Samsung, Apple and Vertical Integration

We discussed Apple’s vertical integration thoughts in prior posts. I also did a Forbes column on the subject, looking into the Jobsian mind to cull what’s cookin’ …

The company that is perhaps the best positioned to compete in a vertically integrated convergence device world is Samsung. Let’s look at what’s going on at that camp.

Samsung said yesterday that it would pull out of the laptop market unless it triples its sales and increases its market share from 1.7% to 5.7%. Yesterday proved quite eventful with its CEO Yun Jong Yong retiring. His retirement follows the resignation of Chairman and co-CEO Lee Kun Hee just three weeks before on charges of tax evasion. The new CEO is Vice-Chairman Lee Yoon Woo, who led Samsung’s semiconductor business from 1996 to 2004.

Another major management change was the appointment of President Hwang Chang Gyu, head of the semiconductor business, as the CTO. Kwon Oh Hyun, who has was running the non-memory chip business will now head the semiconductor business. An interesting analysis of the management shuffle is available here. Another major development was Samsung joining hands with LG and an American company, Harris to develop a new standard for mobile TV broadcast.

Samsung Electronics Co., Ltd. On April 25 reported first quarter results that beat analyst estimates. Revenue grew 19% to 17.11 trillion won ($17.18 billion). Net income grew an amazing 37% to 2.19 trillion won ($2.2 billion), despite drop in semiconductor prices which was offset by flat-screen and mobile-phone earnings. Earlier coverage is available here and here.

The LCD Business revenue grew 53% to 4.34 trillion won and operating profit grew 10% q-o-q and 14-times y-o-y to a record 1.01 trillion won. The Telecommunication Business revenue grew 23% y-o-y to 5.55 trillion won and operating profit was 920 billion won, up 53% driven by favorable currency rates and reduction in marketing expenses. Its market share in cell phones is now 16%, up from 14% last year. Nokia’s share rose to 41% from 37% while Motorola’s share tumbled down to 10% from 18%.

The semiconductor business on the other hand was ridden by weak prices, over-emphasis on high-density products and seasonality driving down revenue 2% to 4.39 trillion won and operating profit down by 64% to 0.19 trillion won. The Digital Media Business had operating profit of 30 billion won on revenue of 1.83 trillion won. The Digital Appliance Division revenues were 820 billion won with operating profits of 20 billion won.

Of all these results, the most interesting one to me is their growing market share in cellular handsets. With a global channel, Samsung will definitely be a player as the market grows, and users upgrade to more capable devices. In fact, when it comes to emerging markets, Nokia and Samsung are much better positioned to cater than Apple and RIM, the market leaders in the high-end smartphone segment.

As Apple experiments with its new-found semiconductor identity, it would be interesting to see how Samsung plays its formidable cards in that domain.