on S5 for success. They make chips, have mega construction projects all over the world, they build ship etc. They are not Apple. Their survival is not depend on the success of one single product or model. Android Authority is in trouble if they keep follow the “sheep” in their tech reporting!! Wake up!!

    • MasterMuffin

      Can’t take any negativity towards Samsung?… Samsung’s mobile division is their biggest division, bringing the most money. They aren’t currently doing that well. So… Why can’t people write about it?

      • systemic

        I think because they way they write it. Fact is if samsung ‘ s guidance is true then they will net about 6.2 billion in net income compared to last year’s 6.96 which isn’t that big of a drop. While the article is praising xiaomi and moto but both companies so far have not disclosed big profits. It’s in the way the article was presented

        • MasterMuffin

          But the fact is Samsung’s profits aren’t growing anymore. Even though Xiaomi nor Motorola have disclosed their profits, I think Samsung should still follow Xiaomi and Motorola, because they are selling phones a lot and that’s what matters. Samsung needs to make their brand more popular in markets like India and China and once that’s done, try to make more cash by continuing making their horrible low-end phones

          • systemic

            It’s hard to maintain high profits and forget about growth when you had record profits the year before. Apple too declined in profits in same period last year and we will how they do this year

          • asd

            One of the reasons they are losing is because their low end devices are rubbish and so people will not recommend a samsung phone and will probably get the likes of moto and xia since they are reliable…I know because my ace 2 was sluggish after jelly bean update so now i have cyanogenmod…if I were to recommend samsung it would be the high end such as note3/2 S5…not low end/mid range phones…insted I would recommend moto or others

    • O RLY?

      “this the “Samsung In Trouble” theme week”

      Could it have anything to do with their earnings report?

      “They don’t only depend on S5 for success.”

      Good – because it isn’t supporting them. Sadly, neither are any of their other sales. You might notice, if you actually bothered to read the article, that it had almost *nothing* to do with the S5…

      “They make chips, have mega construction projects all over the world, they build ship etc”

      None of which account for anywhere near the share of profit their smartphone segment does. They are “also-rans” compared to the smartphone segment.

      “They are not Apple.”

      …and you figured this out all on your own, did you?

      “Wake up!!”

      huh. Sound advice. Here’s some for you: Read the article!!

      • systemic

        Mega construction and ship building is out as this is only for the electronics division

    • Jeremy

      Get your facts right… This article is regarding Samsung Electronics and Samsung Electronics ALONE… The sales figures and whatnot have nothing to do with Samsung’s projects in other industries such as Samsung C&T amongst others

    • BZ

      Well it is AndroidAuthority why would ANDROID Authority give a crap about how many refrigerators they sell. Plus their mobile division is what brought them to “cool” status and specifically i mean the s3. As far as their growth goes well it is what it is.. they spent more money in marketing, coming up with new phones every week to test the market, do you know what happens when there is so much of something. It’s value goes down. Poor samsung tried to gain the high end and low end of the market and you can’t do that. If you try you’ll fail hence why they are in trouble.

  • http://www.justaboutphones.com MakeMeDo

    I think the biggest problem of Samsung is “Too many Models” Then they can’t update them, or even handle them. I have seen people literally lined in front of Samsung Care in India. They should make less models, and they should learn a thing or two from Motorola about it.

  • akemsley

    Why is there a photo of Hong Kong in an article about China? You wouldn’t use a photo of Guam or Puerto Rico in an article about the US, would you?

    • xmaspast

      Hong Kong is in China!

      • akemsley

        See my other reply. Actually Hong Kong is a dependant territory of China, and not actually within the national boarders of China.

        • Jonathan TAM

          To clear up the confusion… Today, the Hong Kong Special Administrative Region (SAR) is a part of China, although this comes with a biblical size of caveats.
          Hong Kong’s basic law, as agreed between China and Britain, means Hong Kong will retain its own currency (the Hong Kong dollar), legal system, and parliamentary system for fifty years. This means, for all practical purposes, Hong Kong is actually a separate country to China.

          • akemsley

            “Ruled by China” does not equal “part of China”. You wouldn’t say HK was part of the UK before 1997, would you? You would say it was ruled by the UK.

          • Jonathan TAM

            I live in Hong Kong… just trust me…

          • akemsley

            I didn’t disagree with you, è­šć…ˆç”Ÿ. All I did was clarify that there is, in practice, a difference between being part of China and being an SAR of China, which of course you are aware of but weren’t so clear in your original explanation.

    • Ck

      Hong Kong is technically part of China

      • akemsley

        Yes, Guam and Puerto Rico are also technically part of the US. But still, you wouldn’t represent the US with Guam since it’s completely different from the rest of the US, so why would you represent China with Hong Kong?

        • Dion Creighton

          I’m speechless. You are a prime-time idiot. Hong Kong has been part of China since 1997 when Britain gave it back to China after 99-year lease… Puerto Rico is an independent nation. Learn some geography before making ignorant comments.

          • akemsley

            Really? Puerto Rico is an independent nation? Perhaps it’s you who need to learn some geography. Hong Kong has been a territory (they call it Special Administrative Region) of China since 1997. Just like it was a territory of the UK prior to 1997. Just like how Puerto Rico is a US territory now. I lived in Hong Kong for 15 years. Perhaps I’m not so ignorant after all.

          • Cole Raney

            Puerto Rico is a US territory. They almost voted to become the 51st state in 2012.

  • gggg

    In fact, even Samsung flagship pricing are not good too. In my country, Samsung flagship phone price almost the same as Apple iPhone.

    Samsung, it’s time to realize and wake up.

  • Amit_N

    Samsung .. You deserve this as you never provide value for money forget about software support.

    I am happy Moto G user now.. Screw Samsung..

    • Conan

      I’m a happy Moto G user too except when it comes to taking a photo in not so good lighting, there it fails horribly compared to Samsung S3 phone.

  • Foramex

    One of the best articles I’ve read in a while

    • Michael Samsara

      Very well organized and on point. People do not fight; resist ideas that serve their purposes once it becomes clear to them that you – or your product – are going to satisfy their needs.

      This satisfaction of perceived and desired needs is the foundation upon which all sales are made. What Samsung is facing is a situation where the market and peoples’ awareness of the technology has advanced to the point where most realize that faster than fast is not necessarily better than best – when the perceived or even actual benefits – are hard to discern.

      Of course, one must also take into account that in China – as in other dictatorial, totalitarian countries such as Russia – there is not a level playing field, but rather one that is “fixed” against outsiders deliberately (and with malevolence). You can bet your life and feel safe doing so that China Inc – aka Communist China – is first and foremost doing everything it can to advance the agenda of any native Chinese manufacturer over anyone out side their realm of control.

  • ToonAmi

    Your article is nice.
    Could Xiaomi success be attributed also to promoting a “local” port of the rom MIUI? With MIUI rom it is updated every friday so you don’t end up with out of date before it is released android phones.
    Xiaomi has been releasing hardware before Samsung now, so your argument about not being a vette is only half right. They are putting out the latest in chips, just not 4g at the moment. Everything else inside spec wise is or on par or above.

    Moto has also been stepping up to the plate as far as updates. It was one of the first to announce L update plans and more than likely will beat the Nexus line to the updates “cough nexus verizon variant”

    Maybe samsung’s phone problem is the fact that they saturated the market with their brand and everyone is tired of it, they are not developer friendly, updates are slim, and well resale value on samsung is crap? They are still gung ho on selling a phone for $600 off contract when Xiaomi and Moto are going for half that price new. Could it be that China is just supporting their own country by buying Xiaomi and not bothering to spend a fortune when research finds simular specs for half the price.

    Xiaomi and Moto are doing one thing apple is doing… less devices and more quality. R&D and all the cost involved to make 5 different s5′s (international,sprint,verizon,at&t,tmobile) + active + note + mid tear model + other model + low end prepaid. Just make no more than 2 or 3 handsets and let the last years model be supported and don’t commoditize yourself .

    Xiaomi has 3 products Note, Redmi, Mi3
    Moto success at the moment is when it focused on 3 products E, G, and X

  • Fantastico

    The problem with the car comparisons is that the Fiat 500 and VW Golf GTi are in fact very expensive cars relative to their size and specifications. They offer value to the enthusiast but not to the price conscious consumer. Xiaomi is more Hyundai than Fiat 500. It offers lots of bang for buck, keeps up with the latest trends, and has a little flair to sweeten the deal. This mass market appeal has been Samsung’s traditional market. Today Samsung’s problem is that it’s trying to mass produce like Hyundai while pricing itself and viewing itself as VW or BMW.

  • Alex

    Not only Samsung, other brands are in the same position. Moto G will soon make one year, and still its the best buy for its price.
    People have to pay near double, to get something that really look/fell/is better.
    And if we go in the Moto E, its even worse. The other phones at that price are just a joke, its a lag party…

  • The-Sailor-Man

    Another smart bashing Samsung. LOL
    Looks like the source is Aplleinsider.

  • http://www.samplequestionpaper.com/ Himanshu Sethi

    So, how could folks who presumably earn multiple times the minimum wage
    be the primary consumers of a brand that focuses on value? Surely they
    could afford more expensive devices from established brands like Samsung
    or HTC if they wanted to ?
    Himanshu Sethi recently posted…CBSE Sample Papers for class 12

  • phantomsofthedesert

    Maybe it’s time that Samsung listened to people. everyone was disappointed in the Galaxy S4 looking to much like the S3. then S5 looking to much like the S4. I had the very first Galaxy right up to the current model. Unless Samsung drastically change next years phone . I can tell you I will not buy it. Samsung this is your last chance to improve . don’t muck it up

  • ryq24

    I always thought sony makes better midrange phone than Samsung.

  • rebirthofcool

    the writings on the wall, Nokia went the same way producing loads of variants of varying designs but of same/similar internals without offering innovation during their last great years on top among phone vendors, perhaps Samsung needs to improve on areas of design, producing less variants among varying screen sizes, focus on delivering effective features (less gimmicks), improve hardware reliability, with a stratification on prices of their low-mid-high end mobile devices

  • Chibuzor Ifediorah

    Perfectly said, why would I buy a Galaxy Grand or any other entry level or mid range device when I could buy a Motorola, Redmi or a phone from China with equal or better specs than S5 for less than half the price………………Its all about user experience at a fair price

  • Gagandeep Singh

    Okay , if we go 3-4 years back when android was still trying to learn how to walk , then Samsung was the company that who picked up Samsung and ran with it.At that time no other OEM was able to deliver good feature full phones as Samsung did.Their only intention was(still is ) to make money from phones at the cash counter itself not by selling some fancy software at later stage.They were Successful at that time because nobody was major challenge to them so they made a lot of cash.

    Now if we analyse situation today those strategies do not work any more , consumers have become aware of specs and price.We can look at the model of xiaomi that they make money not at cash counter but by selling their services afterwards. Motorola has offered(then redefined low/med teir section) moto g , moto x , moto e at very comfortable price range, and still these phones are best selling and performing phones big markets like India , China.

    Xiaomi announced three devices in India this week and I am amazed at specs they offer at such a lower price.Now if you get 1080p display at 14K why wont you go for Galaxy Grand 2 that is no where near its performance.

    Samsung is not somehow understanding that time has changed and it is time to change strategy and offer what people are interested in.I never liked Samsung phone under 20K in India.They sucked big time.They are simply outdated.

    Now quad-core snapdragon processor vs Samsung outdated strategy (Poor mid range phones and out of reach high end phones).Decision is very simple with some minor compromises here and there.

    We have respect for Samsung for lifting android , similarly we had for Nokia or blackberry , But where are those who refused to change with time ?

  • Blowntoaster

    Makes sense. gunning for the latest top end flagship device year in and year out is getting tiring. Midrange devices are looking more and more appealing. they offer the same experience for much less money. so why spend twice the money when 90% of the same experience can be had for half that or less.

  • Cristhian Mejia

    This is Samsung’s doing though because brands like Xiaomi sell very nice looking handsets with good software. Samsung just crams phones with S-crap and other garbage homework.

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