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The mystery of Samsung Electronics SG&A

Samsung Electronics’ SG&A expenses are curiously high. Consider the following graph:

It shows SG&A as reported by Samsung and Apple over the periods 2010, 2011 and the sum of the first three calendar quarters of 2012. Note that Samsung appears to be spending three times as much as Apple on sales and administration.

The company offers a break-down of these SG&A costs and they are also shown (Apple does not provide a break-down except for advertising in its yearly report). The suspicion that something is not right comes from looking not only at the overall picture but the notion that Transportation, Warranty and “Other” for Samsung are higher than overall SG&A for Apple.

Note that Apple’s SG&A includes the cost to operate its retail stores. This includes the salaries and operating costs of over 300 stores.

Considering that many of these costs are borne in the sale of products for consumers (and not borne in the sale of components such as semiconductors,)  the percent of sales of some of these expenses are:

  • Advertising: 3% of consumer sales
  • Sales promotion: 5%
  • Transportation: 4%
  • Warranties: 3%
  • Public relations: 0.5%

Excluding wages and commissions shows a total of 15.5% of consumer sales paid in SG&A expenses. Apple’s total cost for SG&A was only 6.5% overall. Advertising was 0.78%.

I also added to the graph data for 2012 (through first three quarters.) It looks like Samsung SG&A will easily reach $30 billion this year, staying at three times Apple for another year.

I don’t have any explanation for this disparity.

  • obarthelemy

    Apple’s SG&A seems more mysterious to me… are no details at all available ?

    • http://www.isophist.com/ Emilio Orione

      Apple SG&A are in line with other companies, why mysterious? Three times apple without shops to operate is quite a bit more mysterious, but samsung is not a transparent company http://www.theverge.com/2012/11/30/3709688/samsung-25-years-lee-kun-hee

      • http://www.facebook.com/people/Minsoo-Park/100001265179164 Minsoo Park

        Samsung has more than 280 stores in Korea. These stores can be quite large since they display all their consumer products… Also Samsung has many, many regional branch offices, warehouses, service centers around the world.

    • http://www.asymco.com Horace Dediu

      Most companies don’t provide details of what SG&A is spent on or the ratios. Samsung does, curiously. It does not provide detailed information about what generates revenues but does provide quite a bit of detail about this particular cost structure.

  • http://twitter.com/ChristianPeel Christian Peel

    My thought is that Apple and Samsung both want to grow, but Apple wants to grow in a controlled way and to focus on profit. Samsung is focused more on market share and is more willing to use a shotgun approach: spending on anything that they think will help increase sales.

    I’m sure there are more details to be had than this simple explanation, maybe it’s a start.

  • http://www.lazyprogrammers.com Eugene Kim

    Could it be Samsung’s warranty service? They actually send a technician to your doorstep same-day for most if not all warranty services.

    • Tatil_S

      Is that for Korea? Sounds awesome…

      • http://www.facebook.com/people/Minsoo-Park/100001265179164 Minsoo Park

        Well, the technician visits only if the product is large enough … (TV, refrigerator,…) You’ll have to take your phones to regional service centers….

    • http://www.asymco.com Horace Dediu

      The warranty cost is high but it is not the only component. You can see the amount warranty costs are of overall costs in the graph.

  • Tatil_S

    Transportation of what? Sounds too high to be travel expenses, but if it is for transportation of goods, shouldn’t that be part of “cost of goods sold”?

    • http://www.asymco.com Horace Dediu

      Transportation of finished goods can be booked as part of SG&A.

  • gprovida

    Is there concern that the book keeping of SAMSUNG accurately represents the company financial activity, that is, SAMSUNG is a anomaly [like Apple] and info is hidden for competitive reasons or is there simply less accountability in SAMSUNG reporting requirements?

  • Rob Scott

    It looks like they are juicing up their numbers. Buying sales and puting the cost in SG&A?

  • http://www.ben-evans.com Benedict Evans

    If you strip out the marketing, which is clearly abnormal, and probably a fair amount of the ‘commissions and charges’, Samsung shows roughly double the SG&A for a company that has a third higher revenue, is substantially more complex (White goods, LCD panels, TVs, semiconductors as well as everything Apple does), and has a product set that is inherently lower margin.

    That’s not to say there aren’t puzzles in here, but the difference in absolute size isn’t necessarily surprising.

    • http://www.asymco.com Horace Dediu

      One more wrinkle is that Samsung’s revenues include sales made between its own divisions. (Footnote in their Sales table: “Sales includes intersegment sales”. They’ve also restated their SG&A when they switched accounting methods in 2010. The new values are significantly higher. I’m still trying to understand what happened there.

      • torifile

        So they move money from one pocket to another and call it a profit?

        Sounds like a shell game to me. I’m glad I’m not a Samsung investor.

      • http://www.asymco.com Horace Dediu

        Not profit, sales. Profit is derived differently as is cost. Let’s just say that it’s not straight-forward.

      • oases

        Have you looked at their cash flow, it being harder to manipulate?

      • http://www.lazyprogrammers.com Eugene Kim

        Switching accounting methods was a nation-wide push from K-GAAP to K-IRFS which made a lot of numbers change drastically. Don’t know if that helps any.

    • http://www.facebook.com/people/Minsoo-Park/100001265179164 Minsoo Park

      Another factor to consider is the fat bonuses Samsung employees get when Company gets huge operation profits… these are called PS/PI (profit sharing/project incentive) … sometimes they can get large as annual salary…
      Korean newspapers publish a big headline about it every year…

      • http://sharonsharalike.com/ Sharon Sharalike

        That certainly would add incentive to report large costs, especially the more readily controlled and absorbed “inter-segment” kind.

  • Justsaying

    Majority of Samsung growth vs. 2011 is from Emerging Markets and growth in a e.g. China and India distributer channel can be “expensive” so we should see “commisions, fees and other” grow as smartphone product mix shifts to EM and prepaid channels. Might also partly explain share shift vs. HTC if HTC not growing channel spiffs.

    Perhaps it’s a competitive advantage a company not trading securities in the US can persue… Using agents and distributor comisions could be a way to keep books clean.
    Foreign Corrupt Practices Act of 1977 (FCPA) (15 U.S.C. § 78dd-1, et seq.) explains more what American subsiduaries can never do.

  • Walt French

    Boy, there sure seems to be something that Samsung is trying to sell investors with these numbers, but I can’t imagine the story. Forensic accountants, where are you?

    One thing I *will* note: a couple of comments about the expense of running 300 stores. True, dollars out the door, but in a retail operation as efficient as Apple’s, it could be a LOT cheaper than all the commissions, deals with thousands of outlets, etc., that Samsung uses in comparison. Even Samsung’s “wages” would seem to be large as a function of that type of distribution.

    The other note is that this huge expense has occurred as Sammy came from essentially nowhere in mobiles, to being the only non-Apple profitable maker (presuming these books aren’t cooked in some perverse way). OTOH, long ago Apple learned how expensive one’s own factories and inventories were. Cook’s ascendancy must in part be an homage to running a lean operation. Part of “lean” means reduced redundancy, designs/models that can be discarded quickly, etc., all antithetical to Apple’s M.O. Yet some of those features seem to be working in Samsung’s favor.

  • http://www.facebook.com/people/Steve-Lang/546797695 Steve Lang

    Could they be buying Galaxy market share with sales programs, discounts, spiffs, etc. that are being folded into SG&A so to not reduce top line revenue number? IIRC the Galaxy line really established itself as ‘the’ Android handset with the Galaxy II, and that momentum has continued with the III. So they could have made a conscious decision (and big bet) to buy that position in the marketplace and in the consumer’s mind, knowing that it would probably work if the hardware was at least as good as competing handsets (which it was).

    Now in the current marketplace it is mainly the iPhone vs. the Galaxy. Both have the sales, Apple has marketshare and huge profits, which means that Samsung can buy their marketshare and still have reasonable (if not huge) profits. Apple’s margins have given them that room to do so. Going forward, Samsung’s SG&A expenses may go down over time as a percentage of total revenue, as they don’t need to spend as much to maintain the Galaxy mindshare they’ve already achieved.

    • oases

      Mindshare is useful in the short term. A great product is essential in the long term. I think the taps would need to stay on under such a scenario.

      • http://www.facebook.com/people/Steve-Lang/546797695 Steve Lang

        I’m thinking that once they establish the Galaxy name with handsets equal (or better) to competition, they only need to keep up the ‘equal or better’ and wouldn’t need to spend as much money on promotion going forward. With other Samsung divisions supplying parts and expertise to the mobile division, they are in a good place to maintain their hardware parity. Of course another company can pursue the same strategy against Samsung, but many of the other Android makers are having mixed results in the market and may not be able to stomach such an expensive effort.

        Samsung would still spend more money than Apple on SG&A so would always be trading away some margin to maintain marketshare. But being #1 with smaller profitability is much better than being #3 and losing money. Maintaining hardware parity against other Android makers seems very achievable for Samsung since we are mostly talking spec wars.

        Google Nexus could conceivably be a threat to this strategy, as Google seems willing to eat profits to get sales.

      • http://www.isophist.com/ Emilio Orione

        You could be right if this marketing money goes to conquer end users minds, but the main part goes to convince operators to push samsung’s phones.
        At the end of the money end users could still buy samsung, operators will look for the next money dealer or will push whatever they want.
        For operators having more horses is an advantage, nowadays it’s a two horses race, one for the product one for the money, if you stop the money the horses will increase.

      • http://www.facebook.com/people/Steve-Lang/546797695 Steve Lang

        That’s a good point about promotions within distribution. If Samsung were to reduce promotions to the operators, salespeople may stop pushing Samsung phones. But it might take a similar marketing push from another manufacturer to get salespeople to actively push another Android phone. That is, if at one point all manufacturers are offering comparable hardware and comparable promotions, Samsung may be counting on the Galaxy name to maintain sales.

        I agree that such an advantage can be short-lived. But for the time being at least, many people I know are familiar with iPhone and Galaxy brands for smartphones, and little else.

  • http://twitter.com/gregone gregone

    I’m wondering if Samsung could impute device return costs (including from their sales channels) as” other” in SG&A? That could very well explain the disparity between their sales announcements and the numbers released during the Apple lawsuit.

  • Name

    What part of the noise comes from Samsung’s 369k employees vs. Apple’s 73k?

  • Gw

    I think a huge percentage the more than you Account for may be advertising. I remembergoing to Italy to the Trevi fountain and Samsung had a giant billboard right there at the Trevi fountain and in the two weeks I spent in Central and Eastern Europe only saw one advertisement for Apple and that was in poland, none of the other countries did I find any Apple advertising but Samsung was everywhere.

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  • http://www.isophist.com/ Emilio Orione

    Perhaps these numbers explain why apple has contract with roughly 250 operators while samsung, nokia, rim, htc etc.. have contracts with more than 600, something you have got to give.
    For now, with a high price phone with supply constrain that limits distribution, this is not a bit issue, but for the next low cost iPhone it could be.

  • http://twitter.com/Dopeyrizer Vesa Tormanen

    In many countries (I’ve see these in India and China) the leading vendors (apart from Apple) sell their devices with a shop-in-shop concept. Even though a 3rd party runs the retail, there’s a Samsung shop there with Samsung personnel providing more expertise in a branded area. Pure 3rd party sales channels have huge perks from Samsung based on sales performance (holidays etc.). When I lived in India every ad break I saw started with an ad for Galaxy Note and they had marketing teams in all the McDonald’s restaurants demonstrating Note to the people queuing to buy their chicken burger. The advertising exposure to any other mobile device brand was an order of magnitude less.

    I guess what I’m trying to say is I don’t really see a surprise in the numbers. They’ve clearly decided that being biggest is an important target (I guess they know the perils of being #2 from all those years losing to Nokia) and they’ve decided to use marketing to gobble as much share released by Nokia and RIM as they possibly can.

  • gctwnl

    All this inter-segment stuff reminds me how Electronics giant Philips almost went under a while back. There the ‘country units’ sold to other ‘country units’, but the revenue of one was not the same as the cost of the other (complex rules) and the head office made up for the differences. That way, all units could be profitable, except for the grand total. The company almost went under.

    Samsung has these segments, where Apple has outside providers (like Hon Hai). The sales revenue of Hon Hai does not show up in Apple’s numbers as sales (only as cost of goods sold).

    Interesting thing here seems that Samsung counts sales revenue as a group multiple times, one time for the internal and one time for the external sale. If I were an investor in (overall) Samsung, I would become pretty suspicious about bloated revenue figures and cost centers looking like profit centers.

  • Jim

    Bribes. Samsung is more like an organized crie amily than a company.

  • Maddoxx

    Here’s a conspiracy theory- I wonder if Samsung anticipated loosing the lawsuit against Apple and started cooking their books to make itself appears less profitable. Since they weren’t make a lot of money, the final patent infringement verdict could be considerably less. Hmmm!

  • net_addict

    Samsung and Apple are extremely different companies. They happen to compete in the mobile phone space, and to some extent PCs and MP3 players, but that’s where the similarities end. For one, Samsung produces some chips and displays used in Apple products. Furthermore, Samsung sells TVs, refrigerators, semiconductors, TFT/LCD, air conditioners, etc. Sales & marketing activities will be different for all of its different businesses, and I imagine that SG&A as a % of DVD player revenues is much different that SG&A of Galaxy smartphone revenues. Stop comparing the two where it doesn’t make sense.

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  • http://www.readenews.com/ gullfaraz

    In
    many countries (I’ve see these in India and China) the leading vendors
    (apart from Apple) sell their devices with a shop-in-shop concept. Even
    though a 3rd party runs the retail, there’s a Samsung shop there with
    Samsung personnel providing more expertise in a branded area. Pure 3rd
    party sales channels have huge perks from Samsung based on sales
    performance (holidays etc.). When I lived in India every ad break I saw
    started with an ad for Galaxy Note and they had marketing teams in all
    the McDonald’s restaurants demonstrating Note to the people queuing to
    buy their chicken burger. The advertising exposure to any other mobile
    device brand was an order of magnitude less.

    I guess what I’m trying to say is I don’t really see a surprise in
    the numbers. They’ve clearly decided that being biggest is an important
    target (I guess they know the perils of being #2 from all those years
    losing to Nokia) and they’ve decided to use marketing to gobble as much
    share released by Nokia and RIM as they possibly can.

  • http://www.readenews.com/ gullfaraz

    Could it be Samsung’s warranty service? They actually send a technician
    to your doorstep same-day for most if not all warranty services.