netimperative.com | Thu Sep 15, 2005 9:37 AM ET168
By Kim Miyoung
TOKYO (Reuters) - Once lauded as one of the world's fastest-growing mobile phone makers, LG Electronics Inc. is now struggling to keep its handset business profitable, as fierce competition hits margins and delays to launches of new models slow sales growth.
Although aggressive restructuring and an inventory write-off will help the South Korean company return to profit this quarter, it still has a long way to go to remain competitive in an increasingly tough market, analysts said.
"It's not just a result of toughening competition," said Lee Jung-chul, an analyst at Mirae Asset Securities. "It's a combination of lack of hit models, somewhat less effective execution, relatively narrow range of loyal customers and heavy marketing expenses that all depress profitability."
LG (066570.KS: Quote, Profile, Research), which also makes televisions and home appliances, was a latecomer to the crowded cell-phone market but has grown rapidly in the last four years.
Handset shipments have increased more than 60 percent every year for the past four, driven by demand for its designs and technology, coupled with lower prices and aggressive marketing. Mobile phone sales now account for around a third of total revenues.
COMPETITION HITS SALES
But since overtaking Siemens AG (SIEGn.DE: Quote, Profile, Research) as the world's fourth-largest cell-phone maker last year, LG has seen growth slowing sharply and blamed intensifying competition from bigger rivals for failing to meet its sales target.
LG disappointed the market by selling just 12.09 million phones in the second quarter, up from the first quarter's 11.1 million but below its guidance for more than 13 million. It also revised down its cell-phone sales target for 2005 to 55 million units from 62 million.
However, LG said it was turning around quickly to make up for the losses it incurred in the last quarter.
"Our internal target for this year is still 60 million, and we could achieve the target and would probably sell more than 60 million," Ahn Jang-seok, a vice president at LG's telecoms division, said at the Reuters Asia Technology and Telecoms Summit in Tokyo.
One option LG is weighing to revive slowing growth is the third-generation mobile market, which is expected to see global sales more than triple this year to 52.4 million phones, according to a research firm Gartner.
It aims to boost 3G phone sales by 58 percent to 6 million units in 2005, but analysts say it may struggle to reach the target as it depends heavily on a few large clients such as Hutchison Whampoa (0013.HK: Quote, Profile, Research), to whom it sells some 1 million phones every quarter.
The company, which recently agreed to jointly develop next-generation phones with Japan's top mobile carrier NTT DoCoMo (9437.T: Quote, Profile, Research), plans to sell 1 million 3G phones to DoCoMo by the end of 2006, Ahn said.
But analysts urged LG to take more aggressive strategies to stay competitive.
"It needs to be more of a risk-taker to produce well-received models like Motorola's (MOT.N: Quote, Profile, Research) Razr," said Lee Seung-hyuck, a Woori Investment & Securities analyst. "Although such a strategy could boost development costs, that's how it can improve its brand and profitability."
Unlike its bigger rivals -- Nokia (NOK1V.HE: Quote, Profile, Research), Motorola Inc. and Samsung Electronics Co. Ltd. (005930.KS: Quote, Profile, Research) -- LG has recently struggled with a lack of hit models.
LG's latest hot-selling model is its U8120 phone, which sold only 1.8 million last year, while its bigger rival Samsung recently shipped more than 5 million sets of its popular D500 model.
"We had some organizational changes and productivity has increased. So we have no problems in supporting customers and we do not see any problem in hitting our target," Ahn said at the summit, held at Reuters offices in Tokyo.
Ahn said handset volume would increase by some 40 percent in the third quarter to 17 million from the previous quarter and margin was also expected to rebound to around 6-7 percent, against minus 0.2 percent in the second quarter.
But the estimated margins are still well below Motorola's 11 percent and Samsung's 12 percent in the second quarter.
"LG needs to deal with rising marketing expenses from the expansion of open market and intensifying competition," said S.R. Kwon, an analyst at Hyundai Securities.
LG Electronics has said it would keep marketing spending high in the second half as it expects heated competition in key overseas markets in Europe and the United States.