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June 28, 2006 12:53 am

LG hopes phone will sweeten its outlook

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Can LG Electronics’ new mobile phone, dubbed “Chocolate”, be the “Razr Killer” as the world’s fourth-largest handset maker hopes?

The Korean company is pinning high hopes for bigger sales on the stylish Chocolate phone as it struggles to compete with bigger rivals, such as Nokia and Motorola, producer of the successful Razr model.

The Chocolate phone, the first model in LG’s premium Black Label series, has become a big hit in global markets including the UK, China and Mexico as well as the home market.

More than 1m Chocolate phones have been sold in overseas markets in just seven weeks since its global launch in May. The phone was ranked as the all-time best seller by Carphone Warehouse, Europe’s biggest mobile phone retail chain. About 450,000 units have been sold in the Korean market alone since its debut in November.

“I think the Chocolate is a nice little phone; wonderful design – the novelty of the LED keys and good usability. It does have the potential to be as successful as the Razr,” says Carolina Milanesi, an analyst at market researcher Gartner. “The only thing that might have a negative impact on this is that the Razr had the strength of the Motorola brand.”

The Chocolate phone won the prestigious 2006 IF and Reddot Design awards for its unique style and user-interface – a touch-sensitive keypad and a hidden LCD screen.

The phone looks like a chocolate bar when it is not in use, coming almost entirely in black. When the phone is slid open, the keypad glows red but it fades out of sight when not in use. It also has many multimedia features including an MP3 music player, 128MB of onboard memory and a 1.3 mega-pixel camera that can take pictures and record video.

The increasing popularity of the Chocolate phones comes at a time when LG is trying to accelerate its push into European open markets to try to offset a loss of market share in the US to Motorola. LG hopes its new design-focused phone will help it to fight back against competitors by improving its brand awareness.

“We have so far focused on operators’ support but we are now shifting our focus towards consumers. And we need a mega-hit model to penetrate the open markets easily,” says Bae Jae-hoon, executive vice-president in charge of LG’s mobile communications business.

LG is a dominant player in the CDMA and W-CDMA markets but is a latecomer in the GSM market. GSM is a more widely-used mobile transmission technology than CDMA, which is used only in the Americas and parts of Asia. GSM is the standard in Europe and is used by two out of three mobile subscribers worldwide.

“GSM takes up 70 per cent to 80 per cent of the global markets. So the success in the GSM markets is very important for our long-term development,” says Mr Bae. “And we need to improve our brand image to succeed in the open markets.”

LG suffered operating losses in its handset business in the first quarter,
hit hard by price-cutting
by Motorola in the US,
its biggest market. LG has yet to launch a clamshell-type Chocolate phone in the US.

LG is sticking to its premium strategy although it is facing calls to strengthen the lower-end product line-up as consumers in emerging markets increasingly become the main drivers of global demand.

“To become one of the
global top three, and in
the end the best, we have
to increase our muscle.
We should not be obsessed with short-term profits or losses,” says Mr Bae. “We will cope with the increasing needs for lower-end products in some regions but will stick to our premium brand image.”

LG aims to sell 70m mobile phones this year with GSM phones making up more than half of the total. The company sold 55m phones last year. Mr Bae bets the handset business will turn profitable again in the second half, as LG is set to launch seven to eight new models. He hopes the chocolate phone’s success will have a positive impact on sales of other LG phones, as is the case in China.

But analysts remain sceptical about LG’s outlook, saying handset margin recovery in the near term is a “remote possibility”.

Daniel Kim at Merrill Lynch says cost structure is becoming more important than product leadership, given that handset product evolvement is almost complete. “The likely success of Chocolate phone in the European market cannot save its handset business. LG has no cost advantage in a low-to-mid end market against Nokia and Motorola, while the premium market is already crowded.”

Still, while Chocolate
might not be enough on
its own to reverse LG’s
fortunes, if it is able to
curb some of Razr’s
dominance, that might be
a sweet enough outcome for the Korean company.

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