Apple Beware: Samsung’s Great Fall in China Was Swift
In five years, Samsung went from China’s No. 1 to less than 1% market share
SEOUL— Apple Inc.’s AAPL -9.96% stumble in China is an all-too-familiar story for rival Samsung Electronics Co.
Five years ago, the South Korean technology giant sat atop the Chinese market, selling nearly one of every five smartphones there. Today, Samsung is an also-ran, controlling less than 1% of the world’s largest smartphone market. Samsung has pared back local staff and last month closed one of its two Chinese smartphone factories.
Though few expect Apple’s sales in China to fall so dramatically, some of the reasons triggering Samsung’s missteps offer a cautionary tale for foreign smartphone makers.
Samsung, which remains the world’s largest smartphone maker, was outmaneuvered by Chinese rivals that sold comparable devices at lower prices. The company’s decline was exacerbated by a 2016 global recall of Galaxy Note 7 devices with overheating batteries that tarnished its brand. And Seoul’s installation of a U.S. missile-defense system stirred tensions with Beijing, leading to a Chinese consumer backlash against South Korean brands.
Apple’s China sales overtook Samsung in 2015, accounting for 14% of the country’s shipments, according to Counterpoint Research. It has since slipped back while Chinese rivals, including Huawei Technologies Co., gobbled up more market share by offering similar designs and features for lower prices.
Still, Apple—whose recent sales in the country fell far below expectations, prompting an unprecedented cut this week to its quarterly revenue forecast—stands in better shape. It retains cachet among some wealthier Chinese consumers, has been holding its market share steady, and it makes iPhones in China, employing vast numbers of workers in the country.
A Samsung spokesman declined to comment. Apple didn’t immediately respond to a request for comment.
The inability to revive China sales has worsened what’s been a rough year at Samsung. Its overall shipments are down by double-digit percentages—worse than the industrywide slump—and its mobile unit’s operating profits declined by a third in its most recent quarter.
“Samsung has just lost the plot in China,” said Sanjeev Rana, a Seoul-based senior analyst at brokerage CLSA. “I don’t think they are in any position to get back either.”
Apple’s predicament varies from Samsung’s in several key ways, smartphone industry experts say. The iPhone uses the Apple-developed iOS operating system, so jumping to rivals is more onerous than from Samsung, which uses Google’s Android. That said, the Apple ecosystem exerts less control over Chinese consumers who spend a large chunk of their time inside WeChat , a chat, payments and social-media app from Tencent Holdings Ltd.
Apple can also lean strongly on its branding, though iPhones aren’t the status symbol they used to be in China, even among less affluent consumers, said Mark Natkin, managing director at Marbridge Consulting in Beijing.
Shopping at a mall in central Shanghai on Friday, Wang Yu, a 33-year-old who works in foreign trade, was debating buying new devices from Huawei or Samsung. “A lot of people love the country, and want to use Chinese brand phones,” said Mr. Wang, who uses a Huawei phone.
But he’s most swayed by battery life. A Samsung device he used years ago had battery issues after a year, he said. “I used my Huawei for over two years now, but it never froze up,” said Mr. Wang, who will likely stick with the Chinese brand but would buy an iPhone if he had enough money.
Where South Korean companies suffered economic blowback after Seoul defied Beijing with its defense-system changes, Apple has so far escaped a similar repeat of Chinese consumers being stirred by the U.S.-China trade feud. China faces more political risk with the U.S. than South Korea should it attempt to use its influence to flatten iPhone sales.
“If patriotism cooks up, who knows what could happen?” said Tom Kang, an analyst at Counterpoint Research.
Samsung has adjusted its phones strategy amid its struggles in China and a broader sales decline driven by consumers balking at prices soaring past $1,000 and shrugging off new features.
Samsung has just lost the plot in China. I don’t think they are in any position to get back either. —Sanjeev Rana, CLSA
In recent months, Samsung, as part of the shift, has stuffed its best new hardware in middle-tier handsets geared for growing markets such as India. The company has historically reserved such features for its flagship devices like the Galaxy S or Note phones.
Samsung’s November release of its Galaxy A9, which costs about $530, was the first handset to have four cameras installed on the device’s back. Samsung is also spending $700 million to build the world’s largest smartphone factory in India, where the South Korean firm remains one of the largest players.
Apple in recent weeks started to offer discounts in China for trade-ins with used phones, according to its website. For the iPhone XR, Apple is offering a discount of up to nearly a third, which would bring the handset’s price down to as low as 4,399 yuan ($640). For the iPhone XS, the discount is up to nearly a quarter of the original price, lowering the price to as little as 6,599 yuan ($960).
Apple’s higher-end phone sales have been more resilient in China, according to some analysts, and top-of-the-line products are where Samsung is placing its hopes of winning back Chinese consumers.
Samsung is preparing a major technological upgrade this year for its 10th anniversary flagship phones, including a next-generation 5G phone that features six cameras, The Wall Street Journal reported in November. The company is also preparing a mass production for a foldable-screen phone that will be 7.3 inches when opened.
Gapping down
In reaction to disappointing earnings/guidance:
- RPM -8.1%, LNDC -7.1%, FLXN -5.3%
Other news:
- KALV -8.4% (provided a development update on its oral plasma kallikrein inhibitor portfolio)
Analyst comments:
- FLXN -5.3% (downgraded to Hold from Buy at The Benchmark Company)
- FTNT -3.8% (downgraded to Sell from Buy at Goldman)
- COO -1% (downgraded to Sell from Neutral at Goldman)
- EXC -0.8% (downgraded to Sell from Neutral at Goldman)
- EMR -0.7% (downgraded to Sector Perform from Outperform at RBC Capital Mkts)
Gapping up
In reaction to strong earnings/guidance:
- RECN +9.2%
M&A news:
- AMID +29.8% (American Midstream Partners receives revised buyout offer from ArcLight of $4.50 per common unit)
- ZAGG +3.8% (acquires HALO for total purchase price of $43 mln in cash and stock)
Select China related names showing strength:
- WB +3.6%, JD +2.6%, MOMO +2.4%, BABA +2.1%, BIDU +1.9%
Select metals/mining stocks trading higher:
- BBL +3.7%, MT +3.5%, BHP +3.3%, RIO +3.1%, FCX +2.3%
Other news:
- NVAX +11.8% (announces positive Phase 2 NanoFlu results in older adults; sets the stage for Phase 3 clinical trial in 2019)
- CRSP +3.5% (CRISPR Therapeutics and Vertex Pharma (VRTX) announce that the FDA has granted Fast Track Designation for CTX001 for the treatment of sickle cell disease)
- SQ +2.4% (announced that Amrita Ahuja will join the company as CFO)
- BIIB +1.9% (Biogen and C4 Therapeutics enter into strategic collaboration to investigate the use of C4T's novel protein degradation platform to discover and develop potential new treatments for neurological conditions) .
Analyst comments:
- ETSY +4.5% (upgraded to Buy from Neutral at Goldman)
- COTY +2.9% (upgraded to Neutral from Underweight at JP Morgan)
- ARES +2.9% (added to Conviction Buy List at Goldman)
- CELG +2% (upgraded to Neutral at Goldman)
- EXPE +1.8% (upgraded to Buy from Neutral at Goldman)
- GDOT +1.7% (upgraded to Buy at BTIG)
Early premarket gappersGapping up:
- AMID +29.8%, NVAX +10.3%, RECN +9.2%, MT +4.1%, NFLX +3.9%, WB +3.6%, BBL +3.6%, BHP +3.5%, ZAGG +3.4%, MOMO +3.2%, BABA +2.9%, JD +2.9%, SQ +2.7%, RIO +2.5%, CELG +2.3%, FCX +2.3%, FB +1.9%, AMZN +1.9%, BIDU +1.8%, GDOT +1.7%, AAPL +1.5%, GOOG +1.5%
Gapping down:
- LNDC -7.1%, FLXN -5.3%, SIG -4.3%, SBGL -3%, CHK -2.8%, FTNT -2.6%
As Videogame Market Shifts, GameStop Struggles to Boost Sales
With sales stagnating, retailer is looking for another CEO again and reviewing strategic alternatives
Videogame retailer GameStop Corp. GME -0.77% is working to restructure its business as it searches for its fifth chief executive in a little over a year. But some say that to stay in the game, the retailer might be better off selling itself.
The company said last year it was reviewing its strategic alternatives.
Sales have been stuck around $9 billion for the last few years as more consumers buy games digitally, and its shares have sunk about 29% over the past year. Its challenges prompted some analysts and former company executives to suggest that the company’s best option to remain viable is to find a buyer.
“They’ve lost the interest of investors, and being public causes them to do things they might not otherwise do, like try to diversify” revenue, said Wedbush Securities analyst Michael Pachter. The best path forward for GameStop, he said, involves reducing debt, closing stores and going private.
GameStop had about $820 million in debt as of November, about half of which matures this year. Mr. Pachter also expects comparable sales to fall from the prior year, when GameStop releases its holiday-shopping season sales data later this month.
Some private-equity firms are circling. Sycamore Partners and Apollo Global Management are bidding for the company, and a deal could be announced by mid-February, according to a person familiar with the matter.
Sycamore and Apollo declined to comment. GameStop declined to comment on sale talks but said in a statement the company is working to transform itself for the future.
The majority of revenue for GameStop, which has more than 6,000 stores, comes from sales of new and used videogames. Efforts to find other revenue sources—from acquiring streaming-technology startup Spawn Labs to mobile-phone stores—over the past decade haven’t done enough to reduce the company’s reliance on game sales.
Growth in the popularity of digital gaming and the migration of retail shopping online have weighed on GameStop’s performance in recent years. Also, hardware manufacturers like Microsoft Corp. and Sony Corp. have built up platforms allowing consumers to download games to their systems at higher speeds, and publishers have worked to extend the amount of time players spend in games.
“GameStop has become irrelevant in the video game market,” said Mike Hickey, an analyst at BenchMark, in a research note.
Not everyone considers a sale to be the best outcome.
GameStop could become more active in esports—competitive videogame contests—and hold tournaments at its most popular locations, said Colin Sebastian, an analyst at Baird.
“Their strength is in their loyal customer,” Mr. Sebastian said. “They are in a challenging spot, but they have, for now, retained the vast majority of their customers. That window is not going to be open forever.”
Narciso Rodriguez, a 20-year-old from Brooklyn, N.Y., said he downloads most of his games online because he doesn’t like to deal with game disks used with systems like the Sony PlayStation.
Travis Hernandez, a 24-year-old Harlem, N.Y., resident, said he buys disk games, except for Fortnite, largely from Amazon.com .
“I don’t really go to GameStop to get my games,” Mr. Hernandez said.
Former GameStop CEO Mike Mauler said the company should focus on renovating its existing stores, giving them a more-modern layout.
Mr. Mauler, who led the company’s international business for nearly a decade, was CEO for three months in 2018 before resigning for personal reasons. Mr. Mauler and the company declined to provide additional details on the departure.
Mr. Mauler also said the company should focus on selling more accessories and becoming more of a pop-culture retailer, for example, selling T-shirts and shot glasses of popular videogames like “Fortnite” and TV shows such as “Game of Thrones.”
“The key word is patience, picking a strategy and focusing on it.” Mr. Mauler said. “Without those stores, there is no GameStop.”
GameStop said in a statement it is focused on boosting sales of accessories and collectible items, and boosting its rewards program.
The company has said the game Fortnite—which has 200 million registered players—helped lift accessory sales more than 30% in the third quarter from a year earlier.
Still, sales of items like headsets accounted for about 10% of overall revenue in the first nine months of GameStop’s fiscal year, while sales of new and used videogames accounted for about 50%.