Why Is Apple Slowing, And Samsung Sprinting?

For so long Samsung looked like it was the struggling competitor in the smartphone war against Apple. Now the tables are turning.

Thursday saw a surprisingly upbeat financial update from Samsung, after its smartphone business shrank last year thanks in part to stronger competition from Apple. Now the South Korean electronics giant says it will report its best-operating profit in two years (about $7 billion) in late July, putting it ahead of the already-positive forecasts from financial analysts, who are expected earnings of approximately $6.8 billion.

Samsung won’t break down revenue till it releases official results later this month, but smartphone sales are almost certainly driving those profits, in particular, sales of the well-regarded Galaxy S7 and S7 Edge. And helping to drive that? Samsung's bet that consumers are getting excited about virtual reality, by bundling its Gear VR headset with the phones’ pre-orders. It went on to repeat the bundling after launch.

“Samsung have been hyper aggressive with promotions,” says IBB Consulting's senior analyst Jefferson Wang. Giving away the Gear VR might have hit profits in the short term, but “it helps drive sales long term and brings Samsung into an area that will hopefully be the next computing platform.” A recent poll by IBB showed that just 12% of U.S. consumers didn’t know what virtual reality was. That suggests a surprisingly high level of awareness of such new technology, adds Wang.

Meanwhile, Apple’s iPhone sales saw their first ever fall in the June quarter, with an especially worrying, 26% slide in sales of the phone in China, Apple’s hot new market. iPhone sales appeared to be falling behind those of Samsung's Galaxy range too.

Apple's headache in China goes beyond iPhone sales, with the government having blocked access to various web services like iTunes Movies in April, because of local regulatory violations. Soon after that last incident, billionaire investor Carl Icahn dumped all his Apple shares, saying he was concerned that the Chinese government could "make it very difficult for Apple to sell there."

“It’s a huge worry,” says Wang, who just spent two weeks in China and noticed “a huge push” for national brands like Lenovo and, in particular, Huawei. Two years ago there was a greater affinity for Apple’s iPhone, he says, with people in the Chinese smartphone industry pointing to Apple as Chinese-made, assembled in Shenzhen.

“Now they’re saying, ‘Hey, Huawei is a great product.’ The Chinese-designed and built, end-to-end devices are really getting traction.” Chinese consumers are changing their view on smartphones, “specifically with how much better those Chinese competitors are getting.”

Are Apple’s challenges in China just another sign that Samsung is on the up, and Apple heading down? The stock is at least going in that direction. Samsung’s Seoul-listed shares are up 16% since the start of 2016, while Apple’s have fallen by 8%.

But it’s important to note that Apple and Samsung’s big product launches happen at different times of the year, with Samsung traditionally launching its new flagship device in March, Apple in September. That means by the time each one is doing a big launch, its rival’s sales of their last device are starting to slow.

So in the run up to September, Samsung is still riding on the momentum of its big Galaxy S7 launch in March, while it’s been nearly a year since Apple put out the iPhone 6. Apple needs to pull out another eye popping, innovative phone come September to help keep its position in the product-launch dynamic. But will it?

The massive success of the iPhone 6 was linked to its bigger screen, which appealed especially to consumers in China. “I don’t think at this point that there’s a second, huge innovation for them to follow on,” says Wang.

“It’s hard to say if [the iPhone 7] is going got be bland. Everyone is pretty excited with the latest iOS release at WWDC, so people from a software perspective are excited, but from a hardware perspective it might be difficult to say it’s going to blow the doors off.”

It’s also difficult to say if this is just the beginning of Apple and Samsung’s divergence of fortunes.  Consumers are notoriously fickle and while Samsung had a hit this year, while Apple’s was last year, that doesn’t mean either will do the same this year, or in 2017.