Samsung Downgrades Its 2016 Profit Outlook. But How Did It Come To This? Here Are Possible Reasons

When reports of Samsung’s Galaxy replacement Note 7 catching fire started surfacing last week, the company went ahead to still give us an upbeat $7b profit expectation. A lot has happened since then though and one of them is that the South Korean electronics giant has now decided to permanently halt production of its latest gadget. As at yesterday, Samsung shares fell 8 percent Tuesday, wiping out about $17 billion of market value and it doesn’t stop there.

Samsung is now downgrading that $7b expectation to 5.2 trillion won ($4.63 billion) as the loss from the decision to pull the plug on Note 7 continues to unfold before our eyes.

According to Bloomberg, profit is projected to be 5.2 trillion won ($4.63 billion) instead of 7.8 trillion won in the three months ended September, the company said in a regulatory statement Wednesday. That effectively erases all the mobile business profit that analysts had been projecting. Revenue will be 47 trillion won instead of 49 trillion won…. Samsung and Vice Chairman Jay Y. Lee are struggling to contain fallout from the troubled Note 7 phones, which were overheating and catching fire even after a recall that was supposed to fix the problem. The Suwon-based company said Tuesday it would kill this generation of the high-end phone and then cut third-quarter guidance today, less than a week after it was first issued.

This is the first time Samsung could be placing a price tag on the fiasco itself even as it grapples with future earnings which may be hit as a result of this.

Just how does this happen to a company of Samsung’s magnitude?

Leadership: this is an area pundits think Samsung should at least focus on. Quoting the Bloomberg report,….Lee Kun-hee, the family patriarch, remains chairman even though he suffered a heart attack more than two years ago and hasn’t been back at the company since. His son, Jay Y., is heir apparent but he hasn’t been able to take his father’s title because of Korean custom. Can you think of a western major tech company that operates this kind of structure? It’s quite difficult and the role of effective leadership cannot be overstated when a company begins to operate outside its turf. From Apple to Yahoo, leadership has either been their success or failure stories over time and it may be time for Samsung to take a look at this.

Secrecy: Samsung has been accused of secrecy in the past. Often times when things happen at Samsung, you really don’t know who to point fingers to. See how long it took them to officially respond to reports of replacement Note 7 phones catching fire. It was after the fifth report in the US that they reacted the next day by asking users to stop using the phone. Networks in the US and Australia had decided to hit the brakes on the Note 7 before anyone heard anything official from Samsung. It all comes down to company culture and frankly speaking, it just doesn’t work the same way around the world. Samsung

Haste to beat Apple: This may seem irrelevant but is it really? Samsung has never hidden the fast that it wants to beat Apple as frankly what we can call its game. This has resulted in multiple lawsuits over the years between the American and South Koran companies. From patent violations to designs, both companies have accused each other of virtually everything and there’s even a case at the US Supreme Court even as we speak. Perhaps the best news came for Samsung when analysts started predicting towards the end of last year that the iPhone may have peaked and found a real competition in Samsung. It even got better when IDC released its smartphone shipment report for the second quarter of 2016 which showed Samsung with a dominant lead over Apple in that quarter. In fact the report showed that Apple actually lost a lot of ground in the same period. Then came the best of all for Samsung when on August 2^nd, it unveiled a device many called the best Android device ever; the Galaxy Note 7 and yes, you may have to agree with the people who drew that conclusion when you see the features of the phone for yourself. From security to state of the art functionalities, the Note 7 was the real deal. Now imagine if that phone wasn’t catching fire, I personally don’t think the iPhone 7 and maybe Google’s Pixel should have high expectations with respect to market share and individual units sold. But Samsung blew it and in a bid to maintain its lead, it hastily recalled 2.5 million sold units and within 5 weeks, you can say Samsung launched, recalled and relaunched a device that was once called the best Android device ever. Why didn’t they take their time to meet standards this time? One reason might be that it was in a haste to catch up to the iPhone 7 and Pixel phones especially as the holiday season kick in. You can dispute this, but I still can’t understand how a company that was comfortable leading the smartphone world in terms of shipment would fall into a mess like this.

Shortage of Focus: I know Samsung Mobile is a separate division within the Samsung Electronics group but what if this is the problem? I remember a chat between the late Apple CEO Steve Jobs and Nike CEO Mark Parker where the Apple genius told perhaps the leader of one of the most successful sport brands in the world to get rid of the crappy stuff. Parke in asking his friend for business tips was told this… “Well, just one thing,” said Jobs. “Nike makes some of the best products in the world. Products that you lust after. But you also make a lot of crap. Just get rid of the crappy stuff and focus on the good stuff. “Jobs was “absolutely right,” Parker admitted, adding that Nike “had to edit” when making business decisions. One of the results of that conversation the enduring partnership between Apple and Nike which has even lead to Apple recently branding its Apple Watch for Nike. According to Bloomberg, Samsung Electronics generates more than half of its revenue from businesses other than the mobile unit. Sales of semiconductors, glass panels, appliances and other products are projected to keep the company profitable in the third quarter and it’s estimated to make more than $20 billion for the year. As companies like HP, Symantec, eBay/PayPal and others have done in the last two year, it may be time to spin off the mobile division from the parent structure with an independent leadership. Even as Samsung maintains its lead in smartphone shipments, it still falls far behind when it comes to market value and services overall. Why’s Samsung not also dominating in services like streaming, cloud services, or its own software? The new mobile division could use some more streamlined focus that could see it investing more in Tizen (its Linux powered operating system). While iPhone sales may be cooling, Apple services are making up for lost grounds. Revenue from Apple’s service stood at $5.99b as at April this year which represents a 20 per cent year on year increase. “Apple Pay is growing at a tremendous rate,” said Tim Cook. With this, Services represent Apple’s second largest revenue source just behind the iPhone but above the Mac and iPad. The point is that, Samsung Electronics could benefit more from an independent mobile division which would allow better running of the unit. Perhaps this mess could have been avoided.