In the era of flip phones, LG Electronics was king. “Life's Good”, was how the South Korean group’s marketing slogan put it. But the stronghold made LG too comfortable. Its decision to enter the smartphone business later than peers was a costly mistake.
After 23 consecutive lossmaking quarters, LG is now quitting the mobile industry. It is the right decision. Years of catch-up spending pushed LG to become the third-biggest smartphone maker in 2013. But success was shortlived. The company fell behind on new releases and dropped out of the top seven last year, with about 2 per cent of the global market.
LG’s mobile unit accounts for just 8 per cent of sales but most of the group’s losses. There is little hope of improvement. The gap has widened between the high-end segment, in which Samsung and Apple hold 37 per cent of the market, and the five Chinese makers at the low end. Other smartphone sellers account for just 16 per cent of total sales, down from 31 per cent three years ago, according to Counterpoint.
The mobile unit has long been LG’s worst-performing business too. Negative operating margins — which fell to minus 17 per cent in 2019 — continue to weigh on the double-digit margins of its lucrative home appliances business, which accounts for 43 per cent of group sales.
That drag is reflected in the market valuation. Even after a 200 per cent gain in shares in the past year, shares trade at a 1.8 price to book value — half that of global peers such as Electrolux and Whirlpool. In the longer term, dividends of 0.5 per cent, a fraction of Whirlpool’s, should see a boost.
Growth in the smartphone industry is slowing everywhere. Global sales fell 13 per cent last year. Even if it does recover, LG’s 40 per cent stake in LG Innotek and LG Display — key suppliers to Apple — will provide exposure to any upside. It has made the right move.
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