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LG Closes in on Motorola

Sleek design is helping the Korean cell-phone maker rack up market share.

With Motorola in a downward spiral, there's a new burning question in the $142 billion-a-year global cell-phone business: Who will profit most from the collapse of one of its majors? Surprisingly, the answer is not market leader Nokia or No. 2 Samsung Electronics. The real winner, as it turns out, seems to be LG Electronics, a South Korean company that had a reputation for turning out well-priced, serviceable handsets that didn't scream out to be noticed.

Now, LG's days as a second-tier player are over. Shipments of its phones were up 54% in the first three months of 2008, from a year ago. In the process, LG notched its market share up to 8.6%, from 6.4% a year earlier, according to research firm Strategy Analytics. That catapulted it into fourth place in the rankings, ahead of Sony Ericsson and within striking distance of once unassailable Motorola. If Motorola can't get its act together, "LG is poised to overtake the struggling company later this year," says researcher Thomas Kang of Strategy Analytics.

No question, LG's rapid ascent has been, to some extent, a matter of luck. Two of its main rivals, Motorola and Sony Ericsson, have stumbled. Then again, LG has learned a lesson or two from competitors' mistakes. Motorola relied too heavily on its trend-setting, ultra-slim RAZR. LG's biggest hit so far has been Chocolate, a skinny number that resembles a chocolate bar and is equipped with a dial pad that glows red: Some 18 million have been sold worldwide since its launch in May, 2006. The company also made a splash in Europe and Asia with its Prada phone, a touch-screen model designed in conjunction with the Italian fashion house. The pricey handset made its debut in March of last year—three months before the iPhone.

The Chocolate's success helped propel its creator, Skott Ahn, to the top job at LG's $11.2 billion handset unit in early 2007. But instead of churning out a succession of sequels, as Motorola did with the RAZR, the 50-year-old Ahn has relentlessly prodded his people to come up with distinctive new models. To turn up the dial on innovation, he doubled the headcount of designers, to 150, and engineers, to 4,000. He also launched an annual in-house design competition.

This year's winner is the Secret, fashioned from sleek yet sturdy carbon fiber and tempered glass and outfitted with a 5-megapixel camera and software that lets users create their own music videos. It went on sale in Europe this month, and it's likely to be introduced in the U.S. Says Ahn: "We needed star performers to build trust in our brand."

It's working. The flashy new handsets have helped LG raise its profile outside of Korea and North America, which together account for nearly half of sales. (Verizon Wireless, with which LG has a close partnership in the U.S., declined to comment.) "Carriers are treating LG with more respect," says Harrison Cho, telecom devices analyst at Mirae Asset Securities in Seoul.

So are investors. LG's stock is up 57% this year, making it the best performer among the world's top five cell-phone makers. Mirae's Cho expects profits from LG's handset business to more than double this year, to just over $2 billion, on the back of a nearly 50% jump in sales.

Ahn is well aware that his outfit is still weak in the lucrative smartphone market where Apple, Research in Motion, and HTC of Taiwan all enjoy margins that top 20%, while LG's hover at 14%. And Apple, while a niche player in handsets, could become a titan if it decides to lower prices and cut deals with more carriers. Says Ahn: "We have a long way to go, but we are on the right track."

by Moon Ihlwan

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