Vertical integration will give Samsung Galaxies
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Radio City Hall in New York is crowded with visitors
during a Samsung Electronics’ event to launch its Galaxy S4 in March. This is
the first time that Samsung chose New York as the place to unveil a flagship
product.
/ Courtesy of Samsung
Electronics
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Fitch Ratings expects
smartphones to enhance profits
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Alvin Lim, director of corporate ratings at
Fitch Ratings |
By Kim
Yoo-chul / source The Korea Times
Samsung Electronics is expected to solidify its
leadership in the global technology industry by capitalizing on better
profitability and more cash generation, according to a global credit ratings
agency, Monday.
“We expect Samsung to continue to enhance
its profit and cash generation in the medium-term mainly led by smartphones. In
addition, improving industry conditions for semiconductors and display panels
are also positive compared with 2012,” said Alvin Lim, director of corporate
ratings at Fitch Ratings, in an interview with The Korea Times,
Monday.
The credit rating agency stressed Samsung has
demonstrated its undisputed ability to develop market-leading products in a
number of categories through sizable investment in research and capital
expenditure, helping it widen gaps with its rivals.
The
U.S.-based firm identified “connectivity” as the main theme of the global
information and technology (IT) industry over the medium term as the industry
has strived to provide an eco-system in which general consumes can seamlessly
experience content and information through various devices under an integrated
platform.
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A Samsung researcher checks out its EyeCAN device, a
pointing device or mouse-replacement for people that are physically-handicapped.
The device is a glasses-mounted solution that precisely tracks eye movements,
allowing the user to move the pointer
accurately.
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The agency headquartered both
in New York and London said that the firm’s effort to develop the so-called
smart watch is a good example showing that it is taking a lead in
connectivity.
“Vertical integration with strong component
businesses such as semiconductors and display panels, has allowed efficient and
timely development of advanced products, most notably the Galaxy smartphone
series,” the director said.
Samsung has yet to prove its
“creative” innovation, which means the creation of a new product or a market
segment that hasn’t existed before, according to
Fitch.
However, Lim admitted Samsung has room to become a
“true innovator” considering the company’s strength in its robust cash
generation.
“Despite prowess in manufacturing technology,
Samsung’s success story has been largely based on excellence in innovating to
improve products already on the market. In that regard, Samsung still has room
for improvement to be labeled as a true innovator, although if we review all of
the global consumer technology successes of the last decade, the overwhelming
majority would be developments based on existing products,” the director
said.
Fitch praised Samsung’s proven ability to generate
more cash and the agency attributed that strength to Samsung’s strong position
in the mobile handset segment along with other businesses, which provide
diversification.
“Samsung’s success enabled it to generate
large amounts of cash _ 2012 cash flow from operations was $35 billion _ which
it is using to invest in research projects. This investment should enable
Samsung to remain at the leading edge of technology for all of its major
business units, which in turn should result in high margins and strong cash flow
compared with its regional competitors,” it
said.
Over-reliance on Google Android software, heavy
reliance on its handset division and the inability to create a whole-new product
category based on software were cited as the main weaknesses that Samsung should
improve on.
“Samsung does not enjoy the same level of
competitiveness when it comes to software technology, or possess the ability to
create a new product category, both of which have been core strengths of some of
other leading companies such as Apple,” it said.
Samsung
Electronics is the world’s top manufacturer of TVs and is also the top supplier
in display panels and semiconductors. Lim said it’s worth noting that the
company’s handset division accounted for 74 percent of the entire operating
profit during the first three months of this year.
Lim said
this reliance could become a weakness should Samsung Electronics lose its
position in the market. He noted that Apple’s possible launch of low-end
iPhones, if it materializes, will erode some of Samsung’s market position in
emerging markets. “Samsung’s over-reliance on the Android platform due to the
lack of a competitive operating system of its own clearly reflects this relative
weakness. This maybe a threat should competitors catch up in hardware technology
or should industry hardware competence reach a common level and product
differentiation is driven by competition in software offerings,” the agency
said.
Lim said the agency, which rates Samsung at A plus
with an outlook of “stable,” the highest among Fitch’s Asia-Pacific portfolio of
rated technology firms, says it’s highly unlikely that Fitch would upgrade
Samsung Electronics in the medium term.
“Despite its strong
performance, we believe that Samsung’s significant exposure to macro-economic
cycles, volatility risk and reliance on relatively fickle, fast-moving,
investment-intensive markets is inconsistent with an AA category rating and
therefore we are unlikely to upgrade Samsung in the medium
term.”
Lim continued; “Samsung’s A+ rating is clearly
supported by its technological leadership, dominant market positions, and some
diversification offered by non-handset businesses. But the volatility inherent
in its core operations, the cyclicality of its semiconductor and display panel
businesses, as well as the rapidly changing fortunes of global handset
manufacturers, remains a significant risk that is not commensurate with an AA
category rating.”
On a related note, he also confirmed that
it won’t rate Samsung’s biggest smartphone rival Apple above
A+.
Samsung has been quick to boost spending on large scale
marketing campaigns impressed by the raised brand awareness, making it possible
to become a marketing-driven firm. But Lim disagreed.
“We do
not believe the company will become a marketing-driven firm shifting its
strategic focus away from product competitiveness. We agree that the marketing
is an integral part of operations to manage global market share but it will not
be effective without leading products.”
He added the agency
has acknowledged that Samsung’s marketing strategy transformed the brand over
the last five years. “The fall of Nokia, Blackberry and the Japanese consumer
technology giants illustrates that strong brands can struggle if they fail to
develop technology-leading, desirable products.”
The impact
of the ongoing legal battle with Apple on Samsung should be “short-lived” as the
Cupertino-based outfit is already cutting its orders for components to be used
in i-devices from Samsung.
“Fitch hasn’t seen any
significant negative impact on Samsung’s financial profile as its internal
demand has grown steadily. Apple will continue to source some application
processors from Samsung to ensure adequate quality and stable supply. Samsung
should be able to allocate more capacity to meet increasing internal demand,
which should mitigate the impact of lower sales to Apple,” Lim
said.
Mentioning a recent study by InterBrand that ranked
Samsung as one of the “global top 10” corporate brand, Lim said Samsung’s brand
recognition has significantly improved in the past couple of years in both
developed and emerging markets due to a clear marketing
message.
“We also believe that its heated battle against
Apple for the smartphone leadership position, including the legal disputes, has
helped consumers become more aware of Samsung products’ features. Its surge in
the global smartphone market share as the largest seller, along with its leading
position in other major businesses, demonstrates its strong brand power across
regions,” he said.
“Samsung may close the gap with its
rivals but technology companies’ brand value can be volatile and very dependent
on possessing market-leading products.”
Samsung’s brand
value last year was estimated at $33 billion by InterBrand, which is still
behind other technology majors. Apple was the top with $77 billion, followed by
IBM, Google, Microsoft and Intel at $76 billion, $70 billion, $58 billion and
$40 billion.