What goes up must come down. That principle seems to be coming true for Samsung Electronics Co, the world’s top cellphone maker, whose profit is falling, in part because of pressure from its price-cutting rivals in China.
Among other factors, Samsung blamed intense competition from Chinese manufacturers for the decline. Companies like Xiaomi Corp (小米) and Huawei Technologies Co (華為) have rapidly increased market share in China during the past year with the help of handsets they sell at a break-even price.
Investors and analysts are now wondering whether Samsung will choose to cut prices or push innovation harder in order to fight back.
“How does Samsung compete against players that price at cost?” Adnaan Ahmad, an analyst for Berenberg Bank in London, said in a research note. “Investors should question where the growth is.”
Samsung’s response to its predicament could shape the entire smartphone market.
If Samsung aggressively cuts prices to improve sales, it could pressure other competitors like Nokia Oyj, HTC Corp (宏達電) and Motorola Mobility Holdings Inc to lower prices, too. That could lead to lower-quality products or even slimmer margins for the smartphone business as a whole.
At the high end, its main rival is Apple Inc, which has continued to improve sales of its iPhone. Michael Walkley, a Canaccord Genuity analyst, said Apple could find even more success if the company releases phones with larger screens this year, as is widely expected.
Samsung has shown no signs that it wants to go down the price-cutting path. “We also will strengthen our product competitiveness by reinforcing our premium brand reputation, powerful product lineup and cutting-edge technology,” the company said in a written statement.
However, it remains unclear whether that is enough.
Ben Bajarin, a consumer technology analyst for Creative Strategies, said the competitive dynamic among devices running Google Inc’s Android system, like most of Samsung’s offerings and the inexpensive handsets made by Chinese manufacturers, was starting to shift.
Because all Android smartphones work in a similar way, he said, hardware does not make a device stand out.
Software and Internet services, like video streaming or messaging set the devices apart.
Xiaomi is a chief example of that. Besides hardware and low price, to lure customers and keep them loyal, the company offers a special version of Android, called Miui. Fans can help design Miui by giving feedback online, and the company releases a new version of the operating system every Friday to keep fans excited.
The company also makes money by selling apps, games, special Android themes and Internet services.
However, Samsung’s smartphone business is still dependent on selling hardware. While the company also offers specially customized versions of the Android system for its smartphones and tablets, its software has been widely panned by reviewers and customers. In Internet services like maps and online messaging, Samsung is virtually irrelevant.
Samsung has been working with Intel Corp and other companies on a new mobile operating system called Tizen. However, Ahmad predicted Tizen would fail as other competing software systems have before, like Palm’s WebOS and BlackBerry’s latest software system, BlackBerry 10.
In the end, he said, the company would probably resort to cutting its prices, further sacrificing profit margins.
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