Phone makers vexing over subsidy penalties

Local mobile phone manufacturers are fretting over the government’s recent decision to suspend the business of local mobile carriers for more than two months.

During the period, the carriers are not allowed to lure in new customers or receive pre-orders. About 1.8 million smartphones are sold every month in Korea. The sales suspension will likely curtail sales to a third of the current level, according to industry watchers.

The suspension, the longest imposed on mobile carriers thus far for excessive subsidies in mobile phone purchases, will allow only one of the three carriers to operate throughout the 68-day penalty period as they take turns serving the terms. The penalty takes effect Thursday.

Samsung Electronics is concerned about the sales of its latest smartphone, the Galaxy S5, which is set to initiate global sales on April 11. It was reported to be considering delaying the domestic release by one month to May.

Under the penalty measure announced by the Ministry of Science, ICT and Future Planning on Friday, SK Telecom, which provides service to about half of the country’s mobile phone subscribers, will be suspended between April 5 and May 19 while KT, which deals with 60 percent of the rest of the mobile subscribers, will be suspended between March 13 and April 26. LG U+, the smallest one, will serve the 45-day penalty in two separate time windows: between March 13 and April 4, and April 27 and May 18.

If Samsung decides to delay the date for the domestic release of the Galaxy S5, it could be as late as May 19, when the suspension is served out, which would be 40 days since the onset of its global sales. Beginning sales at a time when only one mobile carrier is allowed to sell the phone could alienate the other mobile carriers and Samsung won’t risk ruining its long-time partnership with them, according to market watchers.

“It will cause a glitch in Samsung’s plan to create an early boom of the Galaxy S5 in the domestic market,” said an industry source.

LG Electronics also fears the suspension’s impact on the LG G Pro 2, which it released on Feb. 23. The 5.9-inch phone, which features an innovative KnockOn function, is key to LG’s ambitions to catch up with Samsung and Apple, which sell about two-thirds of the world’s smartphones.

Pantech, the country’s smallest mobile phone maker, depends on the domestic market for 95 percent of its sales, the highest dependency rate among the three phone makers, and is expected to be hit the hardest by the measure.

Pantech has already delayed the release of its Vega Iron 2 by one month. The cash-strapped company entered a second corporate debt workout program last week.

“The suspension of operations aimed at punishing mobile carriers for illegal subsidies worked to wreak havoc on the businesses of device manufacturers,” said a Pantech official.

The situation could get worse for the phone makers due to the possibility of additional business suspensions. The Korea Communications Commission is considering imposing additional punishments on the mobile carriers for excessive subsidies early this year, separately from the Future Ministry.

Meanwhile, a Samsung Electronics subcontractor, which produces printed circuit boards for the Galaxy S5, had its plant catch fire yesterday, destroying one story of its three-story plant in Anseong, Gyeonggi.

Samsung said there are 10 or so more subcontractors that are producing the component, and it will make little impact on the sales of the Galaxy S5.

BY KIM YOUNG-MIN and MOON GWANG-LIP [joe@joongang.co.kr]