Apple 2.0

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Samsung stumbles into 2014

January 3, 2014: 10:58 AM ET

And you thought Apple had a bad 2013 ...

Samsung 2013

Chairman Lee, supported by his daughter, right. Photo: Bloomberg

Chairman Lee, supported by an aide and daughter Boo-jin. Photo: Bloomberg

FORTUNE -- Samsung chairman Lee Kun-hee, 71, looked a little shaky Thursday as he arrived to deliver his annual new year's address.

And so did the conglomerate he's run since 1987 (not counting the two years he took off after his 2008 conviction for embezzlement and tax evasion).

Samsung plays the heavy in so many global markets -- and so many Apple (AAPL) stories -- that it's a little hard to see the world's largest information technology manufacturer in terms of its frailties. But with shares down 10% in 2013 and another 4.6% in the first day of 2014 trading -- Samsung's largest one-day percentage drop in seven months -- those frailties are what analysts are talking about.

Their list may sound familiar to Apple investors: 

  • Slowing growth -- Samsung next week is expected to report fourth quarter operating profits up 9.2% -- "a sharp slowdown," according to the Wall Street Journal, "from the 26% gain in the third quarter."
  • Growing competition -- Mainly from Chinese manufacturers that can make knockoff smartphones even more cheaply than Samsung.
  • Shrinking margins -- "The proportion of less-premium smartphones appears to have increased within the portfolio, squeezing margins," Mirae's Doh Hyun-woo told the Journal.

But Lee knows that Samsung faces deeper, more structural problems.

No electronics manufacturer is better at rapidly turning out in huge quantities smartphones and tablets of different sizes and specs. But in the mobile device market that accounts for more than 50% of its profits, Samsung can't match Apple's software ecosystem, is dependent on Google (GOOG) for Android, and can't seem to shake off the 2012 Apple patent infringement verdict that branded it a "copycat" -- no matter how many flashy innovations it adds to its high-end Galaxy line.

Lee, who 20 years ago famously advised employees to "change everything but your wife and children," stressed on Thursday the need to drop old habits and come up with new technologies -- particularly in software.

Samsung must "get rid of business models and strategies from five, ten years ago and hardware-focused ways, he said. "Research & development center(s) should work around the clock, non-stop."

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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