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Android Handset Makers’ Advance Squeezes Apple
With growth in the global smartphone market virtually slowed to zero, iPhone refresh faces tough competition
By JONATHAN CHENG
July 28, 2016 5:33 a.m. ET
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SEOUL—Earnings reports from the world’s top smartphone makers this week highlight how fortunes are diverging in the mobile-phone market as competition intensifies.
For Samsung Electronics Co., the world’s biggest handset maker by shipments, smartphone sales have roared back to life after several years of struggles, fueling a 56% jump in mobile-division earnings and pushing profit margins back to their highest levels since 2013.
The South Korean technology giant’s earnings report on Thursday added more evidence of the tough competition that Apple Inc. faces as it prepares to introduce the latest refresh of its iPhone later this year.
Earlier this week, China’s Huawei Technologies Co., which ranks just behind Apple as the world’s No. 3 smartphone maker by volume, said that it was on pace to sell 140 million smartphones this year, a target that is 30% higher than a year earlier.
And in China, fast-rising domestic handset makers Oppo Electronics Corp. and Vivo Communication Technology Co., virtually unknown outside the country, have quickly, and quietly, surged to become the world’s No. 4 and 5 smartphone makers by shipment volumes, data from research firm Counterpoint Technology Market Research showed.
Taken together, these advances by makers of smartphones powered by Android, a unit of Alphabet Inc.’s Google, pose a formidable challenge to Apple, which has suffered two consecutive quarters of falling revenue and market-share decline as demand for its iPhones slows, especially in China.
On Tuesday, Apple reported a 27% drop in quarterly net profit, its second consecutive quarter of falling revenues, as the average selling price of its devices fell below $600.
To be sure, companies like Samsung and Huawei aren’t as profitable as Apple. The Cupertino, Calif., company reported a gross margin of 38%, lower than in recent quarters but still more than twice that of Samsung, which boasts the highest profit margin of any Android handset maker at 16.3%.
But with growth in the global smartphone market virtually slowed to zero, any gains made by Samsung, Huawei and a host of other Chinese handset makers will likely come at Apple’s expense.
In the second quarter of the year, Apple’s share of the global smartphone market fell to 11.9%, its smallest share since before 2009, according to data from market-research firm Strategy Analytics.
Counterpoint found that Chinese midtier brands Oppo and Vivo were the only two that had significantly raised their smartphone shipments in the second quarter, rising 135% and 62% respectively from the year before.
The two brands shipped a combined 39 million units in the second quarter, roughly as many as Apple, whose shipments shrank by 15% over that stretch.
For Samsung, the strong numbers are further vindication for a smartphone giant that was spinning its wheels just a year ago as Apple’s hot-selling iPhone 6 and iPhone 6 Plus dominated the premium segment of the smartphone market and Samsung’s Galaxy S5 and S6 floundered.
But the iPhone’s momentum faded coming into 2016, and few major changes are likely when Apple is expected to introduce the iPhone 6’s successor in the fall.
Samsung’s Galaxy S7, meanwhile, broke through by resolving supply-chain issues that had bedeviled last year’s flagship phone and by offering many of the features that smartphone users say they want, such as water resistance and a slick-looking metal-framed design.
For the April-to-June quarter, Samsung said that it earned about 5.85 trillion Korean won ($5.2 billion), its most profitable quarter in two years, thanks in large part to robust sales of its Galaxy S7 smartphone.
Samsung’s mobile division earned 4.32 trillion won in operating profit, a 57% jump from a year earlier.
The smartphone strength came just in time for Samsung, whose success relies on roughly equal parts selling smartphones to consumers and selling components such as semiconductors and display panels to other device makers.
In recent quarters, the components side of the business has struggled as a glut of supply for memory chips pushed down selling prices. In the second quarter of the year, operating profits at the company’s components business fell 28% from a year earlier.
The coming quarters could see a reversal of that trend, with executives predicting a pickup in component sales as the smartphone business faces more headwinds from intensified competition and higher marketing spending.
Meanwhile, Samsung is hoping that the Tuesday launch of the latest version of its larger-size smartphone, called the Galaxy Note, which is a month earlier than its customary launch time in early September, can give it a bigger jump on Apple’s expected iPhone announcement.
As Samsung has showed signs of stability in its core smartphone business, investors have rewarded the company by pushing its stock up to its highest levels in more than three years, though shares slipped 1.3% on Thursday amid the company’s cautious guidance on the coming quarter.
By contrast, Apple’s stock had tumbled 22% in the past year before a rebound Wednesday and is a 30% rally away from the all-time closing high that it hit last year, even after Wednesday’s stock jump.
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