Why Samsung and LG dominate Korea's smartphone market

A short but very interesting article in The Korea Herald helps to answer the question of why Samsung and LG are so dominant in the local smartphone market here in Korea.  Entitled "Foreign makers keep eye on changes in smartphone distribution" the article begins by noting that foreign smartphone manufacturers are paying attention to lawmakers' efforts to reform smartphone distribution channels. "Currently, the Korean smartphone market is dominated by two local firms -- Samsung Electronics with a 63.8 percent share and LG Electronics with 11.8 percent.  Apple holds an 11.9 percent share."
The article goes on to note that "The solid presence of Korean firms is partly driven by the nation’s unique distribution channels in which local telecom carriers entice customers by giving subsidies for Samsung and LG phones, based on prior arrangements between the carriers and handset makers.  They provide less subsidies for Apple phones, as they have no prior arrangement with Apple, and provide none to other Chinese and Japanese brands because their phones are not sold via mobile carriers but through their own stores or online."
Furthermore, " In Korea, only 8 percent of smartphone owners bought devices without going through telecom operators compared to the global average of 61 percent, according to the US research firm Strategy Analytics."
It would appear that the days of such overwhelming dominance by Samsung and LG are about to end.  Smartphones themselves are modular in nature and quickly become commoditized.  These trends suggest that Korea's leading companies, while not abandoning the design and manufacture of smart phones, need to move toward the software and services that these devices carry.

Lenovo a threat to Samsung's Smartphone dominance?

Local analysts and the local media are abuzz with speculation that Lenovo, especially after acquiring Motorola Mobility, will quickly become a threat to Korean smartphone manufacturers, led by Samsung Electronics.  As reported in the Korea Joongang Daily,"The Chinese company, which gobbled up Motorola on Jan. 29, is openly professing that its goal is to move past Apple and Samsung. “From now until 2015, Lenovo and Motorola’s smartphone sales goal is 100 million,” said Lenovo Chairman Yang Yuanqing on Feb. 2." As shown in the accompanying graphic, with the purchase of Motorola Mobility, Lenovo "...leapfrogged LG Electronics and Huawei to become the world’s third-largest smartphone vendor. According to Strategy Analytics, Lenovo and Motorola’s combined market share in the global smartphone market was 6.2 percent as of the end of last year, compared to Huawei’s 4.8 percent and LG Electronics’ 4.7 percent.
This prospective shift in the international market for smart mobile devices illustrates the risks of heavy dependence on the manufacturing and export of hardware, which is modular in nature and keeps getting smaller, cheaper and more powerful.

LG and Samsung Struggle to Crack Smartphone Market

An IHT special report published in The New York Times yesterday was headlined "Korean Giants Struggle to Crack Smartphone Market."  It caught my eye and I read it with some expectation, but it was disappointing.  It failed, as many reports in the mainstream press do, to get to the heart of the reasons why Korea suffered the "iPhone shock" or "smartphone shock" beginning about a year ago.  As readers of this blog will know, I've been caught up with attempting to explain this phenomenon for a long time.  See this post, or another here, or simply search this blog for "smartphone shock" or "iPhone."
The story of why Korea's leading consumer electronics companies are struggling with the rapidly expanding smartphone market is more complex than the IHT special report makes it seem, and it involves the following elements.

• Weakness in software and content versus hardware exports.  Smartphones themselves (the hardware) are not the key element in this wave that is sweeping the globe.  Rather it is the "apps" and the software ecosystem that count.   Not surprisingly, Google and Apple are major players.
• Language -- As I've noted in earlier posts, Korea's heavy reliance on Naver for internet search casts into stark relief the importance of language and culture in any given market.  See my posts on Naver versus Google here or here  or do a search of this blog on the topic.
• Non-tariff barriers -- The WIPI software platform adopted in Korea, while it may have originally had good intentions, eventually became a barrier to entry of the Blackberry or iPhone into South Korea's market.  I've done a number of earlier posts on this topic including this one.
• Worry about loss of Voice Revenue--Korean telecoms executives, along with some of their European counterparts, feared a massive loss of mobile voice telephony revenues if they were to allow the iPhone and other smartphones into South Korea's market.  In fact, these fears were well grounded as Korean youth had flocked to buy Apple's iPod touch, on which many of them installed the free, Skype VOIP service.

The above are just a few of the points I wish that the IHT article, published in the New York Times, would have expanded upon.

Smart phone developments affecting Korea

According to a report in The Chosun Ilbo this morning, wealthy people in North Korea prefer foreign smartphones, as shown in the accompanying screen captures from North Korean Central TV (click to see a full sized version.  The article noted that "High-end Western smartphones are all the rage among women traders in North Korea's thriving open-air markets, a source said Friday. Seventy percent of all cell phones in North Korea are concentrated in Pyongyang, the source said, and North Koreans now prefer imported gadgets to locally manufactured ones. iPhones and Samsung smartphones have become symbols of wealth, with two out of 10 female traders now flaunting imported phones, according to the source."
If such reports are accurate, they would be in line with the global trend toward commoditization of smart phones, which are essentially modular in nature and tend to become cheaper, more powerful and more portable (lighter weight) all the time.  Such changes help to explain why Chinese manufacturers have recently cut into Samsung Electronics share of the global smartphone market.

They also explain why, as reported in The Korea Herald, Samsung is planning to build a second smartphone plant in Vietnam. The article notes that "Samsung Electronics has been approved by the Vietnamese government to invest $3 billion to build a smartphone manufacturing center in the Southeast Asian country, according to the tech giant and local news outlets. The new factory will be built in Thai Nguyen province, north of Vietnam’s capital Hanoi, where the South Korean tech conglomerate has been operating its first smartphone plant in the country since last March. (click on the accompanying graphic for a full sized version) Samsung Electronics invested $2 billion to build the first smartphone factory, which has about 16,000 employees producing and assembling 120 million low-cost phones a year targeting developing markets.

Google sells Motorola Mobility, Agrees with Samsung on Patent Accord

Two developments in recent days offer a powerful commentary on the future of the global ICT sector, with direct implications for South Korea's leading smartphone manufacturers.
First, as reported in the Korea Joongang Daily, Samsung Electronics has signed a 10-year patent cross license agreement with Google that will prevent the two companies from waging a patent war against one another, a move the Korean tech firm believes will help further isolate archrival Apple. As reported in the Joongang Daily, the agreement that covers “a broad range of technologies and business areas” with Google. The “mutually beneficial agreement” covers not only existing patents but also new patents to be filed by 2023, Samsung said. The deal, analysts say, will help the two companies improve on each other’s weak points: software in the case of Samsung and hardware for Google. But Samsung is also expected to benefit from some of the hardware technologies that Google has worked on in recent years, such as robotics and wearable devices.
The second development was the announcement by Google that it is selling its Motorola Mobility division to China's Lenovo for $2.91 billion.  As reported by Forbes, "Motorola Mobility was Google’s largest ever acquisition at $12.5 billion in 2012. Page says the decision was made because of the “super competitive” nature of the smartphone market. “Motorola will be better served by Lenovo—which as a rapidly growing smartphone business and is the largest (and fastest-growing) PC manufacturer in the world,” Page said today. “This move will enable Google to devote our energy to driving innovation across the Android ecosystem, for the benefit of smartphone users everywhere.” The sale doesn’t mean that Google isn’t interested in making hardware to run Android. Earlier this month, Google spent $3.2 billion to acquire smart thermostat maker Nest and bought several robotics companies last year. Page made a point of noting that Google’s vision for smart devices like the Nest and Google Glass, its Internet-connected eyewear, remains a focus for the company."
The most immediately apparent implication of this move for Korea is its impact on the nation's smartphone manufacturers, led by Samsung and LG.

Samsung sells more smartphone components in China

As reported by The Korea Times,industry analysts note that "Samsung Electronics is expanding its supply of smartphone components such as camera image sensors and display panels to Chinese phone makers to take advantage of their soaring market dominance in the highly competitive smartphone market there..."  As this blog has noted in numerous prior posts, (see for example these) smartphones are essentially modular computing and communications devices.  Although Google's Project Ara failed, the physical reality is that all smart phones are created by putting together modules.  This helps to explain why the recent Japanese restrictions on the export to Korea of materials necessary for the manufacture of semiconductors and displays are so potentially damaging to Korea's economy.  In China, companies like Huawei and Xiaomi have come to dominate the smartphone market, in the process taking market share away from Samsung.   This development provides an opportunity for Samsung to improve its overall business position by selling more components to the Chinese manufacturers.

Emerging Growth Patterns in the Global "Smartphone" Market

The Independent recently carried two articles that are of interest to those following the global growth of the smartphone market, which is more aptly thought of as the worldwide transition to mobile broadband.  The first of these reports on data from a recent Gartner study showing that Google's Android system surged past Apple's iPhone and Canada's Blackberry in the third quarter of this year to become the second biggest smartphone platform, after Nokia's Symbian.  Based on third quarter sales, Nokia held a 36.6 percent market share, compared with 25.5 percent for Android, 16.7 percent for Apple and 14.8 percent for Blackberry.   Among other trends, smartphone sales grew 96 percent in the third quarter and accounted for 19.3 percent of overall mobile phone sales.  Nokia continued to be the leading handset manufacturer in the world, followed by Samsung and LG.  Samsung, according to Gartner, was the top Android seller in the third quarter, with sales of 6.6 million Android phones.
The second article of interest appeared last month, and relates to an earlier post on this blog.  It deals with the interesting relationship between Apple and Samsung as competitors yet partners in the global roll out of mobile broadband via smartphones.

Google's Acquisition of Motorola Mobility: Its Impact in Korea

Google's acquisition of Motorola Mobility is making big news around the world, but particularly here in Korea, home of two major handset manufacturers, Samsung and LG.  As noted by The Chosun Ilbo, Google's US$12.5 billion takeover of Motorola Mobility not only allows the search giant to obtain a portfolio of more than 17,000 patents but also gives it the capability to roll out cheap-and-cheerful smartphones within a year or two.
The same paper published an opinion piece entitled "Korean IT Industry Needs to Make Fundamental Changes." It reads in part,
"The world's largest Internet company Google has acquired Motorola Mobility, the mobile phone unit of the U.S. company. So far Google has supplied its Android operating system free of charge to smartphone and tablet PC manufacturers, but now it has gone beyond the software industry and entered the hardware market. Motorola ranks eighth in the global smartphone market, but it is still a formidable force. The company was the first to market a mobile phone in 1973 and has around 17,000 mobile communications patents.
The smartphone market is divided between Apple's iPhone, which has an 18 percent stake, and Android-based handsets, which control 48 percent. Microsoft, another software powerhouse, has already teamed up with Finland's Nokia and is competing fiercely for a larger slice of the pie. Amid rumors that Microsoft may buy Nokia, we cannot rule out the possibility that the global smartphone market could be dominated by Apple, Google and Microsoft, which all have both OS development know-how and handset manufacturing capability."