Motorola's pain is Samsung's gain

By BusinessWeek

Samsung Electronics confronts bad news on many fronts. The South Korean company is facing probes into an alleged bribery scheme, and its money-spinning memory-chip business is in the worst slump in five years.

That's why Samsung executives must be thrilled to have their mobile-phone business, where the future appears upbeat.

The numbers tell the story. Samsung surpassed struggling Motorola (MOT, news, msgs) in 2007 to become the world's second-biggest handset maker after Nokia (NOK, news, msgs).

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Samsung's global market share is up about 3 percentage points from last year, at 14.5% in the third quarter, compared with Motorola's 13.1%. Samsung has set sales records in every quarter this year, with the 115 million phones sold in the January-September period exceeding the 114 million sold during all of last year.

And Samsung believes its record-breaking run is just beginning. The company expects to sell 160 million handsets this year, a 40% improvement from 2006. Executives expect sales of 200 million mobile phones next year and a growth pace that's about double that of the rest of the industry.

"The growth momentum is accelerating, and there's no reversal in the trend," Executive Vice-President Chu Woo Sik says.

One big question is whether Motorola can regain the momentum it had after the Razr's sensational debut in 2004. Responsibility for that task falls to Greg Brown, the company's president and chief operating officer, who will succeed Ed Zander as CEO on Jan. 1.

Low end of the market

One reason for Samsung's confidence is the company's new emphasis on the fast-growing market for cheap handsets. That market has been a priority of Choi Gee Sung, a marketing expert who this year took over as Samsung's telecom chief from Lee Ki Tae, a former engineer.

The strategy shows that Samsung grasps just how difficult it is to create a global megahit like the Razr. It's also a sign that Samsung has learned from its mistakes that caused it to lose market share to Nokia and Motorola, which were faster at embracing the low end of the handset market. Samsung's global share fell from 12.7% in 2004 to 11.6% in 2006.

"Now we are really tracking market data and being driven much more by the numbers in the market," says David Steel, Samsung's vice president for marketing strategy.

Cheap cell phones for China, India and other emerging markets are where the biggest growth opportunities -- and challenges -- lie for handset makers.

Samsung made the transition by drawing on the experience Choi and other executives had gained in selling flat-panel televisions. There, they made big strides by putting more emphasis on design and surveying customers to find out which TV features were necessary and which ones could go.

Taking a similar approach in handsets, the company rolled out basic phones costing around $40 as well as affordable, Internet-enabled handsets. The result: In the first nine months of this year, the company sold 46 million units in emerging markets, up 12% from 41 million in all of 2006. Profit margins for the mobile-phone business are expected to top 10% this year, from 9.5% last year.

Taking market share in US, too

Another Choi initiative has been to revamp the supply chain. He changed it to provide real-time information on which products are selling and where, so marketers could redirect shipments to the markets where demand is strongest.

Company officials figure productivity has improved by 15%, and the company's factories are operating at 90% of their capacity, up from 78% last year. Handset inventory has dropped to just three weeks, a 35% improvement from last year.

"The improved visibility has quickened our decision-making process," Steel says.

That helped Samsung double its share of the Indian market from 3% in January to 6.3% in October. Still, the company has a lot of catching up to do if it wants to challenge Nokia's 76.4% share in India.

The company is also benefiting from the cell-phone product-management shift in other markets. Samsung's share of the U.S. market increased by 3.3 percentage points to 18.3% in the third quarter. It trailed Motorola's 32.6% share but beat Nokia's 10.7%, according to researcher Strategy Analytics.

Samsung is also closing the gap in Europe, and it even rose to No. 1 in France in October, with a 33.9% share compared with Nokia's 22.6%. The company chalked up gains in Britain, Germany and Italy this year as well.

If Choi keeps going, Samsung's challenge of Nokia's dominance might not be far off.

This article was reported and written by Moon Ihlwan for BusinessWeek.