Samsung suppliers reap bumper rewards Shareholders in Samsung Electronics have enjoyed strong returns from the company's recent rise to become the global leader in smartphones - but these gains have been dwarfed by the tenfold increase in the market value of some smaller South Korean companies that provide specialised components for Samsung's devices. Now, however, growing competitive pressure in the industry could mean challenges ahead for some in the web of suppliers that rely heavily on business from the country's biggest company by sales. Since the beginning of 2009, when Samsung was still a minor player in the nascent smartphone industry, its shares have more than tripled as its handset business has grown to contribute nearly two-thirds of total operating profit. But despite its rapid rise to leadership in that sector - Samsung accounted for 39.6 per cent of smartphones sold last year, according to the research group IDC - the rise in its market valuation has been tempered by slower growth in other areas such as its television and semiconductor divisions. There has been no such moderating influence on the performance of Iljin Display, which sells touch screen panels and makes 95 per cent of its sales to Samsung. Its revenue grew from Won9.9bn ($8.8m) in 2008 to Won596bn last year, and its share price has risen by 1,127 per cent since the end of 2008. It is not the only Samsung supplier to enjoy explosive growth over that period. Partron, which makes antennas and camera modules, has seen its shares rise 1,543 per cent and sales grow 644 per cent to Won873bn. Shares in S-MAC, a keypad module maker, have risen 848 per cent with revenue rising 242 per cent to Won485bn. "Depending too much on a single customer carries some risks," says Seol Jae-hyuk, head of investor relations at Iljin Display. But it is too early to talk about customer diversification because the set market is currently dominated by two big players: Samsung and Apple. Yet that duopoly is under threat, with potentially worrying consequences for suppliers like Iljin Display. Samsung's new flagship phone, the Galaxy S4, sold 10m units in just 27 days after its launch but the company anticipates an increasingly tough market. "The furious growth spurt seen in the global smartphone market last year is expected to be pacified by intensifying price competition," it warned in January. Chinese rivals such as Huawei, Lenovo and ZTE pose one of the biggest threats to Samsung's margins. Their low-cost handsets have been eroding the South Korean group's market share in China, although it remained the market leader there in the first quarter, according to the research group Canalys. "As handset prices fall, the set makers will try to pass on the price burden to their parts suppliers," says Park Kang-ho, an analyst at Daishin Securities in Seoul. Fears of such a trend have been evident in the performance of shares in Iljin Display and S-MAC, which have drifted lower in the past two months. Both companies' operating margins showed signs of pressure even last year: Iljin's edged down from 11.2 to 11.0 per cent while S-MAC's declined from 8.2 to 7.4 per cent. But analysts voice less concern about the outlook for suppliers of highly specialised products that are provided by only a handful of companies anywhere in the world. Among these is Jahwa Electronics, a supplier to Samsung of high-end camera modules, whose market capitalisation has risen by 748 per cent since the end of 2008. Partron faces similarly limited competition in camera modules and its operating margin grew from 7.1 to 10.4 per cent last year. "It depends on the competitive nature of the subsectors," says Marcello Ahn, a portfolio manager at Quad Investment Management in Seoul. If there are a lot of vendors available to provide a component, then their margin will be reduced so much that they will suffer operating profit loss. In other cases, we will see margins decline only moderately.