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As profit falls, Samsung ponders tactics vs. Chinese rivals

A woman uses her smart phone at the Samsung Electronics Co. showroom of its headquarters in Seoul, South Korea, Thursday, Dec. 12, 2013. A Seoul court rejected Samsung's claim that iPhone and iPad models violated three of its patents, another setback for the South Korean electronics giant in a global battle with Apple over rights to technologies that power smartphones and tablets. (AP Photo/Ahn Young-joon)

Ahn Young-joon/Associated Press/File

A woman uses her smart phone at the Samsung Electronics Co. showroom of its headquarters in Seoul, South Korea, Thursday, Dec. 12, 2013. A Seoul court rejected Samsung's claim that iPhone and iPad models violated three of its patents, another setback for the South Korean electronics giant in a global battle with Apple over rights to technologies that power smartphones and tablets. (AP Photo/Ahn Young-joon)

NEW YORK — What goes up must come down. That principle seems to be coming true for Samsung Electronics, the world’s top cellphone maker, whose profit is falling, in part because of pressure from its price-cutting rivals in China.

Samsung, a South Korean company, said last week that profit in the last quarter was expected to be 25 percent lower than in the period a year earlier.

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Among other factors, Samsung blamed intense competition from Chinese manufacturers. Companies like Xiaomi and Huawei have quickly increased their market share in China during the past year, with the help of handsets they sell at a break-even price.

Chinese companies have swooped into many other industries, including personal computers and solar energy, to produce products less expensively. Traditionally, this strategy has been used after a market matures, at which point the Chinese companies find a way to make and sell products nearly at cost, building market share and eating into the profits of the incumbents.

Investors and analysts wonder whether Samsung will choose to cut prices or push innovation harder to fight back.

“How does Samsung compete against players that price at cost?” Adnaan Ahmad, an analyst for Berenberg Bank in London, wrote in a research note. “Investors should question where the growth is.”

Samsung’s response could reshape the entire smartphone market.

If Samsung aggressively cuts prices to improve sales, it could pressure competitors like Nokia, HTC, and Motorola Mobility to lower prices, too. That could lead to lower-quality products or even slimmer margins for the smartphone business as a whole.

In many recent financial quarters, Samsung and Apple were already the only companies showing a profit from smartphones.

The low-end market is not Samsung’s only worry, though. At the high end, its main rival is Apple, which has continued to improve iPhone sales. T. Michael Walkley, a Canaccord Genuity analyst, said that Apple could find even more success if it releases phones with larger screens this year, as it is widely expected to do.

Samsung has shown no signs that it wants to go down the price-cutting path. It declined to make an executive available for an interview, but in a written statement the company said it would continue to compete through a diverse set of products that fulfill consumer needs.

“We also will strengthen our product competitiveness by reinforcing our premium brand reputation, powerful product lineup, and cutting-edge technology,” the company said.

In other words, Samsung, at least for now, plans to keep doing what it is already doing: offering a large variety of mobile products at a wide range of prices.

But it remains unclear whether that will be enough.

In the end, Ahmad said, the company will probably resort to cutting its prices, sacrificing profit margins even more.

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