Why Samsung’s share of smartphone industry profits could decline

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Sep. 4 2014, Updated 1:00 p.m. ET

Samsung’s own operating margins continue to decline

In the previous part of this series, we discussed how Apple (AAPL) and Samsung (SSNLF) contribute 106% of the smartphone industry’s operating profits. Meanwhile, Nokia (NOK), BlackBerry (BBRY), and most of the other Google (GOOGL) Android–based smartphones are incurring operating losses.

According to a report from Canaccord Genuity, Apple contributed 65% and Samsung contributed 41% of the smartphone industry’s operating profits.

But we believe this contribution from Samsung should decline in the future. This is because Samsung’s own operating margins continue to fall. According to Samsung’s filings and as the chart below shows, Samsung’s operating margins continue to decline, from 16.6% in 2Q13 to 13.7% in 2Q14.

Why are Samsung’s operating margins declining?

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While announcing its second quarter results, Samsung cited the slowdown in demand for its smartphones and tablets as the main reason for its lower-than-expected results. We discussed, in the prior part of this series, why increasing competition from low-cost Chinese and Indian players have resulted in a market share loss for Samsung.

Korean won appreciation also played a role in Samsung’s lower operating margins. Plus, the company is unable to control its operating expense increase. In Q2 2014, the company had to spend a lot to unload older smartphone models based on 3G technology in China—especially since consumers are bracing themselves for the rollout of next-generation 4G technology.

Samsung’s lower contribution towards the industry’s operating profits should also mean that Apple will start to dominate the industry’s profits.

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