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Samsung is Major Victim of Apple’s iPhone 6 Success

After Apple (AAPL) reported that it had sold $74.6 billion in products and earned a record corporate profit of $18.04 billion profit in a single quarter, Samsung Electronics admitted Thursday that much of Apple’s gain came at its expense. Korea’s former corporate juggernaut reported its lowest annual profit since 2011, with a 32% drop in quarterly profit, to $21.3 billion.

The mobile sales had accounted for 70% of Samsung’s profit in 2013. But with the introduction of Apple’s iPhone 6 and 6 Plus, Samsung had warned analysts earlier this month that there would be pain. Sure enough, the tech giant reported that the mobile division’s earnings had plunged 64%.

China is now the world’s largest smartphone market–the key battleground for mobile firms. As the world’s biggest mobile phone maker, Samsung’s flagship Galaxy brand is being squeezed by high end competition from Apple iPhones with bigger screens, and by bargain-priced smartphones by Chinese domestic rivals Huawei and Xiaomi.

Despite smartphone sales tanking, Samsung’s high-margin chip sales helped offset the downturn in proprietary products. The semiconductor division’s operating profit jumped by almost 36% for the quarter.

Although Taiwan Semiconductor Manufacturing Co. won the contract to produce a majority of Apple’s new A8 chips for the latest iPhones, Samsung is making 40% of the chips, according to research firm IHS. The new A8 chip is 13% smaller and sells for $23, versus its A7 predecessor chip that sold for $20.

Apple took a “cutting edge” approach in designing a new, smaller 20-nanometer design for its custom processor. Building a smaller processor allows Apple to increase efficiency, which helps to improve battery life, according to Andrew Rassweiler of IHS.

Samsung said its processor and RAM businesses did well during the quarter, and the company plans to utilize its own silicon in future products. Samsung said that its focus on new materials, innovative designs and differentiated features will contribute to sales strength when it introduces the Samsung Galaxy S6 smartphone next quarter.

On the tablet side of the business, Samsung will focus on both premium and affordable devices. The company will continue to push forward in the market for wearables as well.

According to TechCrunch, the Senior Vice President of Samsung Electronics’ Investor Relations, Robert M. Yi, said on the earnings call that he expected “the business environment in 2015 to be as challenging as in 2014,” due to economic recession as well as intensifying product and price competition and the increasing cost of developing new technologies.

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