Phone business

LG exits mobile phone business l KBS WORLD

ⓒ Yonhap News

LG Electronics has decided to shut down its smartphone business, 26 years after the company began producing cellphones with the “Hwatong” brand in 1995. Although LG has attracted cellphone users with various successful products, it has not been able to fully adapt to market developments in the era of smartphones, without succeeding in convincing consumers.

LG’s mobile business has posted deficits for 23 consecutive quarters since the second quarter of 2015, with cumulative operating losses amounting to US$4.4 billion. The company made its own efforts to revive the ailing business, but was unable to turn the situation around. Eventually, it made the strategic decision to withdraw from the mobile phone business.

Here is Kim Dae-ho, director of the Global Economic Research Institute, to examine the potential impact of LG’s decision on the smartphone market and the company’s new strategy.

The business community analyzes LG’s failure in the smartphone sector from several angles. More importantly, the company failed to adapt to a changing market environment.

LG was the main phone maker in the 2G era, when mobile phones were just used to make phone calls on the go. Then Apple ushered in the era of 3G and 4G, when people used smartphones as laptops to exchange information, not just as phones. But LG mistakenly believed that the 2G era would last a long time and that it would take a long time for Apple to actually bring smartphones to market. For this reason, LG has not been fully invested in the development of smartphone technology. On the contrary, it remained satisfied with its dominant position in the 2G feature phone market and focused more on “functional” or “design-centric” phones. It is unfortunate that the company did not respond appropriately to major technological change and changing market conditions.

LG approached Vingroup in Vietnam, Volkswagen in Germany and Google in the United States to sell its mobile phone business. But he failed to reach an agreement with any of these potential buyers and eventually decided to dismantle his mobile business unit. It’s a shame that LG ditched its smartphone business, as the company was seen as the main developer of the so-called rollable phone, billed as the next-generation smartphone.

The rollable phone has a rollable screen, which unrolls like a scroll. The phone can increase or decrease in size by scrolling and rolling the screen. It is indeed a dream phone. At the Consumer Electronics Show in Las Vegas earlier this year, LG released a short 7-8 second video showing off its rollable phone to wow many attendees. The innovative phone even won the title of best product.

But developing a product with advanced technology is one thing and deploying it for mainstream use is another. To actually launch the product on the market, the company would have to reduce its mass production costs. But LG’s current reality is too difficult to reach that level.

LG’s exit from the mobile phone business is expected to have a big impact on the smartphone market, both in Korea and abroad. LG Electronics is the world’s ninth largest smartphone maker with a market share of 1.8%. But it ranks third and fourth respectively in North America and Latin America in terms of market share. LG’s departure will likely benefit Motorola and Samsung in North America, while Chinese phone makers like Xiaomi and Oppo could take advantage of the situation in South America. In the Korean market, the competition between Samsung and Apple will be even more intense.

Samsung accounts for around 60% of the Korean smartphone market, followed by Apple with 25% and LG with just over 10%. The question is who will absorb LG’s 10% share, which is not at all small.

I think Samsung is in a better position than Apple, because many users of LG smartphones running on Android system will probably switch to Samsung phones running Android rather than Apple iPhones which run a different operating system, iOS. Samsung, for its part, should compete with Chinese brands operating on the Android platform.

The end of LG’s mobile business is bad news for local consumers in Korea, as Samsung will be the only domestic smartphone maker. There are fears that Samsung’s monopoly status will lead to higher handset prices and lower quality of service. Major telecom operators would negotiate with handset makers to decide on consumer subsidies. But their declining bargaining power will increase the financial burden on consumers buying a new smartphone.

For Samsung, LG’s withdrawal from the smartphone market is also not good news. Caught between Apple and Chinese phone makers, Samsung will have to struggle to retain its leading position in the global market, where Korean-made smartphones may be less present.

While LG has decided to end its mobile phone business, the company still has a vision. LG Group Chairman Koo Kwang-mo has sought to revamp the group’s business portfolio by focusing more on future growth drivers. Now, this initiative should gain ground.

Koo restructured the group’s portfolio citing – “choice and focus”. LG has revised its future strategy to invest more resources in viable and profitable areas, including electric vehicle parts. As part of these efforts, LG decided to form a joint venture with a Canadian-based auto parts company. Moreover, LG is unquestionably one of the leading manufacturers of advanced home appliances. The company seeks to improve its commercial structure by concentrating its energy on the core businesses. This includes its wide range of “home entertainment” products that help people enjoy music, movies and other activities at home using home appliances.

In fact, LG Electronics posted its best quarterly performance in the first quarter of this year, thanks to strong sales of its home appliances, including high-end televisions. The company’s overall performance will improve from the second quarter as its money-losing smartphone business will be excluded from performance reviews.

LG Electronics plans to focus on new industries such as electric vehicle components, robots, artificial intelligence and batteries. While it has decided to withdraw from the smartphone business, the company stresses that it will continue its research and development activities in key mobile technologies.

I think LG made the right choice by focusing on technological development in preparation for the fourth to fifth industrial revolutions. In the age of the Internet of Things or IoT, it is smartphones that connect machines to machines.

For example, people will be able to drive a self-driving car with their smartphone. Without smartphone technology, LG’s electrical appliances and automotive electronics will lose competitiveness. This is why LG stresses that it will continue to develop smartphone technology, which is linked to future industries like autonomous driving and IoT, even if it does not produce smartphones itself. LG has various patents in smartphone technology. It is clearly ahead of the rest in rollable phones, in particular. It seems that LG is determined to cement its status as a global ICT company through constant technological development.

The closure of LG’s mobile business has big implications for other companies. If a company is content with its past success and fails to move forward, it will inevitably be left behind in the cutthroat market. In the era of the Fourth Industrial Revolution, even large companies will struggle to survive if they miss the opportunity to transform in innovative ways. Blackberry, Nokia and Sony all failed for this reason.

We hope Samsung Electronics, the world’s largest smartphone maker, learns from what happened to LG, while LG can turn the misfortune to its advantage.