A look inside Samung’s new high-profile smartphone, the Galaxy S4, shows that the South Korean electronics giant is using numerous components produced by its various internally owned subsidiaries.
A teardown analysis conducted by the market research firm IHS, due to be released tomorrow, has pegged Samsung’s cost of materials and manufacturing to produce the U.S. version of the 32 gigabyte model of the S4 at slightly above $237 per unit. Without a contract subsidy, the entry-level 16GB version of the phone costs $639 when sold by AT&T Wireless.
The cost is somewhat higher than that of Apple’s iPhone 5, the base model of which costs $205 to build for a 16GB version, according to an IHS analysis conducted last fall. It’s also well above the cost of Nokia’s Lumia 900, which costs $209 to build, IHS found at the time.
The S4 cost is not far below the cost of Samsung’s larger Galaxy Note tablet, the cost of which IHS estimated last year to be $270.
Most phone manufacturers source their components from many different suppliers. But Samsung, a large, diversified manufacturer of many different kinds of electronic components, has used its significant capabilities to supply itself with many of the key parts inside most versions of the S4 phone sold around the world.
“Samsung’s strength is this ability to in-source to itself,” IHS analyst Vincent Leung said in an interview. “They just keep adding to the list of components that they can supply to themselves.”
One key component that Samsung did not supply to itself for versions of the phone being sold in the U.S. was the main applications processor. U.S. versions of the phone contain a Snapdragon processor from Qualcomm, which contributes $20 to the overall cost.
Versions of the phone sold in Korea and other markets around the world contain a Samsung-made chip called the Exynos 5 Octa that costs $28. Samsung is known to be manufacturing at least four variations of the phone for different market geographies around the world, including at least two being sold in the U.S., one going to AT&T and T-Mobile, and another going to Verizon Wireless and Sprint, said Andrew Rassweiler, another IHS analyst.
“Samsung is demonstrating its ability to suit the tastes of carriers in different regions of the world,” Rassweiler said. “It comes down to what the market is willing to spend on the features offered.”
The fact that Samsung used the Qualcomm-made chip is a testament to the U.S. chipmaker’s prowess. “Even with all the vertical integration it’s doing, it’s not like Samsung has given up on Qualcomm,” Rassweiler said.
One interesting difference between the U.S. and Korean versions resulted from the difference in the choice of processor. U.S. versions of the phone contain an image-processing chip made by Japan’s Fujitsu that added $1.50 to the total cost. Leung says that in the Korean versions, some of the image processing is handed off to Samsung’s Exynos chip.
Samsung also supplied the flash memory used to store data on the device. IHS estimates that 16GB of memory added $28 to the cost of the device.
The Korean giant also supplied itself with a display and touchscreen parts, which added $75 to the cost of components. The combined display package also includes Gorilla Glass, a strong glass material made by U.S.-based Corning.
Samsung is also thought to have supplied itself with several unlabeled components, including the camera module and some wireless baseband chips.
A few non-Samsung suppliers include Broadcom, which provided Bluetooth and Wi-Fi chips; Maxim, which provided a power-management chip; and Triquint Semiconductor, which provided some wireless chips.
The share slide of more than 6 per cent comes after it recently introduced two stripped-down versions of the S4, fanning worries that profit margins for its mobile business will suffer. It also follows a report that arch-rival Apple will begin a trade-in program for iPhones.
The new stripped-down S4 models will help it widen its lead in the global smartphone market and fend off Chinese competitors, but some fear that the South Korean tech giant is trading in profits for volume.
Analysts say sales momentum for the high-end version of the S4, which became its fastest selling smartphone since its launch in late April, has slowed.
"Sales of high-end handsets are lagging behind expectations, while low- to mid-end handsets are selling briskly worldwide," said Kim Young-chan, an analyst at Shinhan Investment Corp.
"As the portion of low- to mid-range handsets is expected to increase in Samsung's overall mobile phone business, this has also sparked concerns about thinning margins and lower growth."
Apple angst
Apple will start a program this month to allow users to trade their older iPhones for the newest model, Bloomberg news agency cited people familiar with the plan as saying, a first for the company as it prepares to introduce a new version of the smartphone.
"With Apple widely expected to announce an older iPhone trade-in program and also a new cheaper iPhone, overall growth prospects for (Samsung's) smartphone business have dimmed," said Kim Hyun-yong, an analyst at E*trade Securities.
"Second-quarter results will be solid but we have to see whether the trend can be sustainable going forward."
Shares in Samsung finished down 6.2 per cent at their lowest level in four months, wiping out 14 trillion won of value to bring its market cap to 210.2 trillion won ($188 billion).
It was their biggest daily percentage drop since late August when the stock tumbled more than 7 per cent following a US jury verdict that it infringed on Apple's patents.
Samsung, which represents nearly 20 per cent of the main bourse's market value, helped send the main stock index 1.9 per cent lower, while suppliers of smartphone components were also hammered.
Downgrades
Brokerage downgrades this week included a 4.8 per cent cut in Samsung's price target to 2.0 million won from Woori Securities. It cited weakening profit growth for Samsung's mobile business, which generates around 70 per cent of its total earnings.
It also cut 2013 and 2014 earnings per share forecasts by 9.2 per cent and 11.7 per cent respectively.
JPMorgan slashed its earnings estimates and said monthly orders for the S4 have been cut by 20-30 per cent to 7-8 million from July due to weak demand in Europe and South Korea.
Among smartphone component suppliers taking a battering, camera module maker Partron tumbled 11 per cent, printed circuit board maker Interflex dived 10.6 per cent and camera lens manufacturer Digital Optics shed 12 per cent.
Ratings agency Fitch Ratings also said on Thursday it was not planning to upgrade Samsung's A+ rating in the medium term due to its heavy reliance on the fickle consumer electronics market, in particular handsets.
"Samsung has yet to prove its 'creative' innovation, that is, launching a product or a market segment that has not existed before in addition to prowess in manufacturing technology," Fitch said. ($1 = 1115.8500 Korean won)
