Apple isn’t Samsung’s big problem

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Apple isn’t Samsung’s big problem

Samsung, which has just released weak first-quarter earnings, has a currency problem. After a 12-month period during which South Korea’s won advanced 23 percent against the euro, Samsung is having trouble maintaining its sales. But the won has also declined in value against the U.S. dollar, which has raised the company’s materials costs.

Samsung’s profits, in other words, are getting crushed between two separate negative exchange rate dynamics. And to top it off, Apple, Samsung’s primary competitor in cell phone sales, has just released a product, the iPhone 6, that’s dominating the industry.

The situation adds a new wrinkle to a famous observation that Samsung Group Chairman Lee Kun-hee made in 2007. Taking stock of Korea’s recovery from the Asian crisis a decade earlier, Lee warned “we are sandwiched” between highly-developed Japan and low-cost China. He called for an innovation boom to support Korea’s continued economic rise. Samsung’s recent travails (profits slumped 40 percent last quarter, the sixth straight quarterly decline) couldn’t have been what Lee had in mind.

There’s a reason you don’t see Apple CEO Tim Cook sweating over exchange rates: Apple’s innovative products have earned the status of luxury objects. Even when Apple copies Samsung’s shtick - by offering a bigger screen on its iPhone 6, for example - the company’s reputation as an innovator remains unscathed.

Samsung, by contrast, has never managed to create any game-changing product - a Korean-made Walkman or iPhone, say - that would grant it protection from currency fluctuations. The company has found plenty of success in the unsexy business of making supplies for competitors, including Apple, but that’s not the sort of reputation that allows it to charge consumers a premium.

Lee Jae Yong, who is poised to replace his hospitalized father as Samsung’s boss, seems to have taken heed. He has been unwinding the company’s holdings in disappointing sectors like defense; moving talent from mobile phones to Internet initiatives; and making ambitious bets on new products, including biopharmaceuticals, memory chips, batteries and organic light-emitting diode displays.

Samsung has also placed a new emphasis on cutting-edge design. The company’s new Galaxy 6 is a design marvel, and although first quarter sales were underwhelming, Samsung is counseling patience. The second quarter, it says, will look better, with indications that the new smartphone is starting to sell briskly.

But Lee’s maneuvers still risk shortchanging his company. The biggest question facing Samsung isn’t where it will be three or four quarters from now, but three or four years from now. Say what you want about Sony or Sharp sliding toward irrelevance, but in their heyday those iconic Japanese companies changed the tech world by staying one step ahead of shifts in consumer markets.

In that sense, Samsung should focus less on Apple than scrappy upstarts like China’s Xiaomi, which is producing low-cost cell phones that are especially popular in its home market. The average price for Samsung’s headsets is around $200, but, in order to better compete in Asia’s biggest economy, the company should probably think about lowering costs.

Korea’s strong won could and should catalyze positive changes for Samsung, and the broader Korean economy. But that will demand that the country’s corporate chieftains quit blaming the Bank of Korea for their woes and instead get in touch with their inner entrepreneurs. By making investments in research and development and encouraging greater risk taking among their employees, they could enliven Korean growth and make their companies less vulnerable to the whims of currency traders.

They should also take advantage of the won’s relative strength among the currencies of eastern Asia. The yen’s 12 percent drop versus the won over the last 12 months means it’s possible to imagine Japan’s tech powers of yesteryear, like Sony and Sharp, being acquired by an ambitious Korean CEO like Lee. Such a move would certainly take Samsung’s competitors by surprise - and it might even help the company escape the uncomfortable currency bind it has found itself in.

*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.

by William Pesek

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