Chip Figures Take Sting Out of Declining Sales at Samsung Samsung said sales in its mobile division fell 9 percent in the fourth quarter compared with the third quarter, and that sales of high-end smartphones had been weaker than expected. Kim Hong-Ji/Reuters TOKYO - In the marketplace, Samsung Electronics and Apple battle for customers. In the courts, they fight over patents. Yet every time Apple sells an iPhone, Samsung quietly cheers, too. In addition to being Apple's main competitor, Samsung is one of its top suppliers. Samsung provides the application processor in the iPhone 5S - the brains of Apple's flagship handset, and one of its most expensive components. Because Samsung is not only the biggest maker of smartphones but also a leading provider of parts to Apple and other gadget makers, company executives say they are confident that Samsung can work its way through a tough period. On Friday, Samsung confirmed that it had sustained a sharp slowdown in sales growth and earnings in the fourth quarter of 2013 and warned that business conditions would remain challenging in the first half of this year. Apple's sales have risen, and the gains shored up Samsung by lifting the performance of its chip-making business. Samsung said one-time factors were largely responsible for the fourth-quarter weakness. These included a special bonus totaling 800 billion won, or $740 million, that Samsung paid out to employees on the 20th anniversary of a management initiative to improve quality, as well as the effects of a surge in the strength of the South Korean currency, which Samsung pegged at 700 billion won. "This kind of adjustment is normal for a high-growth industry," said C.W. Chung, an analyst at Nomura, though he added that Samsung's earnings could be "flattish" for the next two years. Samsung said sales in its mobile division fell 9 percent in the fourth quarter compared with the third quarter, and it acknowledged that sales of high-end smartphones had been weaker than expected. The premium segment, in which Samsung offers handsets like the Galaxy S4 and the Note 3, is the most lucrative part of the business, but analysts say it is increasingly saturated. Samsung faces a renewed challenge from Apple, which introduced two new handsets - the iPhone 5S and a less expensive model, the 5C - during the fourth quarter. Apple also recently reached agreements to distribute its phones via the largest mobile carriers in Japan and China for the first time. Analysts expect the company to put additional pressure on Samsung by introducing phones this year with screens larger than the 4-inch display of the iPhone 5S and 5C. While analysts say iPhone sales grew strongly after the latest models were introduced, with Apple regaining market share, Samsung's chip-making business shared the spoils. That unit posted a 7 percent quarter-on-quarter increase in sales, helped by "increased A.P. shipments for a competitor's new product," said Jee-Ho Baek, Samsung's vice president of memory marketing, in a conference call with analysts. He was referring to application processors, and while he did not mention Apple by name, the allusion was clear. Samsung's mobile division provides about two-thirds of the company's operating profit, but analysts expect that portion to decline in the coming years as the smartphone business matures. The chip-making unit is expected to pick up some of the slack. That trend was already apparent in the fourth quarter, when the semiconductor division provided 24 percent of operating profit, up from 16 percent a year earlier. Over all, Samsung posted net income of 7.3 trillion won, or $6.7 billion, up from 7.04 trillion won a year earlier but down from 8.24 trillion in the third quarter of 2013. Fourth-quarter sales of 59.28 trillion won were up from 56.06 trillion won a year earlier but flat compared with the third quarter of 2013. Operating profit, at 8.31 trillion won, was in line with a forecast issued two weeks ago. The company said it expected weakness to persist in the first half of 2014, though it insisted that this was because of the "seasonality" of the technology industry, in which purchases are often deferred until later in the year. Samsung has its origins as a trading company established in Korea in 1938. It is now one of the largest and most recognizable technology brands in the world. While Samsung makes a wide range of consumer products other than phones, including televisions and home appliances, many of these have sluggish sales and low profit margins. Sales and earnings fell sharply in the display panel business. Tablet computers are one area of promise, with sales and market share growing. Samsung executives said in the conference call that they were optimistic that new devices with larger screens would expand the tablet business further. The company also sees so-called wearable technology as a promising trend, though an early example, the Galaxy Gear smart watch, has gotten off to a slow start. For now, that has left Samsung's chip-making arm to take up most of the slack from the new softness in smartphones. Memory chips, which are recovering from a long price slump, are outperforming more complicated semiconductor devices like application processors. Samsung said memory chip sales had been bolstered in the fourth quarter by the introduction of new video game consoles like Sony's PS4 and Microsoft's Xbox One. While Apple used to buy other components, including screens, from Samsung, the company has been moving to reduce its dependence on its South Korean rival. Still, it pays about $20 to $30 per phone for the iPhone application processors it buys from Samsung, estimated Sundeep Bajikar, an analyst at the brokerage firm Jefferies. That, he said, was about one-fifth of the overall parts bill for an iPhone. Apple did not respond to a request for comment on reports that it planned to move production of application processors for its next generation of iPhones to the Taiwan Semiconductor Manufacturing Company. But Mr. Chung at Nomura said he expected Apple to alternate contracts for application processors between Samsung and T.S.M.C. from now on. There is a lot of business to go around. In 2013, Apple was the biggest buyer of semiconductors globally, spending $30.3 billion, according to IHS, a research firm. Samsung, which sources some of its chips internally, was in second place, spending $22.2 billion on outside semiconductor purchases, IHS said. As chip technology improves more incrementally, Samsung is one of the few companies left with the financial wherewithal to make the investments needed for new generations of semiconductor equipment, analysts say. As a result, it could be in a strong position to gain business from other mobile phone makers, Mr. Bajikar said. "Then Samsung will have greater control over the whole ecosystem," he said. The benefits of that could be enormous.