April 19, 2021

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LG Electronics to end loss-making smartphone business

3 min read

SEOUL — LG Electronics said Monday that its board decided to terminate the company’s loss-making smartphone business, with analysts saying focus is now expected to shift to the more profitable home appliance and TV divisions.

LG’s seven-member board of directors approved the company’s suggestion to kill the handset unit, which posted more than 5 trillion won ($4.4 billion) of operating losses over the last six years.

“With the termination of the MC [mobile communications] business, our sales could decline in the short term, but we expect it will improve our business portfolio and financial structure in the mid- and long-term,” LG said in a regulatory filing announcing the move.

The decision comes three months after CEO Brian Kwon said that the company was open to all options for the mobile communications division in an internal memo sent to employees, hinting that it would withdraw from smartphones.

LG also said that the wind down of the phone business is expected to be completed by the end of July although inventory of some existing models may still be available after that.

And despite the end of the business, the company said that it will continue to leverage its mobile expertise and develop mobility-related technologies such as 6G telecommunications to help further strengthen its competitiveness in other business areas.

“Core technologies developed during the two decades of LG’s mobile business operations will also be retained and applied to existing and future products,” the company in a statement.

Analysts had been expecting the decision to exit the devices business after the collapse of talks with potential buyers, such as Vietnam’s Vingroup and Russia’s sovereign fund. They say it was the right move, if a belated one.

“The decision will help the company in the long term,” said CW Chung, a senior analyst at Nomura. “The market wanted it to do so earlier. LG just delayed the decision, hoping that it could turn around the business once again,” Chung said.

“LG is doing well in other businesses,” he added. “So if it can build them up a little bit more, I am sure that its performance will improve.”

Ko Eui-young, an analyst at Hi Investment & Securities, said last week that while a sale would have been the ideal outcome, withdrawing still makes sense.

“LG may reduce its [annual] loss by 550 billion won, which will add 4 to 5 trillion won of value to the company,” Ko said

Investors initially appeared to welcome the news, sending shares in LG Electronics up more than 2.5% in Monday morning trading, but the rally lost steam and they ended up closing down 2.5%.

The move closes the curtain on two decades manufacturing and selling phones. LG started its mobile business in 2000 by acquiring LG Information & Communications.

LG Electronics is part of the broader LG conglomerate, one of South Korea’s powerful family-run business groups known as chaebol. While smartphones have ultimately proved a disappointment, analysts say that LG Electronics and the broader group have plenty of strengths going forward including home appliances such as washing machines and refrigerators, long a mainstay, as well as televisions and batteries.

But smartphones were ultimately unable to overcome a series of obstacles.

Market observers say LG, unlike domestic rival Samsung Electronics, has failed to secure stable chip supplies for its smartphones. The larger and more diverse Samsung has long had an advantage as it also manufactures many key components that go into the phones, such as advanced displays and memory chips.

LG’s lack of an in-house chip supply forced it to battle Chinese smartphone makers such as Xiaomi, Oppo and Vivo for technical support and resources from mobile processor developers such as Qualcomm.

It was a more marginal customer for chip suppliers, further hurting its chances of regaining its former influence.

LG also failed to cope with changing trends. The company stuck to feature phones into the late 2000s, even after Apple launched the iPhone in 2007, ushering in the smartphone age.

It was the world’s third-largest phone maker in the early and mid-2000s, behind Nokia and Samsung. However as of the third quarter of 2020, LG’s global market share for smartphones was just 1.91%, according to Counterpoint Research.