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Summary

Fourth-quarter 2014 financial releases from Apple, Huawei, Lenovo, LG, Samsung, and Sony show a market positioning shift from major vendors driven by the following factors:

  • Low prices and margin erosion are creeping upward to higher tiers.

  • Chinese vendors are gaining a stronger foothold and building brand value outside of their home market.

  • Established vendors such as Samsung are failing to maintain customer loyalty and drive innovation.

Samsung’s results had the greatest impact: Samsung Electronics reported an 11% and 36% year-on-year revenue and profit decline for 2014, respectively.

On a quest to capture Samsung users

Every year we see market share fluctuations among the top five smartphone vendors. However, this is the first time that Samsung has shown signs of weakness, to the advantage of many of its competitors. Like a heavy hauler going down a steep road, Samsung risks having an almost unstoppable inertia in its decline – we have seen it happen to Nokia and Motorola. The key question is, how fast will it fall?

This will be a very important year for Samsung as it streamlines its device strategy under one roof, sourcing its own processors and OS and potentially putting the brakes on its share decline. In any event, Samsung will not go to the bottom of the top five overnight. Huawei and Lenovo still need to triple their quarterly sales to reach Samsung’s level. The Korean electronics giant is the only smartphone vendor with the ability to design, test, manufacture, and distribute a new smartphone model globally in under a year, showing huge capabilities to quickly adapt to market demand. Finally, Samsung still made $4.8bn in profit in 4Q14 and gathered staggering amounts of cash in the past couple of years, which it can use to make investments to defend its position.

Many smartphone vendors will focus on capturing Samsung users by offering better designs (e.g. HTC), more integrated Android implementations (e.g. Lenovo/Motorola), multi-device interactive features (e.g. Sony), and advanced device features (e.g. LG). Mobile World Congress 2015 in Barcelona early March will tell us more about the ability of each vendor to compete with Samsung and its new flagship range of smartphones. Ovum believes that Apple, which is the least affected by the current market shift created by Chinese vendors, stands to gain the most from Samsung’s decline. Samsung’s current flagship Galaxy S range has been designed to compete head to head with the iPhone, and its users are most likely to be eyeing a potential move to Apple if they haven’t done so already.

The smartphone market is saturating and competition will continue to intensify, eroding margins and requiring strategy changes. A focus on new device categories such as wearables is one way for consumer electronics vendors to find new revenue streams, but consumer loyalty and innovation is what will drive success in the longer term.

Appendix

Further reading

Q&A: Smartphones 2015 Outlook, TE0004-001009 (January 2015)

Author

Ronan de Renesse, Lead Analyst, Consumer Technology

ronan.derenesse@ovum.com

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