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Why Apple Inc. (AAPL) Is Losing to Samsung

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Over the past several months, I have been discussing with my fellow investors what I believed to be a protracted sell off of Apple Inc. (NASDAQ:AAPL)’s stock. In this article, I will make a direct comparison between the two leading cell phone makers, Apple and Samsung (NASDAQOTH: SSNLF).

Up until now, no company has been able to post sales figures for smartphones or tablets that could even come close to matching Apple’s. Not Dell Inc. (NASDAQ: DELL), not BlackBerry, not even the venerable Hewlett-Packard or Microsoft Corporation (NASDAQ:MSFT). All of that changed when Samsung brought forth the Galaxy S III.

Apple Inc. (NASDAQ:AAPL)For the first time in history, a company brought forth a product that actually kept pace with Apple’s iPhone sales. The fact of the matter is that currently, Apple and Samsung are the only two companies actually turning a profit in the extraordinarily competitive smartphone market. At last report, using fourth quarter earning statements, Apple Inc. (NASDAQ:AAPL) was still dominating the market with 72% of the earnings, with Samsung earning the rest. The truth behind those numbers is that Apple Inc. (NASDAQ:AAPL) is losing ground while Samsung continues to gain.

Samsung versus Apple

A key point to remember here is that Samsung, in terms of total revenue, is actually larger than Apple. Samsung reported $183.5 billion in revenue compared to Apples $156.5 billion; however, Apple Inc. (NASDAQ:AAPL) is still larger in relation to its stock value.

Samsung and Apple could not be farther apart in their business models. While Apple’s business model is to create a market and then to dominate the market that they create, Samsung is happy to just sit back, analyze a given market, and then innovate and improve on it.

Samsung did not create the smartphone, but it is certainly innovating and improving on the product. Everything Samsung does is totally opposite of how Apple approaches business. Remember when Steve Jobs said, “Consumers don’t know what they want”? Samsung believes that it is the market that drives the need and it is Samsung’s job to fill that need.

Even before Apple Inc. (NASDAQ:AAPL) had released the iPhone 5, Samsung had already been selling its Galaxy Note with a 5.3 screen. While iPhone 5 does boast a larger screen than previous models, it is still smaller than the Galaxy Note. The question begging to be answered is, who is right? It would appear that Samsung is right and its sales figures are showing it.

Another key difference between Apple Inc. (NASDAQ:AAPL) and Samsung is that Samsung, at its heart, is a manufacturing company. Apple, on the other hand, contracts out assembly. Historically, Samsung has built its business model around developing, producing, and then selling components to other manufacturing companies. By being a major supplier in that chain, Samsung has learned how to compete with and beat some of the biggest names in the industry and has now set its sights on Apple.

Research and development

Furthermore, Samsung is rapidly outspending Apple on research and development. According to recent financials, Samsung is spending approximately $10.5 billion on research and development. This is an astounding 5.7% of revenue. Compare that with Apple, which only spent $3.4 billion or 2.2% of revenue.

How Samsung approaches the research and development process is astounding. They currently employ over 60,000 employees working in 34 research centers around the world; employing sociologists, psychologists, designers and even commonplace people in foreign countries in the hope of spotting a rising trend. Such endeavors, according to Samsung insiders, produced the Galaxy S III.

The irony

Remember earlier in this article where we discussed how Samsung was a major manufacture and supplier of components in the manufacturing process. Apple is one of Samsung’s largest customers. Apple buys everything from memory processors to graphic chips from Samsung. Apple is now actively seeking out other vendors but it might be too late for them, considering where Samsung is in terms of market penetration.

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