One of the biggest stories in tech this year is the sudden trouble at Samsung.
It has now reported three-straight quarters of profit declines. Last quarter its smartphone shipments were down, and its share of the market tanked.
Samsung is getting hammered by Chinese smartphone companies like Xiaomi, Huawei, Lenovo, and ZTE. Those companies are selling Android-based smartphones for less than $200 that are good enough for consumers in developing markets.
Today, a former Samsung employee turned analyst at Bernstein Research, Marc Newman, has a note on how Samsung can get its mojo back.
"A drastic change in smartphone strategy is required," says Newman. "The harsh reality is that Samsung is losing the low-end smartphone battle due to uncompetitive prices and specs and must be more aggressive to prevent losing share."
Newman says Samsung has been protecting its margins, and that's a mistake. He thinks Samsung should go low-end and clobber the Chinese competitors before its too late.
"Protecting margins in the low-end is fruitless as it just hands share to Chinese competitors and eventually drives margins down anyway due to less scale advantage. Samsung must react now before it is too late," says Newman.
Because Samsung is the most vertically-integrated company in the world, Newman says it has an advantage over the Chinese competition. (Samsung makes chips, displays, etc.)
In Newman's scenario, Samsung starts pumping out super cheap phones to crush the Chinese phone makers. Those cheap phones take Samsung's smartphone margins to 15.5% from 23%. However, they force the Chinese companies to go even lower with their prices, taking their margins from the single digits to negative. This forces them to either go out of business or consolidate.
It's a risky strategy, but we haven't heard a better alternative. Samsung needs to figure something out.
Here's Newman's chart demonstrating the before and after:
