SEOUL -- Samsung Electronics' profit decline has exposed a string of challenges that threaten to dethrone the world's largest smartphone maker.
The South Korean conglomerate on Friday said its operating profit fell more than 60% on the year in the first quarter, hit by sinking prices of display panels and memory chips. Profit margins remain high, but three major factors may hamper the company's ability to bounce back: an excessive focus on quality and complex features, high costs and the absence of a leader to rally around.
Samsung's upcoming Galaxy Fold is symbolic of the company's obsession with the latest and greatest technology. The handset, which comes out in April and features a foldable OLED display, carries a price tag of $2,000 -- out of reach for a large portion of consumers. Not only did the conglomerate devote resources to a phone that may appeal to a limited market, but it also insisted on making the screen fold inward.
Chinese rival Huawei is following close behind with its own foldable, to be released in June. Its phone folds outward -- a design decision many consider less than ideal, but one that was technically simpler to pull off.
Samsung's determination to aim high is seen as one reason behind the rapid erosion of its market share in China. It was the top player with 20% in 2013, but it was down to just 1% last year.
Local competitors like Xiaomi and Oppo have gained ground by launching phones that balance low prices with attractive features, like decent cameras.
Samsung's high-cost structure -- including high salaries -- poses another obstacle.
South Koreans are hungry for job security in a fragile economy. So those who make it into Samsung are staying: The company's average employment term rose from 7.8 years in 2010 to 11.5 years in 2018. As a result, the average annual salary rose to around $90,000 last year from about $60,000 in 2009.
By comparison, Xiaomi pays an average of less than $45,000, according to local media reports. The days when cost competitiveness underpinned Samsung's growth are over.
Samsung Chairman Lee Kun-hee was also instrumental in propelling the company's rise. Known as a bold decision-maker on matters like capital investment, his motto was "change everything except your wife and children." But Lee has not appeared in public for more than four years, due to ailing health. And his eldest son and de facto successor, Vice Chairman Lee Jae-yong, is facing bribery charges.
When Lee Jae-yong was arrested in February 2017, the prevailing view was that Lee Kun-hee had made Samsung so strong that there would be nothing to worry about for at least three years. That optimism did not last long.
Revenue decreased by 14% in the first quarter of 2019, signaling that the company was unable to make the most of its balanced portfolio that includes semiconductors, smartphones and displays. In the past, these operations had complemented each other, forming one powerful moneymaking machine.
Profits in the semiconductor segment halved, while the panel business -- including liquid crystal and organic electroluminescent displays -- is expected to be in the negative or break even at best.
There is hope that this week's launch of superfast fifth-generation wireless services in the U.S. and South Korea will provide a new tailwind. But Samsung is attempting to catch that breeze with a different strategy than its nemesis, Apple. The former is sticking to its focus on production, while the latter is strengthening services such as video distribution.
The question is whether Samsung's approach will be enough to clear the three big barriers that have now emerged.