LG edges back into the handset picture
LG Electronics’ handset business is beginning to push the right buttons.
A year ago, the South Korean company was being squeezed by industry leaders such as Nokia, Motorola and Samsung, and was overtaken by Sony Ericsson as the fourth largest handset maker.
However, in July LG reported its highest quarterly profit and a record profit margin of 11.6 per cent, the second highest after industry leader Nokia. And the company is predicting the company will put pressure on Sony Ericsson once again.
A large part of the resurgence is down to a change in direction for LG.
Historically a mid-tier player selling affordable phones, it raised eyebrows with a series of stylish best sellers including the Chocolate, the Shine and the Prada.
The Chocolate was launched in 2005 but received a lukewarm reaction at first. However, the model began to take off last year and LG then launched the Prada, in conjunction with the fashion house, and the Shine.
All have proved hugely popular globally, with 13m Chocolate handsets sold and 5m Shine phones, while its Prada phone has carved out a niche market.
The success has translated into profit and LG is hoping to accelerate the momentum to win back fourth spot with its new camera phone, LG Viewty, which will be launched at the end of this month.
LG is pinning high hopes on the premium third-generation phone, which it believes will cement the company’s image as a premium phone maker and help it break into the top three handset makers within three years.
“LG is making its name as a fashionable handset maker as its new attempts such as using a touch pad and a stainless-steel casing become successful,” says Peter Yu, analyst at BNP Paribas. “It used to be just a mid-tier product maker but it is now making unique concept products. People started to pay attention to its new models, which is a big change from the past.”
The increasing popularity of LG’s high-end phones has helped the company cut costs significantly, using economies of scale.
It became more cost-efficient, with standardised component sourcing and rationalised supply chain. And an improving performance in the 3G segment and the GSM market also contributed to LG’s turnround. The company aims for profit margin of above 5 per cent for the full year.
However, in spite of LG’s rebound, analysts have raised questions about the sustainability of LG’s high margins, saying that the company needs a stronger product line-up and more competitive cost structure to overtake bigger rivals.
“Although margins are better, they are still a long way away from what Nokia is seeing,” says Carolina Milanesi, a researcher at Gartner. “LG is still very much perceived by operators and consumers as a mid-tier player and this is what they need to change if they want to continue to improve margins.”
The key to whether LG can seriously challenge Nokia and others lies in its ability to come up with more than one stand-out product, says Ms Milanesi, stressing that LG needs to build a stronger product portfolio addressing different price levels and needs of the consumer.
“LG needs winning products that hold their price for much longer than products like the Chocolate have done.
“Not having economies of scale like Nokia, they cannot afford to cut prices and maintain margins.”
Kim Hee-yeon, an analyst at Nomura International, says LG needs stronger presence in emerging markets if it is serious about joining the top three, as industry growth is driven by increasing demand for entry-level phones, which are popular in those regions.
The company therefore faces the dilemma of having to increase shipments of cheaper phones while maintaining profitability. “There is higher growth potential in the low-end market. LG should be more aggressive in that segment but it carries risks because it may have to sacrifice margins,” says Ms Kim.
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