Can LG regain its old self?

This is the third in a series of articles regarding challenges facing leaders of Korea Inc. ― ED.

By Yoon Sung-won

LG Group faces a tough challenge in emerging from its precarious market position in the New Year.

Calling for greater efforts for synergy between affiliates in his New Year speech, LG Group Chairman Koo Bon-moo said, “This year’s business environment looks tough. Unstable changes in the foreign exchange rate and oil prices are both substantial challenges for us as a business operator highly dependent on exports.

“Considering the business trends in Japan and China, and other late movers that are fiercely chasing us, we may face great difficulties in the years ahead,” said the chairman, who enters his 70s this year.

LG Electronics, the group’s key affiliate, remains in second place in the global television market behind Samsung Electronics despite strong support from LG Display ― the world’s leading display panel maker.

On a positive note, its smartphone business saw a remarkable rebound last year thanks to its 5.5-inch G3 smartphone. The handset enjoyed huge popularity in the domestic market and was also recognized overseas for its quad high-definition display, produced by LG Display, and the embedded camera made by LG Innotek.

To tap into the popularity of the “G” series brand, the company adopted a two-track strategy to release both premium smartphones and budget handsets in the global market, including North America. This meant an estimated 16 million were shipped in the fourth quarter of 2014, according to industry sources.

Regardless, LG Electronics’ smartphone business remains in the second-tier of the industry, failing to pose a significant threat to the first-tier market leaders ― Samsung Electronics and Apple. Meanwhile, Chinese smartphone makers Xiaomi, Huawei and Lenovo have improved their presence in the midrange handset segment globally and are set to hamper LG Electronics’ efforts to enter the first-tier group.

LG Chem, another LG Group core affiliate, also faces difficulties due to falling oil prices.

The company has generated a majority of its profits from its petrochemical businesses. Such a business structure may now lead to the depreciation of corporate value in the short-term.

China’s movement to develop natural resources such as coal and shale gas in raising self-sufficiency added to that country’s decreased demand, with a slowdown in economic growth there providing another risk factor for LG.

According to a report by the Korea Investors Service on Dec. 29, the petrochemical industry will see a limited improvement in performance this year. Local petrochemical businesses are expected to undergo difficulties in retaining demand in China due to the country’s economic slowdown and the expansion of Middle-Eastern products on the market, the report revealed.

In response, LG Chem has pushed ahead with new businesses such as the development of shale gas and solar energy, but market expectations are that these new businesses are likely to need time to generate significant profits amid uncertainties in global oil prices.

LG Uplus, the telecom arm of LG Group, also faces tough challenges in raising its domestic market share and upgrading its market status.

SK Telecom, KT and LG Uplus have maintained around a 50 percent, 30 percent and 20 percent share of the local mobile market for a long time.

The nation’s smallest mobile carrier has worked to topple the long-standing market structure and argues that it has succeeded in gaining more market share since the launch of its long-term evolution service.

Despite this, expectations are that a drastic change in the market is unlikely under current telecom laws that firmly prohibit provision of excessive subsidies to attract customers.

In an effort to seek new growth engines for a long-term perspective, LG Group affiliates are eyeing electronics parts manufacturing for automobiles and green energy solution businesses.

In the automobile parts business, LG Electronics takes charge in design and engineering, LG Chem develops secondary cell batteries and LG Display produces automotive display panels. LG Innotek and LG Hausys are researching and manufacturing car parts and interior materials, respectively.

LG affiliates including LG Electronics, LG Chem and LG CNS will join hands for the green energy business. They will work to develop systems to produce, store and consume eco-friendly energy and seek business-to-business market opportunities.

Kiwoom Securities Analyst Kim Ji-san said LG’s market prospects are positive for the first half of this year.

“Despite the fact that market conditions remain tough, LG Electronics is likely to recover profitability and gain market share with the new handsets ― G Flex 2 and G4 ― early this year,” he said.

“The company has established a belated reputation in midrange handsets. It is expected to post stable profits as Chinese makers like Huawei and Lenovo encounter a stalemate in the saturated market in China.”

Kim also revealed positive prospects for LG’s new automotive parts business.

“The company has been successfully providing automobile telecom modules for General Motors in the United States and it has posted multi-trillion won sales in this segment,” he said. “This is one of many business areas that LG is doing better than Samsung.”