Three Key Questions For Samsung’s Smartphone Business

Samsung Electronics’ (OTC:SSNLF) smartphone business, the largest in the world in terms of unit shipments, had a mixed 2016. The year began on a positive note, as Samsung benefited from strong sales of its well-received flagship Galaxy S7 and Edge devices and some weakness at Apple, which saw its first year over year decline in iPhone sales (-12% over FY’16). However, things went downhill towards the end of the year, as the company had to recall and eventually discontinue the Galaxy Note 7 after several incidents of the device catching fire. Below, we outline some of the key factors to watch over 2017.

We have a $1,350 price estimate for Samsung Electronics, which is slightly ahead of the current market price.

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How Will The Note 7 Crisis Impact Samsung’s Smartphone Strategy?

While the Galaxy Note 7 crisis could end up costing Samsung upwards of $5 billion in the near term, there could be longer-term repercussions for the company. The negative news cycle surrounding the Note 7 is likely to have weighed significantly on the firm’s smartphone brand. There could be issues relating to product positioning as well. Samsung has relied on the Android platform for software, while pushing the envelope in terms of hardware design – with innovations such as curved screens – to command a premium for its devices. However, with the Note crisis, Samsung’s biggest strength has become an area of vulnerability, as customer perception regarding the safety and reliability of its hardware may have taken a beating. Samsung may need to improve its competitiveness on the software and cloud-based services front, but this will not be easy given that it lacks the customer data sets and network effects that its Silicon Valley rivals enjoy (related: With Its Hardware Called Into Question, How Will Samsung Differentiate Itself?).

How Will Samsung Respond To Apple’s 10th Anniversary iPhone And Google’s Pixel Ramp? 

2017 is expected to be an important year in the high end of the smartphone market, with both Google and Apple expected to see some gains, potentially at Samsung’s expense. Google is expected to scale up sales of its first handset, the Pixel, which launched this October. Morgan Stanley expects the device, which has received very strong reviews, to see sales of as much as $3.8 billion in 2017. While Google’s primary strategy with the Pixel is to create a solid Android-based alternative to the iPhone, it might be Samsung that ends up feeling much of the heat, given the Pixel’s superior Android implementation and service offerings.  Moreover, Apple is poised to launch its 10th anniversary iPhone next year, featuring a complete redesign after three years of the iPhone 6 form factor. This is likely to trigger a massive upgrade cycle, potentially attracting customers away from other high-end vendors such as Samsung.

Is A Recovery In China In The Cards?

In China, the world’s largest Smartphone market, Samsung’s relevance has been fading and the firm no longer figures among the top five smartphone brands in terms of shipments in the country. Samsung has been facing significant competition from domestic brands such as Oppo and Vivo, which focus on value handsets that sell primarily via offline channels in Tier 3 cities and rural areas.  Samsung, in contrast, has been largely dependent on operators and their subsidies (which have been declining) to sell devices. While Samsung has launched a relatively compelling lineup of low-end phones such as the C series and J series over the last year, these devices don’t seem to have reversed the company’s fortunes in China.

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