7 Min Read
* Backup plan aims to avoid repeat of last year's costly supply disruption
* Analysts warn Samsung may have raised consumer expectations too high
* Stakes for Samsung high on product that delivers its biggest profits
By Miyoung Kim
SEOUL, March 13 (Reuters) - The success of Samsung Electronics Co's latest Galaxy phone, set to be launched in New York on Thursday, could hinge on a supply backup plan aimed at preventing a repeat of a costly snag for its premium smartphone last year.
Some analysts predict the new Galaxy S IV could top 10 million unit sales in the first month after its launch, so any hiccups in the smooth delivery of core components could be disastrous.
The risks are high. A simple manufacturing snafu involving unsatisfactory design of handset cases cost Samsung some 2 million units of lost sales in just a month after it launched the S III in May last year.
"There could be, again, a supply bottleneck due to tight supply of components... but I think any such disruption will be very brief, as Samsung is making a bigger bet on the S IV than on its predecessor with a backup plan to avoid such disruption," said Greg Noh, an analyst at HMC Investment and Securities.
After pre-empting its launch with a marketing blitz for the new Galaxy phone, the South Korean electronics giant also risks having overhyped its new phone, analysts warn. They say consumers could be disappointed if it has only incremental improvements rather than the dazzling features they've come to expect.
Samsung picked the United States for the launch of its top-selling Galaxy series, hoping to regain its lead in the crucial U.S. market. Apple Inc outsold Samsung there for the first time in the quarter ending in December, even after Samsung spent a record $400 million on phone advertisements there last year.
The stakes are especially high for Samsung, which derives the majority of its annual profits from the product, while growth rates for the global smartphone market taper off.
J.K. Shin, head of Samsung's mobile business and a newly elected board member, will skip his first Samsung shareholders meeting on Friday in Seoul in order to attend the Galaxy launch at the Radio City Music Hall.
"It's got to be a blockbuster phone that beats its predecessor and competitors in nearly all aspects, otherwise Samsung could follow the footsteps of others and fail to manage expectations, which get only higher," said David Choi, an analyst at SK Securities.
Samsung executives declined to comment on steps they've taken to ensure supplies keep flowing, but some analysts said a disruption of any component part could potentially cascade, interrupting deliveries.
"Based on checks we had with suppliers, Samsung has already done significant work to ensure smooth supply and not to repeat what they had to deal with last time," said Lee Seung-woo, an analyst at IBK Securities.
"For now it appears there's no major issue at all, but obviously we have to wait and see how smoothly it goes after the launch."
Of particular concern are eight-core processor chips and screens, or even simple handset cases.
"Handset cases again appear to be in tight supply, and Samsung may use two different processors to maximise battery efficiency through the right combination of chips for different network conditions to yield the best performance," Noh said.
The new Galaxy phone is widely expected to boast crisp, full high-definition quality pictures, a slightly bigger 5-inch screen, a 13 mega-pixel rear camera, and an improved eight-core processor.
Earlier media reports had also suggested the new Galaxy, which uses Google's free Android software, may have functions that track the viewer's eye movement, and boast an unbreakable or flexible screen.
Whether that will be enough to excite consumers is debatable, analysts say. Samsung declined to comment.
"With so many great things speculated about the S IV, it could actually disappoint in terms of wow factors," said Choi at SK Securities. "If you see Samsung's share price, which hasn't moved much of late, I think you can get a more cool-headed assessment of what's coming."
Shares of Samsung, which has a $220 billion market value, have fallen 1 percent so far this year, while Apple shares tumbled nearly 20 percent as disappointing sales of iPhones raised fears that its dominance may be slipping.
"It's about the buzz they can generate around the product," said Ben Wood, an analyst at mobile consulting firm CCS Insight.
Samsung has developed a cheeky TV ad that mocks Apple customers, and dramatically ramped up spending on marketing and advertising, a cornerstone of Apple's success.
"It's not afraid to carpet bomb the world with marketing efforts to make sure nobody on the planet misses out on the story of the Galaxy IV," Wood said.
Such bravado underscores how far Samsung has come since its first Galaxy, which debuted in June 2010 in answer to the runaway success of the iPhone. That propelled Samsung to become the world's top smartphone maker, vexing Apple which virtually created the smartphone market with its first iPhone in 2007.
The touchscreen-based look and feel of the Galaxy also prompted Apple to file global patent disputes against the South Korean firm.
In 2012, Samsung surpassed Apple as the world's largest maker of smartphones, controlling 30 percent of the market versus Apple's 19 percent. But in the high-end market, sales of Samsung's Galaxy S and Note still lag far behind Apple's iPhone, the best-selling smartphone globally.
As overall market growth slows, however, it is also becoming more competitive. Rivals such as LG Electronics Inc and Huawei Technologies have announced products with features and hardware comparable to those the upcoming Galaxy will reportedly have.
"I'm expecting them to come out with some new features they can hang their hat on," said Avi Greengart, an analyst at Current Analysis, referring to the Galaxy launch.
"As long as the Galaxy S IV doesn't regress and as long as it's competitive with the flagship phones from other phone manufacturers, I give it really good chances of winning consumer sales even if it isn't different for the sake of being different."