Is Samsung Electronics’ failure in the Chinese market just superficial?

During the National Day holiday, South Korean giant Samsung Electronics announced the closure of its last smartphone factory in China. Although Samsung's factory closures in China have not been uncommon in the past two years, the closure of the last factory is still considered a "Waterloo" for the former giant in China.

Another piece of evidence of Samsung's decline is its financial report data. On October 8, Samsung Electronics released its third-quarter 2019 financial report, with revenue of 62 trillion won and operating profit of 7.7 trillion won, down more than 56% from the same period last year. This is believed to be due to the shrinking Chinese market.

However, there is another dimension to consider when evaluating a company's profitability, which is the profit margin of the ratio of profit to revenue. According to its third-quarter financial report, although net profit fell sharply year-on-year, the profit margin remained at 12.4%. In comparison, in 2018, Huawei's profit margin was 8.2%, Xiaomi's was 4.9%, and the overall profit margin of A-share listed companies was 7.7%.

If we go back to the so-called Samsung's failure in China theory, we will find that this is still superficial. The increasing labor costs in China are an indisputable reality. For manufacturing giants that need low labor costs to maintain quantitative production, it is reasonable to use the lower-cost Southeast Asian region as a new option. Taking the closure of Samsung's Tianjin factory, which has previously sparked heated discussions, as an example, we can see that although the labor-intensive factory has indeed closed, it does not mean that Samsung has left China's manufacturing. On the contrary, Samsung has chosen to greatly increase its investment in high-tech industries in Tianjin.

Samsung from South Korea is not the first manufacturing giant to be labeled as "failed in China". In March of this year, there was news that Sony's mobile phone factory in Beijing would be moved to Thailand. In recent years, LG, Nikon, Olympus, Panasonic and other Japanese and Korean manufacturing companies have performed poorly in China from the outside world's perspective. Most of them have long lost the star halo of the 1980s and 1990s. Compared with the new companies born in China in the past 30 years, the image of these brands shows a trend of decline. Midea's acquisition of Toshiba's refrigerator and washing machine business and Foxconn's acquisition of Sharp, Chinese companies taking over these old Japanese and Korean companies, further deepened people's imagination of their collective failure in China.

In terms of C-end business, both Samsung, a representative of Korean capital, and Sony, a representative of Japanese capital, have performed poorly in the past two years. Due to competition from local brands such as Huawei and Xiaomi, Samsung's share of the Chinese smartphone market has dropped from 15% in 2013 to less than 1%.

However, a reality that we have overlooked is that these old giants that seem to have withdrawn from front-line businesses have not really entered a downward life cycle as we imagined. On the contrary, in more advanced and cutting-edge fields, these companies still have core technologies.

Taking Samsung as an example, despite a sharp decline in net profit, this has not affected its continued growth in R&D investment: According to the "EU Industrial R&D Investment Ranking 2018" previously released by the EU, Samsung ranked first in R&D investment, and Google 's parent company Alphabet ranked second. Huawei, which is already the Chinese company with the largest R&D investment, ranked only fifth.

If profit margins represent a company's present, then R&D investment represents a company's future. As a lesson from history, more than a decade ago, domestic mobile phone brands represented by Bird also defeated Nokia and Motorola through price wars, but ended up going bankrupt due to the lack of core technology. In contrast, today, although our local brands have achieved good results in market share, they still do not have the core voice in technology.

From this point of view, the truth about the survival of Samsung and even those old giants in Japan and South Korea that seem to be in a bad situation may not be what we imagine. To a certain extent, we can even pessimistically say that while we are still smugly mocking those old giant companies for falling into a big defeat, they have already entered a new no-man's land of exploration that the public cannot predict. Understanding this may be more valuable than blindly asserting that "Samsung" is losing in China.