SYDNEY/SINGAPORE/LONDON, January 09 (Fitch) Recent media reports of Apple potentially releasing a low-end iPhone towards the end of 2013 suggest a shift towards a strategy focused more on market share - which could have an impact on Samsung Electronic’s (Samsung, ‘A+'/Stable) leading position in smartphones from 2014 and place downward pressure on industry operating margins.
Samsung gave indications this week of record operating profit for the fifth consecutive quarter. These preliminary numbers showed sales for the full-year 2012 up by 22%, and the operating profit margin rising to around 14% from 10% in 2011. Smartphone sales were the key driver, as the company’s global market share rose to 32% in Q312 from 23% in Q311 - led by the success of its Galaxy S3 and Galaxy Note II models in particular. Apple’s smartphone market share was half that of Samsung, at 16%, although this is likely to have risen during Q4 with the release of its iPhone 5 model.
Fitch expects Samung to extend its lead over Apple in 2013. Samsung has a wider variety of handsets in terms of both price and screen size. It also commands a greater geographical exposure, particularly in emerging markets where pre-paid plans are the norm and many people cannot afford high-end phones. Thirdly, Samsung’s status as the undisputed leader for several key smartphone components - including display, processor and memory chip technologies - reinforces the likelihood that its future smartphone models will be equipped with cutting-edge technology. For example, Samsung’s pending transition to smartphones with unbreakable and flexible AMOLED screens is one important development likely in 2013.
In this context, Fitch believes the media reports of Apple’s low-end iPhone make sense, particularly if Apple aspires to take a reasonable market share in major emerging markets including China and India. Samsung’s operating margins improved in 2012, but Fitch expects intensified competition among the major smartphone manufactures to limit the extent of such improvement in 2013. Moreover, if Apple does release a low-end iPhone, then not only are its operating margins likely to narrow, but this could also pull down the margins for Samsung and other smartphone manufacturers in 2014.