LG to up outsourcing for handset production

By Kim Yoo-chul

LG Electronics has planned to increase its outsourcing of handset production this year in order to expand its global market share, according to a company executive, Monday.

He said that although there was a chance the move could undermine its corporate image, it anticipates that expanding outsourcing will help the phone business regain its competitive edge.

“LG plans to double production outside the Korean Peninsula by the end of this year,” said a senior LG executive, Monday, on condition of anonymity.

This means that a maximum of 7.2 million handsets are going to be manufactured by LG’s main OEM partners including Foxconn of Taiwan. LG’s target is to sell 80 million handsets this year, 35 million of which will be smartphones, according to the company.

Currently, outsourcing accounts for about 5 percent of production, but LG plans to increase this to 8 or 9 percent. “Manufacturing of premium models will mostly remain local, though,” said the executive.

He claimed that LG Electronics still has no intention of re-entering the ultra low-end of market for handsets, which today sell for below $50. The company identified “quality” as the top priority’ of its mobile phone business.

However, LG spokesman Na Young-phil denied the report, saying that the company plans to maintain the outsourcing portion at the last year’s level. Today’s handset market is controlled by Apple and LG’s rival Samsung Electronics. The companies have over 70 percent of the global smartphone market.

Japan’s Panasonic is mulling the possibility of shifting output of its mobile handsets this summer. Once outsourcing is complete, the electronics company will be the first Japanese company to produce all of its mobile phones abroad.

“LG could save money from expanding its outsourcing and investing the saved money in marketing as the Korean company has leading items and advanced technology in its product portfolio,” said a fund manager from a U.S.-based investment bank.

Market analysts expect the handset division to report operating losses for the three months ending June 30 hit by increased spending for the marketing of its Optimus line.

“We forecast LG’s mobile business to report 2.6 trillion won quarterly revenue with 38 billion won operating losses during the second quarter. While Samsung and Apple are cementing their leadership in high-end phones, LG is pressured to secure its bottom line amid rapid the rise of Chinese budget manufacturers,” said Kim Hyun-yong, an analyst at SK Securities.

“Based on this belief, its decision to expand outsourcing makes sense. That is the right decision to save LG from a further fall in market share,” Kim said.