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Drained by markets, Samsung plugs into software

No one can accuse South Korean billionaire Lee Kun-Hee of resting on his celebrated company's laurels. In his annual New Year's address to the troops, the chairman of Samsung Electronics Co. exhorted employees to shed old practices, move away from a long-time focus on hardware and work non-stop to develop its own innovative strategies and business models.

"To be a leader in an environment that lacks certainty and visibility, we must go beyond the boundaries of current markets and technologies," Mr. Lee declared. "It is therefore time to change once again."

It's a message he has delivered before. But it is taking on more urgency as Samsung battles to retain market share and shore up faltering margins in the race to create ever-smarter smartphones, semiconductors, tablets, TVs and other consumer electronics gear.

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Mr. Lee, who turns 72 on Jan. 9, appeared frail. But it is the recent weaknesses exhibited by South Korea's biggest conglomerate that have investors concerned.

Despite three quarters of record-breaking profits in 2013, Samsung's stock fell 9.9 per cent, its first such downbeat performance in five years. And it has absorbed a further drubbing in the first trading days of 2014, hitting its lowest level since its chairman was hospitalized with pneumonia in August. The company's market value plunged nearly $9-billion (U.S.) in Thursday's trading alone.

A rising won is one concern for Samsung and other major South Korean exporters. The currency climbed to a five-year high against the Japanese yen before weakening Friday when finance officials signalled their readiness to intervene to bolster the flagging currency.

But far bigger rain clouds have begun darkening Samsung's sunny outlook.

Nobody peddles more mobile phones – close to 30 per cent of the world total – accounting for more than half of Samsung's operating profits in the record third quarter. But prices keep declining, and unlike its leading global rivals, Samsung remains dependent on a competitor, Google, for the Android software to run the phones.

Meanwhile, Google's Motorola Mobility arm has just slashed prices on its leading consumer model, putting it nearly 40 per cent below the comparable Samsung product in some markets. And the South Korean company faces similar pricing pressures at the cheaper end of the spectrum from newly aggressive Chinese competitors. Oh yes, and those bruising – and so far losing – patent wars with Apple continue around the globe.

When Samsung provides its preliminary fourth-quarter results Tuesday, it is expected to report that operating profit rose by just over 9 per cent from a year earlier, well below the 26 per cent gain in the third quarter.

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The company has garnered headlines with its 110-inch ultra-HD TV, which will retail for a modest $150,000 or so. And it is expected to unveil its latest version of a smartphone with a curved screen at the gadget-lovers paradise in Las Vegas this week, formally known as the International Consumer Electronics Show. The curved-screen phones look cool. And Samsung claims to have 10 orders already for the huge TVs from buyers in the Middle East, who don't seem to care that there's almost no content yet for the format.

That, in fact, is Samsung's biggest problem. It makes great hardware. But as other electronics players have shown, you can't afford to ignore software. Google and Microsoft arrived at their dominant market positions through software, not hardware; even Apple's successful devices are inseparable from their operating systems. Fortunately, Mr. Lee and his family brain trust are learning. That's why he warned staff that Samsung has to ditch "business models and strategies from five, ten years ago." Which means making software development, and the development of an Apple-like software ecosystem, a central plank of its vast R&D spending. "Research and development … should work around the clock, non-stop."

Samsung has not been known as a great innovator. Until that changes, its reasonably valued stock is likely to continue to underperform, no matter how many handsets and giant TVs the company peddles.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More


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