Perception can be quite deceiving.
Nokia’s exit from the mobile phone business and Samsung’s battery explosion saga might have left investors with the impression that the two are goners, but the truth is, both companies are very much alive and kicking.
Samsung’s share price has set new highs recently. Nokia, on the other hand, has successfully transformed itself into the world’s second-largest telecom equipment maker.
Samsung suffered a massive setback shortly after it rolled out Galaxy Note 7 in August last year. It was forced to recall and kill the production of the fire-starting smartphone model.
As a result, its smartphone sales plunged by 14.2 percent in the third quarter of last year, according to Gartner, marking the worst quarterly sales in its history. Its total mobile phone sales dropped 8 percent in 2016 from the previous year.
The company ceded its leadership in the smartphone market to Apple as its market share fell 10 percentage points to 17.8 percent.
Its share price dropped to 1.52 million won (US$1,332) in early September last year, from 1.68 million won in early August.
Many feared that Samsung might collapse after the Note 7 saga, and that it might even drag down the whole economy of South Korea.
However, its share price has started to rebound since late last year and hit a record high of 2.4 million won on Tuesday, up 43 percent from the level before the battery explosion scandal.
There are at least two reasons for Samsung’s surprisingly good performance.
First, many people view the firm simply as a smartphone producer, but its biggest source of profit is actually elsewhere.
True, last year its telecommunication equipment unit led by mobile phones remained the largest revenue source, generating an income of 100.3 trillion won, down 3 percent from the previous year. That represented 44.5 percent of its total revenue.
However, its other businesses such as semiconductor, memory and liquid crystal display (LCD) have contributed more profits as they have higher gross margins than smartphones.
Through these businesses, Samsung actually benefited tremendously from increasing handset sales of its major rivals like Apple.
For example, the material cost of an iPhone 7 is US$219.8, according to iFixit, of which display, random access memory and flash memory account for more than a quarter. Samsung, in fact, is Apple’s largest supplier.
Samsung reported operating profit from its parts business hit 15.9 trillion won last year, or 54 percent of its total profit. By comparison, its telecommunications equipment unit generated a profit of 10.8 trillion won.
Second, the impact of the battery explosion is not as severe as many had expected. Samsung has a wide range of low and middle-range products in the Note series.
Also, it has recalled and ended the production of Note 7. As a result, its sales bounced 8.4 percent in the first quarter of this year.
Separately, many might think that Nokia has gone out of business amid overwhelming competition in the smartphone market.
Actually, Nokia exited the handset market and sold its business, along with the Lumia and Asha brands, to Microsoft for US$7.2 billion in 2013.
Its most profitable business is now selling telecom equipment such as servers, routers and switches to global telecom operators.
Nokia has established itself as the world’s second-largest telecom equipment maker, with last year’s revenue reaching US$24.9 billion.
It has acquired businesses from main rivals like Siemens and Alcatel-Lucent to further strengthen its position in the sector.
Currently, Nokia has a market cap of 34 billion euros (US$38 billion), compared with less than 8 billion euros in 2012. Indeed, it has staged a successful comeback.
This article appeared in the Hong Kong Economic Journal on June 21
Translation by Julie Zhu
[Chinese version 中文版]
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