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SPECIAL REPORT 1
By MELAnIE LEE And MIyOung KIMguAngZHOu, CHInA, JuLy 26, 2013
The smart phone war in China
Why is Samsung whipping Apple in the world’s biggest smart phone market? It has connections.
SAMSung APPLE
SPECIAL REPORT 2
SAMSUNG APPLE THE SMART PHONE WAR IN CHINA
Apple Chief Executive Tim Cook believes that “over the arc of time” China is a huge opportunity for his
pathbreaking company. But time looks to be on the side of rival Samsung Electronics Co Ltd, which has been around far lon-ger and penetrated much deeper into the world’s most populous country.
Apple Inc this week said its revenue in Greater China, which also includes Hong Kong and Taiwan, slumped 43 percent to $4.65 billion from the previous quarter. That was also 14 percent lower from the year-ago quarter. Sales were weighed down by a sharp drop in revenues from Hong Kong. “It’s not totally clear why that oc-curred,” Cook said on a conference call with analysts.
Neither is it totally clear what Apple’s strategy is to deal with Samsung - not to mention a host of smaller, nimbler Chinese challengers.
Today, in the war for what both sides acknowledge is the 21st century’s most im-portant market, Samsung is whipping its American rival. The South Korean giant now has a 19 percent share of the $80 bil-lion smartphone market in China, a market expected to surge to $117 billion by 2017, according to International Data Corp. That’s 10 percentage points ahead of Apple, which has fallen to 5th in terms of China market share.
Cook said Apple planned to double the number of its retail stores over the next two years - it currently has 8 flasgship stores in China and 3 in Hong Kong. But, he added, Apple will invest in distribution “very cau-tiously because we want to do it with great quality.”
Samsung, with a longer history in China, now has three times the number of retail stores as Apple, and has been more aggressive in courting consumers and cre-ating partnerships with phone operators. It also appears to be in better position, over an arc of time, to fend off the growing assault of homegrown competitors such as Lenovo
Group Ltd, Huawei Technologies Co Ltd and ZTE Corp, former company execu-tives, analysts and industry sources say.
Apple declined requests for comment for this article.
VARIED MODELS Samsung’s history and corporate culture could hardly be more different than Apple’s, the iconic Silicon Valley start-up founded by Steve Jobs and Steve Wozniak in 1976. Lee Byung-Chull started Samsung in 1938 as a noodle and sugar maker. It grew over the decades into an industrial powerhouse, or chaebol as Koreans call the family owned conglomerates that dominate the nation’s
economy and are run with military-like discipline.
Apple, by contrast, became the epitome of Californian cool, an image the com-pany revels in. That hip image translates in China - its stores are routinely packed - but hasn’t been enough to overcome the more entrenched Samsung.
A stuffy electronics bazaar in the south-ern Chinese city of Shenzhen illustrates part of the reason why.
Samsung Galaxys and Apple iPhones of different generations sit side by side, glint-ing under bright display lights as vendors call out to get customers’ attention. With its varied models, Samsung smartphones out-number iPhones at least four to one.
While Apple releases only one smart-phone a year, priced at the premium end of the market, Samsung brings out multiple models annually with different specifica-tions and at different price points in China.
And those models, analysts say, are loaded with features tailored specifically for the local market: apps such POCO.cn, the
SEEIng REd: With 19 percent of the market share for smart phones in China, Samsung has left Apple
and other rivals fuming in its wake. REUTERS/JaSon LEE
Text continues on page 6
$80 billionThe value of the smart phone market in China in 2012
Source: International data Corporation
SPECIAL REPORT 3
SAMSUNG APPLE THE SMART PHONE WAR IN CHINA
Sources: Apple; Samsung; Reuters
Samsung/Apple in China
Beijing
Shenyang
RUSSIA
Guangzhou
Chengdu
Nanjing Shanghai
Hangzhou
200 miles
200 km
Beijing
RUSSIA
Shanghai
Experience StoresR&D centre
Sales centre
Apple launchesiPhone
OpensBeijingApplestore
2007 2008 2009 2010 2011 2012 2013
Launches iPhone in China, butthe appstore is only in English
Opens ShanghaiApplestore
Launches iPhone 4 globally and the iPad 2 in China
Releases Wi-fi only versions of the iPad and iPhone 4 in China
Samsung began manufacturing in China in 1992, and has opened numerous “Experience stores” in every state, while Apple has eight stores in just four locations
LaunchesSamsung Galaxy S II
OpensShanghaiExperience Shop
LaunchesGalaxy S4
Opens first appliancesExperience storein China
Opens Apple store in Chengdu.Launches iPhone 5 in China
iPhone 4launched bytwo Chinesecarriers
Chengdu
Shenzhen
SAMSUNG
APPLE
LaunchesGalaxy S III on all 3 Chinese carriers
SAMSUNG APPLE
SPECIAL REPORT 4
SAMSUNG APPLE THE SMART PHONE WAR IN CHINA
most popular photo sharing site in China, or the two slots for SIM cards (Apple offers one), which allows service from multiple cell carriers, either at home or abroad.
“The Chinese just love features. They want their phone to have 50 different things that they’re never going to use,” said Michael Clendenin, managing director of technology consultancy RedTech Advisors. “Apple just doesn’t play that game. Unfortunately, if you want to hit the main-stream market in China, and you want a lot of market share percentage points, you have to offer the Swiss army knife of cellphones.”
“SETTING THE PACE”Analysts believe Samsung’s increasing strength in China is a critical reason behind its rival’s possible intention to introduce globally a new and cheaper iPhone model, as well as one with bigger screens - a staple of Samsung’s offerings.
Said a Samsung executive with experi-ence in China: “We definitely think we’re setting the pace there. They are having to respond to us.”
Most audaciously, Samsung has gone after Apple not simply by offering lower priced smartphones, but by attacking its ri-val directly in the pricier end of the market. “We put a lot of emphasis on the high end market in China,” co-CEO J.K. Shin told Reuters in an interview.
Samsung launched a China-only luxury smartphone together with China Telecom <0728.HK> marketed by actor Jackie Chan that retails for about 12,000 yuan ($2,000). The flip phone, named “heart to the world,” is encased in a slim black and rose gold metal body. The sleek look - called “da qi” (elegantly grand) - is coveted by Chinese when they shop for cars, sofas or phones.
“There are a lot of ‘VVIP’s’ in China, and for them we launched luxury phones promoted by Jackie Chan. This helps target niche customers and build brand equity,” said Lee Young-hee, executive vice presi-dent of Samsung’s mobile business.
Rest of AsiaN. America
E. Europe
W. EuropeL. AmericaM.E./Africa
Q12012
Q3 Q4Q2 Q12013
Q3 Q4Q2
Q12012
Q3 Q4Q2 Q12013
Q3 Q4Q2
Estimate/ forecast
0
20
40
60
80China
Samsung
Apple
Source: Gartner and HMC Investment & Securities
Smart phone demand outlookSmart phone shipmentsIn millions of units
Samsung & Apple shipmentsGlobal - In million of units
0
20
40
60
80
SPECIAL REPORT 5
SAMSUNG APPLE THE SMART PHONE WAR IN CHINA
While Samsung won’t sell millions of these smartphones, the creation of the phone in conjunction with a carrier rein-forces Samsung’s willingness to go local - and tap into niche markets.
“The key point is that Samsung consis-tently adapts to the local market,” said TZ Wong, a Singapore-based technology ana-lyst with IDC.
Apple’s latest mobile operating system offers links to popular Chinese applications like Sina’s <SINA.O> microblogging plat-form Weibo, but the application itself must be downloaded onto the phone. On all of Samsung’s entries, it’s already there.
“People know intellectually that Samsung is from Korea, but when it comes to the messaging there is always a local face,” Wong said.
RETAIL PRESENCESamsung opened its first office in China in 1985 in Beijing - an era in which it was all but inconceivable that Apple and Samsung would end up in one of the world’s most in-tense corporate grudge matches. Like other South Korean chaebols, Samsung was a first mover in China, using the market pri-marily as a base to produce electronics for the world.
In contrast, Apple’s big push in China came only recently, with the advent of the smartphone age roughly five years ago.
The early entry gave Samsung an unde-niable edge, and it adapted fast to a rapidly changing environment. By the mid-1990s, with the economy booming, Samsung
made the strategic decision to treat the Chinese market not just as a produc-tion base, but to start marketing to China higher-priced electronics, said Nomura researcher Choi Chang-hee, who wrote a history of Samsung’s experience in China.
That shift has meant Samsung’s retail presence in China far outstrips Apple’s. Aside from selling via the distribution outlets of the three major telecom carri-ers, Samsung also has a strong retail pres-ence through its partners Gome Electrical Appliances and Suning Commerce Group, as well as its own “Experience” stores and small retailers all over the country.
Apple works through the same channels, but its relatively late entry means it has a significantly smaller presence. Samsung, for
example, has more than 200 official distrib-utors and resellers in Guangzhou province, while Apple lists 95.
Over the last two decades, Samsung has also taken pains to build relationships with Chinese government officials and -perhaps more critically - the three major telecom carriers.
The notion of the importance of connec-tions - or “guanxi” - in China is occasion-ally overrated in business. Not, according to Samsung’s Shin, in this case. “It’s our core policy to keep friendly relationships with the operators,” he said. In China, each car-rier uses a different technology and that re-quires Samsung “to tweak our smartphones to their request.”
“It’s not easy,” Shin said, “but we do this to be more operator friendly.”
Contrast that with the ongoing nego-tiations Apple has had with China Mobile <0941.HK>, the largest cellphone operator. For years the two sides have been unable to come to an agreement on revenue sharing, effectively precluding Apple from hundreds of millions of potential customers.
OuTnuMBEREd: Samsung has a far greater distributorship in China than its chief rival Apple.
REUTERS/STRingER
We definitely think we’re setting the pace here.They’re (Apple’s) having to respond to us
Samsung executive in China
Tim Cook may be scratching his head over slumping China sales,
but smartphone competitor Samsung is raking in the cash. Here’s how the South Korean tech giant is doing it. Seen an Insider TV video of the story.http://link.reuters.com/jym89t
REUTERS TV
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SAMSUNG APPLE THE SMART PHONE WAR IN CHINA
SPECIAL REPORT 6
FOR MORE INFORMATIONMiyoung Kim, Company news chief [email protected] Tarrant, Enterprise Editor [email protected] Williams, Global Enterprise Editor [email protected]
SCRUTINY FROM THE TOPSamsung’s reach extends higher than just the CEOs of the top state-owned telecom companies. Top executives have met each of the last several Chinese leaders, most re-cently Xi Jinping, who spent time in April with vice chairman Jay Y. Lee, son of K.H. Lee, Samsung Electronics chairman.
“What surprised me most,” said Lee later, “was that they (Chinese leadership) know very well about Samsung. They even have a group studying us.”
The Chinese government has also made clear it’s well aware of Apple - though not always in a good way. In April, state media bashed Apple for its “arrogance,” protesting among other things that its current 1-year service warranty was insufficient. Apple ini-tially dismissed those criticisms, but Cook later apologized to Chinese consumers.
Samsung’s success in China has it roots, one former executive said, in a previous ob-session for the company: its desire not to replicate the mistakes made by Japanese rivals.
“Samsung spent a lot of time
benchmarking Sony, Toshiba, and Panasonic,” said Mark Newman, who spent six years in Samsung’s global strategy group and is now an industry analyst at Sanford C. Bernstein in Hong Kong.
“One of the things that came out of that is the realization that the insular approach has its drawbacks, and so Samsung has made an effort over the last 10 years to be much more global.”
This strategy of decentralization is plain-ly evident in China, he said, home now to more Samsung employees than any country outside South Korea.
FIGHTING HIGH AND LOWSamsung now leads in both low-end and high-end segments in China, according to IDC, and its logic of going after both ends of the market is straightforward. In China, where the average wage is roughly $640 per month, many users looking to upgrade from feature phones to smartphones can-not afford Apple.
By bracketing the market with mul-tiple models, Samsung can breed deep
relationships with customers, many of whom, market research shows, trade up to more expensive models as they get older. Playing high and low also posi-tions Samsung to fend off the intensifying competition from Chinese firms such as Lenovo and Huawei and literally hundreds of smaller local players.
“That’s where the next battle for Samsung will be fought,” said Newman. “We’ll have to see if Apple does introduce a new, cheaper model for China - and the world.”
Writing by Bill Powell, editing by Bill Tarrant
PHOnE REFLECTIOn: Apple’s logo is reflected on the back of a Samsung galaxy note. REUTERS/BaRRy HUang
