Samsung is an also-ran in a market it once led

By Timothy W. Martin 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 5, 2019).

SEOUL -- Apple Inc.'s recently revealed stumble in China is an all-too-familiar story for smartphone rival Samsung Electronics Co.

Five years ago, the South Korean technology giant sat atop the Chinese market, selling nearly one of every five devices there. Today, Samsung is an also-ran, controlling less than 1% of the world's largest smartphone market. Samsung has trimmed local staff and last month closed one of its two Chinese smartphone factories.

Though few expect Apple's sales decline in China to be as dramatic, Samsung's comedown offers a cautionary tale for foreign smartphone makers.

Samsung, which remains the world's largest smartphone maker, was outmaneuvered by Chinese rivals that sold comparable devices at lower prices. The company's decline was exacerbated by a 2016 global recall of Galaxy Note 7 devices with overheating batteries that tarnished its brand. Geopolitics also interceded when Seoul's installation of a U.S. missile-defense system upset Beijing, leading to a Chinese consumer backlash against South Korean brands.

Apple's China sales overtook Samsung in 2015, accounting for 14% of the country's shipments, according to Counterpoint Research. Apple has since slipped back, as Huawei Technologies Co. and other domestic smartphone makers grabbed market share by offering similar designs and features for lower prices.

Apple made a surprise cut to its revenue forecast on Wednesday citing soft sales in China. Still, it stands in better shape than Samsung in that market. The Apple brand retains cachet among some wealthier Chinese consumers and has been holding its market share steady; plus, the company makes iPhones in China, employing vast numbers of workers.

A Samsung spokesman declined to comment. Apple didn't immediately respond to a request for comment.

Samsung's inability to revive China sales highlights what has been rough going for the company. Its smartphone shipments overall are down by double-digit percentages -- worse than the industrywide slump -- and in the latest quarter operating profit for the mobile unit declined by a third.

"Samsung has just lost the plot in China," said Sanjeev Rana, a Seoul-based senior analyst at brokerage CLSA. "I don't think they are in any position to get back either."

Apple's predicament in China varies from Samsung's in several key ways, smartphone industry experts say.

The iPhone uses the Apple-developed iOS operating system, so jumping to rival brands is more onerous than it is for owners of Samsung phones, which run on Google's Android. That said, the Apple ecosystem's hold is diminished for many Chinese consumers because they spend a large chunk of their time inside WeChat, a chat, payments and social-media app from Tencent Holdings Ltd.

Also, iPhones may not be the status symbol they once were, but Apple can still lean heavily on its branding, said Mark Natkin, managing director at Marbridge Consulting in Beijing.

Shopping at a mall in central Shanghai on Friday, Wang Yu, a 33-year-old who works in foreign trade, said he would buy an iPhone if he had enough money. At present, though, his choice was Samsung or Huawei, which is his current brand.

"A lot of people love the country, and want to use Chinese brand phones, " Mr. Wang said. But he is most swayed by battery life. A Samsung device he used years ago had battery issues after a year, he said. "I used my Huawei for over two years now, but it never froze up," said Mr. Wang, who will likely stick with the Chinese brand.

Whereas South Korean companies took a hit in China after Seoul defied Beijing on the missile-defense system, Apple so far has escaped a consumer backlash amid the U.S.-China trade feud. China faces more political risk with the U.S. than with South Korea should the government foment a campaign against buying Apple products.

"If patriotism cooks up, who knows what could happen?" said Tom Kang, an analyst at Counterpoint Research.

Samsung has adjusted its phones strategy amid its struggles in China and a broader sales decline driven by consumers balking at $1,000-plus prices and shrugging off new features.

In recent months, Samsung has stuffed its best new hardware in middle-tier handsets geared for growing markets such as India. The company has historically reserved such features for its flagship devices, like the Galaxy S or Note phones.

The November release of its Galaxy A9, which costs about $530, was the first handset to have four cameras installed on the device's back.

Samsung is also spending $700 million to build the world's largest smartphone factory in India, where the South Korean firm remains one of the largest players.

Apple in recent weeks started to offer discounts in China for trade-ins with used phones, according to its website. For its new iPhone XR, Apple is offering a discount of up to nearly a third, which would put the handset's lowest available price at 4,399 yuan ($640). For the iPhone XS, the discount is as much as a quarter of the original price, taking its price as low as 6,599 yuan ($960).

Apple's higher-end phone sales have been more resilient in China, according to some analysts, and top-of-the-line products are where Samsung is placing its hopes of winning back Chinese consumers.

Samsung is preparing a major technological upgrade this year for its 10th anniversary flagship phones, including a next-generation 5G phone that features six cameras, The Wall Street Journal reported in November. The company is also preparing mass production of a foldable-screen phone that will be 7.3 inches when opened.

Zhou Wei in Shanghai and Yoko Kubota in Beijing contributed to this article.

Write to Timothy W. Martin at timothy.martin@wsj.com

(END) Dow Jones Newswires

January 05, 2019 02:47 ET (07:47 GMT)