LG Electronics announces withdrawal from mobile handset business

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Summary

The impact LG's withdrawal from the smartphone business will have on the global mobile phone market can be seen from two perspectives. First, change in the competitive landscape in the set market. Second: changes in the component supply chain. Due to its scale, LG’s shipment volume is expected to be replaced by competitors without a significant impact on the set market.

LGE’s MC division recorded operating losses for 5 years

LG Electronics officially announced its withdrawal from the mobile phone business on April 5th. Production of mobile phones continues until the end of May, and the official withdrawal will be completed on July 31st, 2021.

LG Electronics entered the smartphone market in 2009, while the history of LG’s mobile phone business, including feature phones, began in 1989. The smartphone business grew steadily since 2009 and recorded the biggest volume of 59.8 million units in 2015. But since then, shipments have decreased every year and profits have been in the red for five consecutive years since 2015.

Table 1: LG Electronics MC division revenue and OP trend

Source: LG Company IR Report

Revenue and operating profit of the Mobile Communication division (MC), which includes the mobile phone business, steadily declined and recorded KRW 5,217 billion in 2020, which is 37% of revenue in 2015. The cumulative loss from 2015 to 2020 reached KRW4,308 billion.

As Chinese OEMs continue to increase their share of the global smartphone market and the market expected to grow at low single digits over the next few years, it is impossible for LG Electronics to reverse losses into profits for its handset business. Even though smartphones will play an important role in the era of smart home and AI, shareholder and top management patience with the money losing mobile business has reached its limit.

Figure 1: LG Mobile Handset Shipment Source: Smartphone Model Market Tracker

LG's mobile phone shipments declined from 72.1 million units in 2015 to 29.9 million units in 2020. The share of smartphones accounted for 97% of all LG mobile phones. As feature phone shipments decline to less than 1 million units per year, LG's exit is unlikely to affect the global feature phone market. LG held 2.3% of the smartphone market in 2020, ranking 9th overall.

In terms of scale, LG is far behind leading OEMs, but as LG maintains meaningful market share in specific markets, it is inevitable to see some changes in the competitive structure in that market going forward.

More than half of LG smartphone shipments come from below-$150 price segments

Table 2: Smartphone shipment share by price tier

Source: Smartphone Model Market Tracker, Omdia

LG focuses on low-end smartphones. The low-end smartphone ($91-150) accounts for 41% of LG’s total shipments in 2020. Smartphones priced under $150 account for more than half of LG’s shipments. The second largest share is Mid/-low ($151-250), accounting for 25% of the total.

Compared to other OEMs, Motorola has the most similar product portfolio. In fact, the North America and Latin America and the Caribbean are the major market of both LG and Motorola – putting them into competition with each other, without many other markets to also successfully operate in. Chinese OEMs, like Xiaomi, OPPO and vivo, have entered other regional markets, supplanting legacy brands like LG.

North, Central and South America are key markets

The chart below shows the share of LG smartphone shipments by region and LG's market share in each region. North America is the biggest market for LG, accounting for 47% of total shipments in 2020. Latin America and the Caribbean markets and Asia and Oceania accounted for 22% and 15%, respectively. However, as LG's market share is less than 5% in countries other than South Korea in Asia, and the market share of Chinese brands in this region is rapidly expanding, LG's volume is expected to be quickly replaced by those brands.

Figure 2: LG Smartphone shipment share and market share by region Source: Mobile Handset Database - Country, Omdia

In North America and Latin America and the Caribbean, LG's share was 9% and 7%, respectively. In these markets, LG's main competitors are Samsung and Motorola. Since Apple and Samsung sell high value-added products, LG's direct competitor is Motorola. LG shipped 14.0 and 6.5 million smartphones to North America and Latin America and the Caribbean, respectively in 2020. This volume is expected to be replaced by competitors. In addition to Samsung and Motorola mentioned above, Xiaomi is expected to be a beneficiary in this market as Xiaomi has recently increased its market share.

The North American smartphone market is controlled by the wireless carriers which control the smartphone buying experience for most customers. This market requires OEMs to have close carrier relationships and the ability to pass carrier certifications. These market dynamics make it difficult for OEMs to enter the market without carrier support – a key reason for some Chinese OEMs to not have entered the market officially yet.

Xiaomi’s market share increased to 3.8% in Latin America and the Caribbean in 2020, up from 1.5% in the previous year. In North America, as Xiaomi has not officially entered the market yet, Motorola and TCL are expected to replace LG in the low-end market and Samsung and Google in the mid-range market.

Small economy of scale limits impact on wider industry

LG has acquired a lot of patents related to mobile handsets during its long experience in the mobile phone business. In the last few years, LG tried to stand out amongst the competition with new concepts and designs, such as the world's first curved smartphone (G Flex), modular smartphone (G5) and most recently, a Rollable smartphone. Although those were commercial unsuccessful, they added unique twists to the smartphone form factor. 

LG's business exit from the global mobile phone market will change in the competitive landscape in the set market. 30 million units shipped per year is small volume compared to the top OEMs, but in terms of quantity, it is not a small scale. Nevertheless, LG’s volume will be absorbed by competitors without a significant impact on the set market.

Secondly, there will be a change in the component supply chain. Recently, set makers have lowered their shipment plans for this year due to a shortage of major semiconductor-related components. As LG's component suppliers overlap with top-tier companies and suppliers, LG's exit is expected to help ease supply constraint to some degree in the second half of the year. However, this is also expected to be limited rather than a large impact due to a smaller scale.

LG’s exit opens the door for competitors like Motorola and TCL to regain momentum in key markets across the Americas, where other Chinese OEMs have not taken as much share as in other parts of the world.

Losing LG as a smartphone OEM eliminates a source of innovation in the market. Even though not always commercially viable, LG impacted the smartphone industry with its willingness to experiment with the form factor and hardware components of modern smartphones.

2021 is shaping up to be a year of significant shifts in the smartphone market with Huawei’s diminishing role and LG’s complete exit on the horizon.

Appendix

Author

Jusy Hong, Senior Research Manager, Wireless Devices

askananalyst@omdia.com