Asian smartphone makers seek to cut costs Lower-cost smartphones by Chinese manufacturers such as Xiaomi are gaining popularity Leading Asian smartphone makers such as Samsung Electronics are racking their brains to come up with effective ways to protect market share and profit margins in the increasingly saturated global smartphone market. With three-quarters of people in the developed world owning a smartphone compared to only a fifth of those in more populous emerging markets, companies are expanding lower-priced product ranges to make their smartphones more affordable, while expanding production and procurement in lower-cost countries to save costs. "With lowered expectations for technical innovation, cost-cutting and scale have become more important to stay ahead in the mature market," says Suh Won-seok, an analyst at Korea Investment & Securities. Analysts say Samsung is well-positioned to cope with the high-end market saturation, thanks to its diversified product portfolio and overseas production bases. The world's largest smartphone maker by sales believes there is still room for growth in the developed world, especially replacement demand, and says it will continue to innovate hardware features. "We will also leverage our design and marketing capabilities to drive continued strong sales of high-end smartphones," the company says. In addition, we will also be expanding to meet low-end smartphone demand. IN Mastering Growth This year, Samsung launched various lower-priced models including the Galaxy S4 Mini, while trying to maintain its high-end market leadership with the recent launch of the large-screen Galaxy Note 3. Samsung and LG Electronics have an advantage in terms of operational efficiency and component sourcing because they are vertically integrated, with production of key components such as chips, display and batteries done by affiliate companies. This allows the South Korean companies to source most of their high-quality handset components easily. "We are better able to maximise operational efficiencies and boost product yield rates though early and detailed planning with sister companies," LG says. Kim Young-woo, an analyst at HMC Investment Securities, expects Samsung to expand overseas production and procurement, especially in lower-cost countries such as China and Vietnam. This year, Samsung started building its second handset plant in Vietnam for $2bn to double its production capacity there. "Market saturation will inevitably lower prices, reducing Samsung's sales and operating profits," says Mr Kim. The company will sharply increase its Vietnamese capacity to cut labour costs. Samsung now produces nearly 80 per cent of its handsets in Vietnam and China - roughly 40 per cent in each. Mr Kim expects Vietnam's portion to increase by 10 percentage points to 50 per cent in the next two years, while China's share is likely to fall from 40 to 32 per cent. Samsung's labour costs in Vietnam are much cheaper, with a Vietnamese worker's monthly wage at about $230, compared with about $827 for a Chinese worker. Samsung will probably turn its attention to China and Taiwan for cheaper component sourcing Kim Young-woo "Now, the game is more about who can spend more on marketing while cutting costs through economies of scale," says Mr Kim. Samsung will probably turn its attention to China and Taiwan for cheaper component sourcing. LG is also boosting cheaper smartphone sales in developing markets, as it sees a "large opportunity" there. The company has already made up some lost ground by introducing a range of cheaper L and F series smartphones, overtaking Taiwan's HTC in the first quarter as the world's third-largest smartphone maker by sales. But analysts caution that such a strategy could harm LG's margins further, after they halved in the second quarter despite record smartphone shipments. Analysts also predict that intensifying competition from lower cost Chinese groups such as Huawei and Lenovo will make it difficult for LG to strengthen its presence in the lower-end market. LG does not even rank among the top five smartphone makers in China, the world's largest smartphone market. Chinese brands now account for about a fifth of surging global sales of cut-price smartphones and have emerged as serious competitors to Samsung and LG. Some of them have become international contenders, with Lenovo's global market share in phones nearly doubling to 4.7 per cent last quarter. However, analysts doubt how far they can go, when most of them remain local. "They can do well at home, but their strategy is unlikely to work internationally, except in some emerging markets," says CW Chung, an analyst at Nomura. Wearable devices are not likely to make up for falling margins within the smartphone market in the near future Despite all the efforts to cut costs and raise operational efficiency, analysts say companies will inevitably suffer from lower handset prices and margins, which will prompt them to find new growth drivers. Wearable devices are seen as the next big thing, but they are not likely to make up for falling margins in the smartphone market in the near future. Samsung has become the first global mobile computing company to launch a smartwatch, leapfrogging its arch-rival Apple in the "wearable technology" market. The company is optimistic that its Galaxy Gear, unveiled this month, will generate new revenue streams but analysts are sceptical. "It will take a few years until we see substantial demand for wearable devices," says Marcello Ahn, a fund manager at Quad Investment Management. Before then, Samsung had better focus on expanding its tablet market share, as tablets are likely to replace notebooks next year.