Smartphone race takes toll on LG profits

Playing catch-up: LG’s efforts to crack the smartphone market have focused on feature phones

LG Electronics, the third-largest mobile phone maker, on Wednesday announced a 90 per cent drop in operating profit in the April-June quarter, hauled down by a loss at its handset division as it struggled to keep up with rivals in the smartphones race.

While the South Korean group promised “modest growth” in the third quarter, the weaker results are likely to fuel debate over the extent to which LG and other exporters could be further undermined in the second half by slowing demand, especially from Europe.

Net profit in the second quarter fell 33 per cent to Won856bn ($722m) from a year earlier while operating profit dropped to Won126bn, which LG blamed on the investment it was pouring into research and development and marketing.

Its handset unit posted an operating loss of Won120bn, from a Won620bn profit in the second quarter last year.

LG has vowed to overtake Samsung Electronics as the second-biggest maker of handsets by 2012. It has about 10 per cent of global share compared with Samsung’s 20 per cent.

LG said earlier this year that it was devoting 30 per cent of its mobile phone research and development labour force to working towards a breakthrough in smartphones, in which it has about 1 per cent of the global share. But it has been trailing Apple and local rival Samsung Electronics in the race to unveil compelling smartphones.

Samsung has rushed out its Galaxy S smartphone to compete with Apple’s iPhone, but LG’s plans have yet to gain traction.

“LG does not have a smartphone that defines its brand,” said Ha Eun-mi, analyst at HI Investment and Securities in Seoul. “They jumped into the smartphone market very late, trying to catch up with competitors who started one or two years earlier.”

LG’s strategy was to compete for the luxury niche, including expensive “feature” phones such as the Prada, in conjunction with the fashion house. The Prada phones and later LG multimedia models lacked the iPhone’s wide-ranging computer-style features.

The handset maker is counting heavily on the success of a smartphone, based on Google’s Android operating system, that it is due to launch this quarter.

Televisions bit hard into profits because LG sells 40 per cent of its TVs in the weakening euro area while facing costs in dollars.

LG, which also makes household appliances such as refrigerators and washing machines, is dependent on international markets remaining robust. It is aiming to sell 1m 3D televisions this year, a quarter of the global market.

Samsung Electronics, the biggest technology group, will post results on Friday. Analysts believe it could be on track to deliver higher net profit than the top 19 Japanese electronics companies combined this year.

LG shares slid 3 per cent after the results, compared with a 0.3 per cent rise for the overall market.

Additional reporting by Kang Buseong