Samsung hopes new phones will bring recovery

Samsung Electronics will unveil its next smartphones this weekend, with the focus on whether they can draw customers from Apple. The real question may be whether the phones can pull customers from Qualcomm and Sharp.

The Galaxy S devices are aimed at demonstrating that Samsung can make top-tier chips and screens, as well as smartphones. The company is using its own application processor chips in the phones, replacing those from Qualcomm, and its own multisided screen, something no rival can produce. The goal is to create customers for those products, even if it loses ground in phones.

Samsung is at risk of losing its leadership in smartphones after four years atop the industry. The company fell into a tie with Apple in the fourth quarter, and earnings have dropped for three straight quarters. Samsung is pouring more than $21 billion into capital expenditures this year to grab a bigger slice of revenue from the 1 billion handsets sold by rivals.

“It’s a great chance to lure more customers,” said Tom Kang, research director at Counterpoint Technology Market Research Ltd. “If the S6 sells well, many handset rivals will adopt a ‘me, too’ strategy with Samsung’s new chips and curved displays.”

Shares of Samsung fell 1.3 percent to 1,357,000 won ($1,233) in Seoul today, paring this year’s gain to 2.3 percent.

Asia’s biggest electronics company wants more of the combined $51 billion in revenue generated by sales of application processors and screens for mobile phones. Qualcomm captured more than half of the $21 billion processor market last year, according to Strategy Analytics.

Samsung plans to release two versions of its new high-end smartphone on Sunday during the Mobile World Congress in Barcelona, with one model featuring a display on three sides, people with knowledge of the matter have said.

Both phones will have metal bodies and use Samsung’s Application processor instead of Qualcomm’s Snapdragon, the people said. Analysts expect the devices to use the S6 name. The company also hints at new ways to charge the phone without cords. Seho Park, principal engineer at Samsung’s mobile unit, predicted “users will be able to enter a new wireless world like never before” with future Galaxy models.

New features are key for helping Samsung stand out in a mobile market where Apple earns the biggest profit and dozens of companies use Google’s Android software to produce seemingly interchangeable phones.

Revenue from the iPhone and iPad totaled $60.2 billion in the quarter ending Dec. 27, while revenue from Samsung’s mobile division, including tablet computers, was $22.9 billion in the quarter ending Sept. 30, according to data compiled by Bloomberg.

“Samsung has fallen into a ‘one of the Androids’ category and it’s getting harder to get people to open up their wallets,” said Yoo Eui-hyung, an analyst with Dongbu Securities Co. in Seoul. “The performance of S6 will be the key selling point for Samsung’s mobile components.”

Samsung’s ascent to the top of the global smartphone industry in 2011 drove record earnings, yet the 40-year-old division making logic and memory chips is now the biggest contributor to profit. That includes semiconductors made for its own phones and those by Apple and Sony Corporation.

Operating profit at the chip division surged 36 percent to 2.7 trillion won in the fourth quarter, while mobile-phone unit earnings slumped 64 percent to 1.96 trillion won.

Vice Chairman Lee Jae Yong is spending about $14 billion on a factory for chips near Seoul and counting on rising demand to justify that investment. Samsung said Feb. 16 it will begin mass producing processors with circuitry making them faster, more energy efficient and more productive than those from Qualcomm.

Samsung’s processor business may post an operating profit of as much as 1.4 trillion won this year after losing 700 billion won last year, Yoo said.

“Qualcomm historically has had the best-of-breed chips in the market,” said Bill Kreher, an analyst at Edward Jones & Co. who has the equivalent of a hold rating on Qualcomm shares. “This is a first sign that there may be cracks in that theory.”

Samsung last year earmarked 23.4 trillion won for capital expenditures, including 4 trillion won for displays.

“It’s the right time for Samsung to tap new external customers and reduce its reliance on its Galaxy phone sales,” said Lee Min-hee, a Seoul-based analyst at I’M Securities Co. “If the next Galaxy is proven to be a big success, Chinese makers will quickly jump in to make similar products.”

Bloomberg