Samsung, LG see opportunity in emerging markets: But can they play in low end?

In the world of wireless handset vendors, there’s an increasing divide between the haves and the have-nots.
In this case, the having or not-having doesn’t revolve around bling, but scale. Nokia Corp. and Motorola Inc. have the scale to invest in research and development for new technology and design. More importantly, scale also allows the development of handset platforms that enable the haves to address various market segments at a manageable cost-the coveted scale that makes Nokia and Motorola global players.
Platform manufacturing quickly repays capital investments, providing the market’s two giants with the ability to address emerging markets with low-cost handsets sporting desirable features. Vendors without a well-honed platform approach are challenged to mount a credible campaign to penetrate the emerging markets that produce the volume shipments that translate into market share.
Thus, increasingly, the haves is a club with two players-Nokia and Motorola-and the have-nots include everyone else outside the club’s gated environs.
Thus when Samsung Electronics Co. Ltd.’s handset division president, Lee Ki Tae, recently told a Dow Jones reporter that Samsung would grow market share by increasing the proportion of sub-$60 handsets destined for emerging markets next year-to 10 or 15 percent of total shipments-analysts could be forgiven for puzzlement.
“It’s all about scale,” said Bill Morelli, wireless analyst with IMS Research. “Nokia and Motorola can leverage their strength to produce a large number of phones that use newer technology, based on platforms on which they can add or subtract features, depending on the market they’re selling to.”
LG Electronics Co. Ltd. made a similar announcement recently, Morelli said.
“That’s puzzling,” the analyst said, “because they’ve just gotten recognition for putting out a more technically advanced, higher-end feature phone. Taking on a two-pronged approach seems odd, particularly given that Samsung and LG don’t have the economies of scale that Nokia and Motorola do. Samsung and LG may be forced to use older technology on which they’ve paid the capital costs-that doesn’t give them an edge in the marketplace.
In terms of market share, the big movement in the business (apart from Sony Ericsson Mobile Communications’ impressive, albeit modest, gains) is the way Nokia and Motorola have pulled away from the pack. According to market analysis by Strategy Analytics, the two market leaders together will claim about 56 percent of the global market this year, up fully 10 percent from two years ago. At Motorola’s investor day in July, the American handset giant said that the top two vendors are roughly at parity in their share of developed markets. The big disparity between them-Nokia will claim 34 percent market share and Motorola will claim 22 percent this year-comes in Nokia’s advantage in emerging markets, where Motorola is a contender. Moreover, Motorola has packed every technical advancement available at a manageable cost into its just-launched Motofone, designed to provide style and functionality under adverse conditions in emerging markets.
The Samsung executive’s remarks-which the famously reticent South Korean company declined to confirm, deny or acknowledge as a policy statement-acquired a level of nuance when an anonymous Samsung source told The Korea Times that Samsung’s strategy will be to target emerging markets not yet dominated by Nokia and Motorola. The company plans to establish brand loyalty for the inevitable handset replacement cycle. This, essentially, is the strategy being pursued by Nokia and Motorola in the world’s very largest developing nations such as India and China.
According to Morelli’s view, Samsung may have the price-and-feature-set correct, in that sub-$60 in today’s environment can provide what he calls the “base-plus-one” offering of a phone with one advanced feature, whether that’s a camera, FM radio or gaming functionality.
“What we’ve seen time and time again in economically challenged markets is that population wants phones with desirable features,” Morelli said. “Mobile phones are status symbols in emerging markets, just as in developed countries.”
Samsung also has relatively high average selling prices in its corner, a function in part of its focus on mid- to high-tier handsets. High ASPs lay the groundwork for solid profit margins, a factor that might erode for Samsung as it attempts to expand its portfolio at the lower end.
But Samsung and LG aren’t just competing with the advantages of scale wielded by larger rivals Nokia and Motorola in emerging markets; they’re facing an environment with a thriving gray market for low-cost, knock-off handsets, Morelli said.
“I think they’re going to have a tough go of it,” the analyst concluded.