Smartphone profitability: Why you can’t compare Apple to Samsung

Apple and Samsung are two of the fiercest competitors in the consumer electronics market today.

Both companies and especially their flagship products, the iPhone 5s and the Galaxy S4, have very large, loyal fan bases.

It’s not usual for either side – not to mention the multitude of fan sites and blogs that cover them – to grasp at any convenient facts or figures available to claim an advantage to one side or the other in the marketplace.

It therefore come as little surprise, as both companies posted their quarterly results, for some to try to use them to claim superiority for one side over the other.

First, Samsung revealed a 26% year-on-year jump in quarterly profits, with net profits jumping to 8.26 trillion won ($8 billion) for the quarter, up from 6.56 trillion ($6.4 billion) a year earlier.

A day later, Apple revealed its net profits slipped from $US8.2 billion to $US7.5 billion as the company’s gross margin dropped from 40% to 37%.

However, comparing these numbers at face value is likely to be an exercise in futility – and here’s why.

South Korea’s national economy is dominated by a series of highly integrated diversified business conglomerates known as the “chaebol” (roughly translating as “wealth factions”).

In Australia, having diversified conglomerates went out of fashion in the ‘80s, with Mayne Nickless, Pacific Dunlop, Alan Bond and the late Christopher Skase.

In South Korea, however, highly vertically and horizontally integrated business empires are the norm, rather than the exception. The best known of the chaebol are Samsung, Hyundai, LG, SK Group and – before the ‘90s Asian Financial Crisis – Daewoo.

Samsung doesn’t just manufacture your smartphone. It assembles your smartphone. Depending on which model you use, it manufactures the processor and memory chips that power it. And the OLED display it uses. And the chemicals used in the production process. One of its many divisions probably had a hand in manufacturing the production line equipment or constructing the factory.

Samsung is the world’s second largest maker of computer chips after Intel. It’s also the world’s second biggest builder of ships.

When it comes to creating smartphones, Apple’s focus is far narrower. While it designs smartphones and their software, many of the other stages of production are left to other companies.

Foxconn, for example, does the assembly work. Apple does not own its own chip foundries, battery production firms, a display factory – or for that matter a shipping company.

While it’s easy to tell how much the iPhone contributes to Apple’s bottom line, figuring out how profitable Samsung’s smartphone business is poses a range of problems.

For example, when one wholly owned subsidiary sells components to another, whether that transaction happens at cost price or market rates could be seen as a question of internal accounting. The answer could potentially be determined by the tax code or government subsidies.

Likewise, should the value of a smartphone sale to Samsung be limited to just looking at the company’s mobile division, or the total earnings across the group?

Looking at the quarterly results of Apple and Samsung might be interesting. But the very different business structures of the two tech giants means it’s ultimately an exercise in futility.


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