Samsung: Does it need a mobile makeover?

Summary: Samsung is breaking out the promotions to clear out excess inventory of its smartphones. Analysts are calling for a shift in direction for the mobile unit.

Samsung's second quarter results look shabby amid bloated inventory, marketing promotions to move devices and weak demand for tablets and smartphones in key markets like China.

The electronics giant's statement on its second quarter results provided a decent bit of detail, but the bottom line is profits will be weaker than expected. As a result, analysts aren't buying the company's outlook for the second half of 2014. Samsung second quarter means the company will have to be more nimble before its mobile unit really takes a hit.

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Consider Samsung's reasons for a weak second quarter, which was partly the result of strong Korean currency relative to the Euro, U.S. dollar and emerging markets. Samsung said:

'For smartphone, amid slow growth of the market, sell-in shipments fell in 2Q due to increase in mid- to-low end channel inventories as competition intensified among set makers in Chinese and European markets.' Marketing expenses surged to cut channel inventory and prep for new model launches. China inventory was high due to demand and 'price competition among local players.' Europe inventory was high too. Tablet 'shipments declined more than expected due to weak overall demand.' For good measure, Samsung said its 5- to 6-inch smartphones are hurting tablet demand. Samsung said the third quarter would show improvement due to its new smartphone lineup.

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Analysts weren't buying it. Macquarie analyst Daniel Kim said:

In our view, Samsung needs to rework its Mobile strategy from product development to inventory management to deal with stagnant top line growth and margin pressure. It needs to be more nimble, despite its huge size. It has to control marketing costs, although it has to address the global markets and the various price segments. It requires a more creative and out-of-the-box strategy, even though smartphone innovation is slowing.

Credit Suisse analyst Keon Han said:

To put it bluntly, the company failed to control inventory in China as its low-end platform strategy got stale in the face of improving specs and improved performances of local Chinese smartphone brands. Pricing competition remains fierce, with all brands fighting for thin profit margins.

The big question is whether Samsung can duke it out with lower-cost players and compete at the low-end of the market. At the high-end of the market there are also concerns. The Galaxy S5 has a design that is too similar to the S4 to warrant a big upgrade cycles. Tablet growth is slowing so that'll hurt Samsung too. When Apple comes out with a larger iPhone, Samsung will also have issues. Smartwatches aren't likely to save the day either.

Bottom line: Samsung, Android's lead dog, has a multi-front war in the smartphone market. It will have to develop different tactics going forward.

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