Samsung Electronics’ quarterly operating profits are expected to fall below 8 trillion won ($7.9 billion) for the first time in two years.

The company said in its earnings guidance Tuesday that it posted 7.2 trillion won of profit in the second quarter, a 24 percent drop from the 9.5 trillion won recorded a year ago. Its sales were at 52 trillion won, representing a 9.5 percent fall compared to the same period in 2013. 

Samsung Electronics tried to explain the profit decline, saying that a strong Korean won and a sluggish smartphone market were the major factors behind the fall.

“The earnings forecast is the result of the strong Korean currency throughout the second quarter and a slowdown in the overall smartphone market growth. We saw increased competition in the Chinese and some European markets. And this led to higher inventories for the medium- and low-end smartphones,” the statement said.

Analysts also attributed the sharp decline to the lackluster performance of the company’s Information Technology & Mobile Communications division. Samsung’s smartphone business, which accounts for more than 70 percent of the company’s total business profits, has been losing ground to Chinese companies in recent years.

“While Chinese handset makers are fast building their competitive edge in the global markets, Samsung Electronics has shown few differentiated factors in its smartphone business,” said Lee Min-hee, an analyst at I’M Investment & Securities.

Chinese companies like Huawei and Lenovo are increasingly expanding their market shares in the Chinese market, which has grown into the biggest handset market. They are also increasing their presence in North America and Europe, which Samsung has long dominated with its high-end smartphones. The weak sales of its new marquee smartphone, the Galaxy S5, in these regions aggravated the situation.

In the third quarter, Samsung may continue to see a sluggish performance as it has not found any new growth engines to improve its earnings amid the fierce competition with Chinese companies, industry watchers said.

“Samsung Electronics has posted over 8 trillion won in operating profits for the last year due to its strong performance in the smartphone business. However, its lackluster performance in the smartphone segment now mirrors the sluggish growth of the entire business of Samsung Electronics,” said Byun Han-joon, an analyst at KB Investment & Securities.

Lee Joon-jae, head of KB Investment & Securities’ research center, predicted Samsung Electronics will post earnings of less than 8 trillion won in the third and fourth quarters. “Most of the company’s businesses will see an improvement in the third quarter but they will not be able to post more than 8 trillion won (in profit),” Lee said.

By Shin Ji-hye (shinjh@heraldcorp.com)