LG’s shrewd turnaround

One of my son’s friends returned home last September after studying engineering in the United States. He received offers from two local electronics giants: Samsung and LG. Surprisingly, he chose LG Electronics. LG Electronics had a long fall from grace at the time. Its shares were shunned by investors, sending the stock price to under 40,000 won ($33) per share. With the stock price at a fourth of its peak, its market capitalization shrank to the 6 trillion won level. I asked why LG and not Samsung?

He said his ultimate goal was a start-up, and he believed he could learn more at LG. “If I can contribute a little to the company, it could be rewarding. Even if the company does not do well, I would appreciate the experience.”

I recalled that young man as I read news about LG’s strong comeback these days. LG Electronics emerged as one of the most active stocks this year, even as the main bourse was mired in a slump. The stock jumped above 6,200 won, recovering 60 percent from its nadir last August. It became a favorite with foreign investors. Other LG Group names, including LG Chem, are also on an upward swing. In a recent report, Shinhan Investment observed that the innovation DNA has been revived at LG.

Securities analysts were impressed with LG Electronics’ latest G5 flagship smartphone, which has surprisingly innovative features. The G5 transforms into an independent full-spec camera or Hi-Fi Plus audio player and is expected to sell more than 10 million units when it hits the market next month, far outpacing the 4 million unit sales of the previous G4 series.

LG was always a good manufacturer but somehow has been less innovative in its design and marketing. Its corporate culture is also less stringent and tense than its local archrival, Samsung.

The evaluation of LG’s new look and direction is generally positive. Experts say LG was clever to shift its focus to a business-to-business platform from a business-to-consumer platform. It concentrated resources on automotive electronics, batteries, energy storage, displays and basic chemical products. In the consumer division, it walked away from the mass market segment in smartphones, TVs and washers, where Chinese rivals have become strong, and instead kept filling its pipeline to the high-end premium market.

Business-to-business serving specific corporate clients was a strategy Panasonic of Japan used to rebuild itself. Panasonic, like LG, produced all kinds of electronics. While enduring the lengthy Japanese recession, it tried its hand at almost everything. But by 2012, it was on the brink of going into bankruptcy after losing out to Korean and Chinese competitors. The company dumped consumer appliances and instead focused on the commercial business of supplying parts to the automobile, aerospace and energy industries. In 2014, it registered a net profit of 380 billion yen ($3.3 billion).

LG is said to have studied and benchmarked Panasonic. The key was securing talent in research and development. The research staff at LG Electronics totals 19,000, accounting for half of the company’s employees in Korea. The research staff at LG Chem is 3,400, a quarter of the total.

LG is already the world’s top company in electric vehicle parts and plastic material, observed Min Dong-joon, a professor of engineering at Yonsei University. It is a pity, he added, that the company does not hold the same lead in semiconductors.

There is much work to be done until LG begins to rake in sizable profits from materials and parts. But it is headed in the right direction. Chemical groups like Hyosung and Kolon are now doing well after they turned to high-performing materials. Korean companies should stop wasting resources by trying to compete with Chinese counterparts in finished goods for consumers. Instead, they must focus on what they can do better.

JoongAng Ilbo, March 10, Page 28

The author is the business news editor of the JoongAng Ilbo.

by Kim Kwang-ki