Samsung and LG Take Aim at Nokia

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The Koreans—along with many industry watchers—expect their party to continue for the time being. Thomas Kang, senior analyst at Strategy Analytics, figures the Koreans could widen their presence in emerging markets now dominated by Nokia, thanks to a weak Korean currency that allows Samsung and LG to cut prices with limited impact on profits. The won has lost its value against the dollar by nearly a third in the past year.

Profit Margins Under Pressure

A big challenge comes if the currency swings back upward. Lee at Samsung says her company won't buy market share at the expense of profits. But analysts argue that profitability needs to be compromised for any phonemakers aggressively trying to penetrate Nokia's strongholds in China, India, and other fast-growing emerging markets, until they achieve economies of scale. "I don't think Samsung could enjoy respectable profits in fiercely competitive emerging markets until its global market share reaches 25%," reckons Kang at Strategy Analytics. "I'm quite confident Samsung will do fine this year, but it could face dangers next year when the won is expected to get stronger." Analysts caution that the Koreans must heed what happened to Motorola, which started to falter after it lost its price war with Nokia in low-end markets.

Indeed, Samsung recently had a foretaste of how quickly business can turn sour in the handset industry. In the fourth quarter of 2008, when Samsung lowered prices and increased marketing expenses in the face of declining demand, its telecom operating profit plunged 74% year-on-year, to $135 million, while revenues rose 38%, to $8.2 billion. The unit's profit margin plunged to 1.6%, down from 8.9% a year earlier and below the company's target of 10%. LG, which has been gearing up a campaign to end its poor presence in emerging markets, also saw its handset margin drop to 5.2% in the fourth quarter, from 11.5% in the previous three months.

The Koreans aren't deterred. Samsung plans to release some 20 smartphones to challenge the iPhone and Research In Motion's (RIMM) BlackBerry series, including a phone using the Google-backed (GOOG) Android operating system. In mature markets, Samsung execs say they want to expand the company's success in Britain and the U.S., where it edged past Nokia and Motorola, respectively, in the latter half of 2008. In emerging markets, "we will have to continue sowing seed with patience until we can reap the fruits," says Lee. LG, for its part, has recently signed a five-year deal costing tens of millions of dollars annually to sponsor Formula One, underlining its redoubled marketing campaign. The big question is, can the Koreans reap some reward before they're caught in a price war that could wipe out profits?

Moon is BusinessWeek's Seoul bureau chief.