As Smartphone Sales Shift, Apple and Samsung Worry About Margins

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The high-end smartphone industry was growing rapidly each year until the market began to reach its saturation point.  So many users, especially in the U.S., already have a high-end smartphone – defined by the over $300 price line – that sales of these high-priced and high-profit items are screeching to a halt…or at the very least are slowing down.  They have slowed so far that manufacturers – other than Apple – are looking to the emerging markets for sale in the low-midrange price area.  While sales in these economies, such as India and China, are rapidly growing, the profit margins are much lower, so volume is a necessity at this point.

The competition in this area is fierce, and outside the top-five – Samsung, Apple, Huawei, LG and Lenovo – phone shipments from other manufacturers rose from 27.4-percent in 2011 to 39.3-percent in 2013.  Chinese manufacturers have really stepped up their game, and we are not talking about globally known companies such as, Lenovo and Huawei, but others such as Oppo, Gionee, Xiaomi and CoolPad are taking market shares away from the bigger companies with their lower production costs.

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For Samsung, this will be the second quarter in a row that their mobile operating margins are declining – down to 16-percent in the fourth quarter of 2103 from the 18-percent overall for the entire year. With their new flagship, the Galaxy S5 about to debut, the price cutting has already begun with a U.S. purchaser having to pay no more than $200 on a two-year contract, with Verizon already pushing the BOGO – unheard of a couple of years ago. With fewer improvements on the S5 over last year's Galaxy S4 and lower pricing, analysts think that Samsung is going after the "broad market" rather than the tech savvy customers. With the new Galaxy S5 costing 10-15-percent less to manufacturer than the S4, Samsung has some leeway to lower prices. However, this lower pricing must be looked at very carefully as Clement Teo, analyst at Forrester Research in Singapore points out:

"Samsung needs to be very clear about the market segment it's pursuing.  Take Apple – it didn't drop prices on its iPhones, even with the new models.  This helps it maintain a margin premium and attracts a certain loyal user base."

For years Apple has resisted the path to go mass-market, but to instead, keep its "premium positioning" but it looks like we are finally seeing some cracks in their armor.  Apple came out with their iPhone 5C, but priced at just $100 less than its premium counterpart was certainly not a device for the emerging markets – Apple would rather sell its older, discounted models to these markets.  The problem is that even markets like Brazil and China are now demanding the latest in gadgetry. Apple's iPhone shipments grew only 8-percent in their third quarter, when five years ago the shipments more than doubled when a new device was released.

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Apple is losing not only its market share, but also its leverage to squeeze suppliers for better volume pricing.  If Apple increases its screen size a mere 30-percent larger, it could take away 4-5-percentage points off their gross margin.  According to our source, iPhone margins are down from the 50-60-percent a few years ago to the mid-40-percent range.  The iPhone still sells the most expensive smartphone, averaging $649 this year – while the average price of an Android phone is $247, and this could hurt Apple's future sales and margins.

Apple's strategy for now is to sell their devices at a premium price to a select market segment, and while it is working for now, albeit to a shrinking group, they may be the ones most hurt by the margins game. Samsung already has devices priced for everybody and with the hot new China companies up and coming, large margins may be a thing of the past.

Please hit us up on our Google+ Page and let us know if you agree with Apple's reluctance to bend to the emerging markets and what do you think about the new companies from China entering the U.S. markets.

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