LG on corporate evolution
Chairman Koo on double task — searching for new core competencies; bolstering existing ones
By Kim Yoo-chul
LG is preparing a comeback driven by its commitment to see diversification of earnings by giving more authority to its telecom and chemical businesses.
The ability to foster businesses when everyone is tightening their budgets is a clear sign of true leadership; however, focusing on growth in a growth-inhibitive environment could be a daunting challenge.
A glib answer for expansion is ``diversification’’ and LG Chairman Koo Bon-moo is directly handling it because the business tycoon believes a diversified firm is better insulated against a loss of revenue in one business sector.
Koo is paying more visits to LG’s plants in Korea for inspections, strengthening the view of a ``steady hands’’ policy.
LG’s revenue growth so far is mostly because of the significant contribution of the conglomerate’s listed electronics affiliates.
Last year, it saw 141 trillion won in total revenue, up from 30 trillion won it registered in 2004 and there is no doubt that its ``electronics trio’’ ― LG Electronics, LG Innotek and LG Display ― led the way.
This year, LG is eyeing record revenue of 156 trillion won with $107.3 billion coming from overseas. The target is achievable considering mammoth growth in its chemical businesses and higher hopes for a turnaround in telecommunications, officials said.
``Given the uncertain outlook in electronics due to slow demand for digital items and in the global economic recovery, LG’s chemical and telecom businesses are increasingly being asked to contribute more,’’ said a fund manager from a U.S.-based investment bank in Seoul.
The manager said it was noticeable that LG has invested more in non-electronics businesses, as that mean it is keener on diversifying its business portfolio.
``We are seriously considering whether to raise our portion of listed LG stock after the government’s decision to allocate the latest radio band to LG and the brighter outlook in its chemical business.’’
LG Electronics is the world’s No. 2 TV maker, although it is a second-tier maker in the world of smartphones. LG Display also only trails Samsung in the global flat-screen industry.
LG Innotek is the group’s component-making affiliate.
LG Chem is the world’s biggest maker of lithium-ion batteries for electric vehicles, while LG Life Science and LG Household & Healthcare are the conglomerate’s other chemical-centric units.
Telecom business to recover
Telecommunications are widely regarded as a ``double-edged sword’’ for the entire group because the business has stalled over the last few years.
LG fared well in the world of 2G-based ``feature phones’’ few years ago when LG Electronics provided the quite competitive design-focused 2G variants Chocolate and Shine.
But it was limited in terms of expansion in smartphones as it didn’t have the radio band that almost all telecommunication companies across the globe hasd ― 2.1GHz.
Back in 2000, the government allocated the 2.1GHz band to LG, however, it voluntarily dropped the right in 2006 because handset vendors had been reluctant to offer more CDMA tech-based mobile phones to LG.
Since major handset manufacturers offered devices based on the 2.1GHz radio band, LG Uplus suffered difficulty in getting handsets and giving better roaming services to clients.
Uplus is now the nation’s smallest mobile carrier after SK Telecom and KT, and it is the only firm which has not been selling Apple’s iPhones due to this reason.
Sales of smartphones using Google’s Android mobile operating system surpassed the 10 million mark here last week.
SK had 6.18 million subscribers using Android phones, followed by KT with 2.06 million. Uplus had only 1.86 million as of the end of June, according to data from the companies.
But Uplus, led by former telecom minister Lee Sang-chul, can now offer speedier smartphone models as the nation’s telecom regulator excluded SK Telecom and KT from bidding for advanced 2.1-gigahertz (GHz) frequency bands in an upcoming auction, making a fairer game.
``It took a decade before we could re-use the 2.1GHz band,’’ said a top-ranking LG executive.
Uplus welcomed the decision because obtaining the 2.1GHz band will offer it an opportunity to offer advanced wireless services, leading it to invest in the next generation LTE network, it said in a statement.
Korea, which is the world’s most-wired society with Internet literacy exceeding over 85 percent of a population of some 47 million, has already emerged as a ``hot-bed’’ for smartphones, leading to a growing requirement for wireless data services.
Given the surge in data traffic demand, winning frequencies is expected to help telecom companies to deploy advanced networks as local carriers transition toward LTE-related services, Uplus officials and market analysts said.
The Korea Communications Commission (KCC) plans to raise at least 1.15 trillion won or $1.1 billion through the auction of the LTE spectrum across three bands ― 800MHz, 1.8GHz and 2.1GHz.
Uplus will be able to use the new advanced spectrum for a decade, KCC officials said.
``That’s a big plus for LG’s telecom business. We’ve secured room to lead SK Telecom and KT in LTE services,’’ said a Uplus spokesman, adding it plans to offer LTE services both in the 800MHz and 2.1GHz bands from the next month.
The market leader SK Telecom was upset as expected by insisting the telecom regulator’s latest allocation was unfair, it said in a separate statement.
But LG’s telecom business needs fine-tuned funding plans as it needs at least 2 trillion won for groundwork in LTE services ― 1.2 trillion won for LTE, and 445 billion won for the acquisition of the latest spectrum among other administrative costs.
Uplus’ revenue for last year was around 8 trillion won. ``Worries over efficient use of the new spectrum are high considering Uplus lack of customers and LG’s struggle in smartphones,’’ said Jeong Seung-kyo, an analyst at Woori Investment, a local brokerage.
Uplus reported an 89.9 billion won operating profit during the first three months of this year after a 50 billion won operating loss a quarter earlier.
Uplus is also being pressurized to cut its mobile charges after the leader SK Telecom decided to cut its basic rate by 1,000 won after government pressure to tame inflation.
``A cut in the mobile rate is necessary; however, we need to secure our bottom line as investment in networks is rising,’’ said a Uplus spokesman.
Uplus will have business talks with smartphone majors Apple, Motorola and HTC.
Strong chemical business
Undoubtedly, LG Chem chief executive Kim Bahn-suk is solidifying his position as the chairman’s ``right-hand man’’ with the chemical business growing at a level to cushion the struggling electronics business.
LG Chem is flying high on rising rechargeable battery orders from car majors outside the peninsula as they roll out more electric cars amid ``green initiatives.’’
The company has so far secured over 10 battery contracts with Ford, Volvo and General Motors among others.
``Its business portfolio is ideal. With a competitive edge in the conventional chemical business, its battery unit has begun yielding profit based on its strength in materials,’’ said a fund manager from a Europe-based investment bank in Seoul, requesting anonymity.
He added the bank has put more LG Chem shares on its management portfolio due to investors’ favorable reviews of the affiliate.
LG will invest 2 trillion won and $300 million, respectively, in its battery plant in Ochang and the United States by 2013.
Officials believe the completion of the two facilities will give it 25 percent share of the global electric vehicle market by 2015.
LG Chem received 19.47 trillion won in revenue last year with an operating profit of 2.82 trillion won, both records.
LG’s four chemical units ― LG Chem, LG Hausys, LG Life Science and LG Household ― are seeking 50 trillion won in total revenue by the end of 2016 from 24.88 trillion won last year, said senior LG spokesman Jung Jeong-wook.
``The electronics business is LG’s key. But we will allocate more resources to balance business structures for sustainable and viable growth,’’ added Jung.
LG plans to invest 21 trillion won in facilities and research and development. The electronics business will receive the biggest chunk of 14.2 trillion won, while chemicals and telecommunications are set to get 3.6 trillion won and 3.2 trillion won, respectively.
``We see next year as being more lucrative for LG. With a comeback in smartphones and 3D TVs, the spectrum decision will change business fundamentals at Uplus,’’ said Lee Seung-oong at Dongbu Securities.
Merrill Lynch has raised its target on LG Chem to 580,000 won from the previous 500,000 won, while Daiwa Securities of Japan revised up its target by 20 percent citing the diversifying business portfolio.