Competitive Intelligence

Samsung vs. Motorola: South Korean Handset Maker Gains on U.S. Rival

Worldwide cell phone handset market share figures are out for 2003 and Samsung has made some decided progress against competitors in both CDMA and GSM markets, particularly Motorola, although overtaking them for number two will still be a tough hurdle. Here’s an excerpt from a piece comparing the two from the Miami Herald:

Wireless phones were key to Samsung's transformation from a financially ailing maker of memory chips and cheap microwave ovens into a respected brand. The company ignored the low end of the market, focusing instead on pricier handsets for customers who can afford the latest and coolest gadgets.

Samsung shipped 11 percent of all wireless phones sold last year. The company's share of shipments still trails Motorola's 15 percent, but Samsung is neck and neck with Motorola in sales.

Samsung chalked up $10.6 billion in handset revenues last year compared with Motorola's $11 billion. An average Samsung phone, at $190, is 30 percent more expensive than Motorola's $146 average selling price, according to research firm Yankee Group.

And Samsung's profits are fatter. The company's 18 percent gross margins compare favorably with Nokia's 20-plus percent margins, while Motorola's hover in the single digits.

"Samsung has just played its cards right," said Neil Strother, senior analyst for wireless handsets service at In-Stat MDR.

The conglomerate's swift rise in a business that Motorola pioneered is a lesson in the challenges Motorola faces as new chief executive Edward Zander tries to energize the company.

Motorola, with deep roots in radio and communications technology, is going up against Asian consumer electronics giants, including LG Electronics and Sanyo, that leverage their expertise in digital cameras, color displays and music players in the increasingly popular all-in-one phones.

None has been more successful in muscling into Motorola's biggest business than Samsung, which made its mark by betting on an emerging technology seven years ago.

CDMA, or code division multiple access, was new to North America in 1997 when Samsung introduced CDMA phones with Sprint PCS for the carrier's new all-digital national network.

"Samsung is the classic example of how an Asian handset vendor can expand a toehold," said Yankee Group analyst John Jackson. "And they've done it by being a manufacturer."

Bucking the trend toward specialization, Samsung thrives as a vertically integrated manufacturer. Its biggest factory complex is in Gumi, South Korea's largest inland industrial city.

While Motorola is spinning off its semiconductor division, Samsung continues to buy chips, display screens and other parts from its affiliates. That can be an advantage when sales heat up and industry demand outstrips supplies.

One reason Motorola was late last year in delivering phones to stores was a parts shortage. "Being late in this market costs you," Strother said.

Samsung is blessed by another advantage: South Korea's rabid appetite for all things digital, especially mobile technology.

The country's wireless networks are among the world's most advanced, providing a test kitchen for Samsung's concoctions. Korean consumers, on average, replace their phones every nine to 12 months--three times more often than the world average.

Samsung satisfies their appetite by churning out models at a furious pace.

It introduced 150 models worldwide last year compared with Motorola's 40.

Motorola dramatically reduced the complexity of its product line three years ago to make its cell phone business profitable. By contrast, Samsung appears to thrive on complexity, designing different phones for each carrier to help them side-step cutthroat price competition.

The SGH-e715 camera phone it produced recently for T-Mobile looks and behaves differently, for instance, than comparably priced phones for Sprint.

"If the e-715 is a hit for T-Mobile, we would not like for Sprint to come in and rain on their parade" by offering a similar phone at a lower price, said Muzibul Khan, vice president of product management and engineering at Samsung's wireless terminals division in Richardson, Texas..

The seeds for Samsung's success were planted in the United States in 1997, when Sprint was hunting phones for its new CDMA network.

"Only a few companies had the capability," said Sprint's John Garcia, senior vice president of sales and distribution. "Motorola was skeptical, as was Nokia."

Sony Electronics Co. partnered with Qualcomm Inc. to build Sprint's first CDMA phone, but the carrier needed more.

"We needed more advanced handsets, and we needed a lot of them," Garcia said.

Sprint decided to take a flier on Samsung, whose new CEO, Yun Jong Yong, was leading a radical restructuring. The carrier signed a three-year, $600 million contract--a deal that paid off handsomely for both companies.

"What we thought we would sell in three years, we sold in two," Garcia said.

"Samsung invested heavily to coordinate with our engineers to build customized services in their handsets that work uniquely on our network," Garcia added. "That's one of the things that makes them different."

The Sprint deal provided a "market success," said Peter Skarzynski, senior vice president of Samsung Telecommunications America in Richardson. "Then we expanded a step at a time to other CDMA carriers."

Samsung's phones turned heads.

"They were no longer just another garden variety Asian electronics maker," Strother said. "Their overall quality went up."

So did Samsung's reputation for innovation.

"Among carriers, Samsung is perceived to be more a technology leader than Motorola when it comes to delivering coordinated consumer electronics," said Chris Ambrosio of market research firm Strategy Analytics.

In South Korea, where more advanced networks deliver higher speeds than in the U.S., consumers are watching television on Samsung phones, sending video clips and playing 3D games. These features will arrive soon in Samsung phones for U.S. carriers, Skarzynski said.

Motorola, meanwhile, isn't standing still.

Just as Samsung exploited the growth of CDMA technology, Motorola has an early lead in UMTS (Universal Mobile Telecommunications Service). It's a third-generation standard that delivers faster speeds, opening up new ranges of mobile computing and entertainment possibilities.

Motorola also is betting on its software, called MotoJUIX, to give it an edge against players such as Samsung, which licenses other companies' software.

MotoJUIX is based on Java and Linux, an open standard. Motorola said it would give the company flexibility and speed to handle the explosion of applications coming with third generation networks.

"There are a lot of transitions rippling through the industry that allow a technology innovator to win and take share," said Ray Roman, Motorola's vice president and general manager for North America.

Analysts don't think Samsung will knock Motorola from its perch as the world's second-biggest phonemaker anytime soon.

For one thing, Samsung already has maximized its lead in CDMA, said Chris Ambrosio of Strategy Analystics. For another, Samsung has yet to become a mass-market player, serving up quantities of cheaper phones as well as pricey ones.

But, Samsung has to watch our for its own countrymen – LG Electronics topped the Strategy Analytics ranking in CDMA phones, overtaking BOTH Samsung and Motorola, selling 21.3 million CDMA mobile phones last year, a 21.6 percent share, versus Samsung’s shipments of 20.4 million units during the same period, accounting for a 20.7 percent share.

Both LG and Samsung said the greater market share was largely attributed to more aggressive marketing and diversification strategy. Both companies used to focus primarily on the North American export market, but recently diversified its CDMA handset lines to other emerging markets like Brazil and China. LG's emergence as a top competitor is made more interesting as the company has long been the No. 2 player on the Korean CDMA market after Samsung, which essentially controls the high-end mobile phone market with its strong brand and market power.

Meanwhile, Motorola shipped 19 million CDMA handsets last year, securing an 18 percent share, Nokia ranked fourth, carving out a 12.5 percent share, or 12.3 million units, followed by Kyocera with 10.9 million units (11 percent) and Sanyo with 3.4 million units (3.5 percent).

But Korean handset manufacturers have yet to catch up with other competitors for GSM share. Nokia topped the ranking with 146 million units, or 42.2 percent market share for the global GSM handset market, followed by Siemens with 43.3 million units, or 12.5 percent, Motorola was No. 3 with 38.4 million units, Samsung ranked fourth with 33.8 million units, and LG shipped 6.1 million GSM phones last year.

Most ironic is that less than a decade ago, nobody saw Samsung, or LG for that matter, as a serious handset competitor to relative Motorola’s dominance.

- Arik