Business

Samsung’s camera business officially joining the bottom feeders

Samsung Electro-Mechanics today formally confirmed a mid-October report claiming the company is expanding into the entry-level smartphone camera market. The part about that historic contract coming from Samsung (Electronics) itself is still unofficial, but the insiders behind the original claim have a near-spotless track record, so it’s probably safe to consider it accurate. During an earnings call with analysts held after today’s announcement of the company’s Q3 financials, EVP Bae Kwang-wook confirmed the move.

According to the senior executive, Samsung Electro-Mechanics already accepted contractual obligations constituting its move into low-end mobile camera module manufacturing. In fact, it even started fulfilling some orders during the third quarter of 2020. By this time next year, that segment will account for about 10% of the company’s sales, the EVP said during the call.

Why moving into entry-level anything is rarely a business success indicator

Bae also provided some estimates in regards to how much money this is expected to make, but even if he wasn’t biased in a sense that he wants to make his company look good, the assumptions given to analysts are at least partially influenced by an attempt at extrapolating historic data and using it to predict earnings. Instead of, you know, just flat-out saying how much its first contracts are worth.

This would make more than zero sense in any other smartphone camera component category but the one Samsung Electro-Mechanics is now entering. Because most businesses, especially those as derivative as consumer electronics, rely on creating value to earn money. The more you create, the more you can charge, or get away with charging, depending on whether you’re asking the buyer or the seller. As you might imagine, there’s a cap to this economic behavior that’s proportional to the complexity of the task at hand. Manufacturing is a secondary sector, but component production, by itself, is still way lower than consumer electronics manufacturing, which usually means “consumer electronics assembly” these days.

All of that means this move to deliver camera modules to low-end smartphones probably won’t drive any meaningful growth in terms of whatever bottom line Samsung Electro-Mechanics will have to report a year from now. Sure, it probably won’t lose any more money on this expansion, like entry-level smartphone companies actually can and often do in ultra-competitive markets like India. But you can disregard the prospective business expansion angle Bae is selling here. Because Samsung would not be entering the low-end smartphone camera category if there was any other segment to service instead.

This is all evidenced by the fact that despite producing hundreds of millions of cheap smartphones on a yearly basis for over a decade, Samsung Electronics has never managed to squeeze into its sister company’s production capacities until right now. Why? Because that sister company was printing money doing better-paying contracts, many of which were from Samsung Electronics itself. In other words: if you’re part of a consumer electronics supply chain, you make the big bucks doing contract work for the next Galaxy Note or iPhone, not the next Galaxy A twenty-whatever.

So, take this news as an indicator that Samsung Electro-Mechanics appears to be out of ideas in the smartphone camera business, no matter how many more hundreds of millions of modules it projects to sell next year. It’s 300 million, in this case, which adds up to 1.2 billion in total. That’s a pretty impressive figure, right? You almost don’t want to burden it with boring context. Such as, for example, the fact that a quarter of it will probably ruin your profit margin by several degrees of magnitude, despite being the entirety of your projected growth.

Just to add some final context, flagship camera modules are currently more expensive than even the thing responsible for the “smart” part of smartphones – chips. Yes, imagine all that extra money Samsung Electro-Mechanics won’t be making next year because it found nothing better to do than to waste resources on budget component production, while the big bucks are already being made and that market share is its own to lose. But you won’t hear that on any analyst call, as those tend to only involve people paid to be maximally optimistic in their public communications.

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