Does Samsung have Apple in a headlock?

SEOUL, South Korea — Koreans like to joke by welcoming foreign visitors to the “Republic of Samsung.”

Among an oligarchy of competitors, South Korea’s largest conglomerate is a ubiquitous presence.

Samsung builds ships, military weapons, bakeries and even operates a theme park. But it’s known abroad chiefly for making smartphones and refrigerators.

Its flagship division, Samsung Electronics, is the world’s largest electronics company by revenue. Total sales reached $179 billion in 2012.

Samsung has competed neck-and-neck with its American competitor Apple for the past three years in a mobile-phone war waged between Galaxy handsets and iPhones.

But now Samsung is edging ahead. During the first quarter of this year, Samsung again overtook Apple as the world’s leading mobile phone seller in terms of revenue, according to Strategy Analytics, a Massachusetts-based consultancy.

Samsung sold smartphones worth $23.6 billion in the first quarter, bringing the Korean company back to the top spot after Apple briefly overtook Samsung in the fourth quarter of 2012.

Although Apple trailed Samsung with sales totaling $22.95 billion in the first quarter, down $7.71 billion from the previous quarter, it has retained the top ranking in profits thanks to its high-end approach.

“The business earnings of the mobile business grew from the previous quarter led by increased sales of smartphone products,” spokesman Ki-yung Nam said. “Especially flagship smartphones such as the Galaxy S III and Galaxy Note II, and by decreased marketing expense due to seasonality.”

At the same time, the popularity of Samsung’s devices is helping prompt users of the Google Android platform they use to download 500 million more apps a month than iPhone users, and Android is set to overtake Apple in the number of apps each offers.

Experts credit Samsung’s edge to a number of factors.

Apple CEO Steve Jobs’s death in October 2011 could be eroding Apple’s celebrity. “One thing Apple had in its favor was a mystique of exclusiveness portrayed in his public appearances,” said Tony Michell, a Seoul-based consultant and author of Samsung and the Battle for Leadership of the Electronics Industry.

Apple phones were more expensive, implying better quality.

But Apple’s decision to sue Samsung on patent infringement accusations in two separate American lawsuits in 2011 and 2012 may have tarnished the brand. “The court cases and associated publicity actually broke this mystique in my view,” Michell said.

A California court ruled in Apple’s favor in August 2011, however Samsung has won rulings in Japan, South Korea and the United Kingdom.

On Thursday, the company also announced it would open a research and development center in Finland in an apparent attempt to take on another competitor, Nokia, on its home turf.

“The question could be posed as what took Samsung so long,” Michell said.

Samsung holds an exalted place in what was recently a poor country that has transformed itself into a technology hub over the past two decades.

The conglomerate’s predecessor started out as a vegetable and rural dried-fish exporter in 1938, when the Korean peninsula was a Japanese colony.

After dictator Park Chung-hee rose to power following the Korean civil war of 1950 to 1953, he directed easy credit to the country’s conglomerates, called chaebol, in an attempt to bring prosperity to his barren backwater, and encouraged them to expand into fields that would drive national development.

However, Samsung only recently became a high-tech champion.

Its chairman Lee Byung-chul founded the electronics division in 1972. It spent the next two decades manufacturing home appliances before moving into low-cost televisions and phones.

“The laboratory reminded me of a dilapidated high-school classroom,” Ira Magaziner, a health-care advisor to Bill Clinton, wrote of his 1979 visit to the Samsung Electronics campus.

After Lee died in 1987, his son, Lee Kun-hee took over the company.

Despite worries that he lacked adequate entrepreneurial spirit, the Japanese-educated new leader transformed Samsung’s global image.

He ordered the company to move away from mass-produced, low-quality items. “Change everything except your wife and kids,” he said in a line company representatives continue to repeat.

In the mid-2000s, Samsung sales overtook those of its main competitor, Sony, and challenged Nokia’s dominance in cellphones.

After Apple proved released the iPhone in 2008, Samsung set to work developing its competitor, the Galaxy S smart phone, released in June 2010.

The company managed to keep up its success despite the 2011 legal battle with Apple. On its home turf, the company also weathered a public outcry in 2008 over the arrest, conviction, and presidential pardon of chairman Lee for tax evasion.

Part of the company’s resilience rests on its diverse business operations. In addition to smartphones, the multinational corporation sells chipsets and parts to Sony, Apple and other competitors.

That arrangement helps insulate Samsung from market fluctuations.

As the world’s largest maker of memory chips, the company holds 10 percent of the global market in system semiconductors, according to the market information provider iSupply.

The question now, analysts say, is whether Samsung can keep up its game, or whether its cutting-edge tendencies will stagnate like Sony’s a decade ago.

Michell, the consultant, believes the bureaucracies of South Korean companies, with their rigid hierarchies, are prone to stifling innovation.

Samsung may be widening its lead for now, he says, but whether it remains competitive will depend on how much it can cut down fat and stay flexible.

 

The article was originally published in PRI’s The World