Samsung Electronics Q3 Profit Falls Sharply

Samsung Electronics Co. on Thursday posted a sharply lower third-quarter net profit, as its mobile business continued to lose ground to low-cost Chinese smartphone makers where competition is expected to intensify.

The company said in its earnings statement that uncertainty remains for its mobile business in the fourth quarter because of an anticipated year-end surge in competitor smartphone launches which will require higher marketing expenses.

Net profit fell 49% from a year earlier to 4.2 trillion won ($4 billion) because of weaker smartphone sales and lower prices. The decline follows a 20% profit decline in the previous quarter.

Samsung said operating profit slid 60% from a year earlier to 4.1 trillion won, as expected. But profit for the mobile unit fell slightly short of market expectations, dropping 74% year-over-year to 1.75 trillion won, the lowest since the second quarter of 2011.

Regaining a foothold against low-cost brands will remain a challenge amid heightened price competition, analysts say, leaving the company with a bleak outlook for its mobile unit for several months.

Upstart Chinese phone-maker Xiaomi Inc. recently overtook Samsung in China as the largest smartphone vendor in the country, dealing a blow to the world’s largest smartphone maker.

In the latest sign of an effort to smooth business ties within China, Samsung Vice Chairman Jay Y. Lee met with China’s President Xi Jinping Wednesday afternoon, Samsung Group said in a statement.

While the meeting wasn’t specific to the two and took place as a part of a broader meeting of business leaders in the region, Samsung Group emphasized that it was the third official meeting that has taken place between Messrs. Lee and Xi this year.

“Samsung will actively expand its business in China in accordance with the government’s policies and hope to be a loved company within China that makes contributions to its society,” Mr. Lee said in the statement, making a rare public comment.

China is not only the biggest smartphone market that Samsung can’t risk losing but is also a place that is expected to play an increasing role for the company’s growing chip business. In 2012, the world’s largest memory-chip maker unveiled plans to invest $7 billion for a new chip plant in China over the course of several years. Following an initial investment of $2.3 billion, the company began producing memory chips in 2013 from the plant in Xi’an city.

As Samsung works to reignite growth at its mobile unit, solid performance from the company’s chip business will be key in cushioning any further downfalls in profit, which may go on for as long as a year, analysts say. Earlier this month the company announced plans to invest $14.7 billion to build a new chip plant in South Korea.

In the third quarter, Samsung’s chip business posted higher profit than the company’s mobile unit for the first time in three years. Operating profit for chips stood at 2.3 trillion won, slightly higher from last year’s 2.1 trillion won.

Chip margins came in at 23% dwarfing a 7% margin for mobile devices.

Total revenue slid 20% to 47.4 trillion won for the quarter.

Analysts estimate Samsung shipped between 78 million and 81 million smartphones during the quarter ended Sept. 30. This represents a drop from the 88.4 million units shipped during the same period last year, according to Strategy Analytics.

The company didn’t disclose exact shipment figures for its mobile phones.

Source: MarketWatch