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Samsung Electronics is spending more to build its new flagship Galaxy S5 than the previous model despite a slowdown in the high-end smartphone market.
The 32-Gigabyte Galaxy S5, which is water resistant and features a heart-rate monitor and fingerprint scanner, costs an "astronomical" $256.52 to build, according to teardown analysis by IHS. The model, which was launched on Friday, is selling for around $650 off-contract in the U.S.
This is well above $236 required to build its predecessor and $207 for the iPhone 5S. It contrasts even more starkly with smartphones at the lower end of the cost spectrum, such as the ZTE U793, which has a materials bill of less than $35, according to the market research firm.
"Samsung is throwing more components into the device - they know that the high-end is going to be very competitive and they want to differentiate themselves. That in effect is their strategy," Wayne Lam, senior analyst, wireless communications at IHS told CNBC.
"They are really competing both against Apple and their Android ecosystem – so there is more competitive impetus to innovate by adding more features," he added.
Samsung's market share dropped to 29.5 percent in the fourth quarter of 2013, from 31.1 percent a year earlier, mainly due to a saturated high-end smartphone market in developed regions, according to research firm Gartner. During this quarter, Chinese manufacturers including Huawei and Leonvo picked up market share, as they acquire technical and design expertise to add to their low production costs.
Meanwhile, Samsung said last week that is was on track to post a second straight quarter of declines in profits because slowing growth in smartphone sales is weighing on earnings. The South Korean tech giant estimated that its January-March operating profit fell by 4.3 percent to 8.4 trillion won ($7.96 billion).
"It remains critical for Samsung to continue to build on its technology leadership at the high end," Gartner said in a recent report.
Discussing the impact of the higher costs on Samsung's bottom line, Lam said the percentage loss in gross margin isn't much relative to the revenue they capture. Margins in the premium segment are "tremendously" high, he noted.
It remains unclear whether Samsung's investment will pay off, however.
"Smartphone makers are getting into an arms war they are innovating so quickly that we may have more technology than markets are asking for," Lam said.
Tom Kang, research director at Counterpoint shares a similar view. While Samsung has invested heavily in components to make the device stand out, he said the upgrades are not immediately "obvious" to consumers looking at the phone on store shelves.
"There are only a handful of feature of components that consumers appreciate – some of them may work, some may not. At the end of the day, consumers may appreciate a lower price tag more," he said.
The device's fingerprint scanner has come under a lot of scrutiny in the past day after researchers at Germany's Security Research Labs found there was a loophole in the sensor that could leave a user's phone vulnerable to hackers.