Trouble in TV Land
By Kim Yoo-chul
LG Electronics, the world's second-largest flat-screen television maker, can ill afford to lag behind in light-emitting diode (LED) backlit liquid-crystal display (LCD) televisions, which is the product of the moment in the consumer electronics industry.
However, the recent struggles of LG Innotek, LG Group's electronics parts maker that provides LED chips and modules to LG Electronics, just might be enough to derail the company's bid for world television supremacy.
LG, one of South Korea's biggest conglomerates, has been pushing to "vertically integrate" its key business units to lower the production costs for LCD televisions with LED backlighting, a premium segment in the television market. And the role of LG Innotek was considered a key part of the puzzle.
Giving more power to specialized parts units such as LG Innotek and LG Display, instead of having LG Electronics handle LED chips and LCD screens internally, was also believed to allow the firm's consumer electronics products to retain a competitive edge.
However, group officials have to be concerned about the recent struggles of LG Innotek, which continues to see its stock prices plummet and its ability to supply LED chips questioned.
LG Innotek's current stock prices have dropped about 40 percent since September and industry watchers are casting a murky outlook.
"LG Electronics' LED TV strategy is highly reliant on the production capability of LG Innotek in LED chips, and also LG Display's ability to provide the panels," an industry source told The Korea Times, Wednesday.
"The drop in stock prices reflects the worries of investors over LG Innotek's capability to finance its LED business. There are also uncertainties over the market conditions for LED products."
LG Innotek, which makes LED components and LCD modules, said it planned to invest 1.15 trillion won (about $970 million) by the end of 2010 to boost its production capability.
Company officials, however, are struggling to find ways to raise more cash to spend on its LED business, including plans to issue new shares.
At the end of October of this year, LG Innotek's debt-to-equity ratio stood at 64 percent, and the company has already issued bonds worth more than 100 billion won combined.
"It will be challenging for LG Innotek to finance its aggressive LED capital expenditure with only EBITDA earnings and debt," Switzerland-based brokerage Credit Suisse (CS) said in a report.
A sharp deterioration of the company's printed circuit board (PCB) margins, higher competition and rising inventories amid the approaching year-end season are also expected to weigh on the company's profit structure, analysts say.
Burden for LG Electronics
The troubles at LG Innotek is leading to uncertainties over LG Electronics' LED backlit LCD television business, with the consumer electronics maker continuing to adjust targets seemingly every other week.
Flat screens using LED backlights are slimmer, more power-efficient and offer sharper images than those lit by traditional cold cathode fluorescent lamps (CCFLs).
Led by Samsung Electronics, the global LED TV market has rapidly been increasing as consumers are allured by the enhanced picture qualities and energy saving features amid signs of economic recovery.
LG Electronics lowered its LED TV sales target for 2010 to 5 million in a third quarter earnings briefing last month. A month ago, Kang Shin-ik, LG's television chief, had said it would sell 7 million units of LED TVs in 2010.
"It is difficult to predict the global LED TV market as the segment has been on a faster expansionary track. That's why our target sales are having flexibility," an official at LG Electronics said.
"Some say the lowered target was due to insufficient chip capability from Innotek. However, we could receive the necessary components by expanding our outsourcing channels."
The Innotek spokesmen said the company was on a stable route to strengthen its LED chip abilities and added that more related measures would come.
Additionally, LG Display is planning to absorb the LCD module operations of LG Innotek.
Innotek, in return, will receive a cash infusion that will allow it to concentrate on LEDs.
"LG Innotek will earn 1.5 trillion won in LED sales in 2012. Still, we are in the process of vertical integration of our LED businesses from LED backlighting, wafers, chips and packaging to module operations," an Innotek official said.
LG Innotek, which merged with another LG Group component-producing arm, LG Micron, in July, has LG Electronics, LG Display, Nokia, Motorola and Japan's Sharp as its biggest clients.