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How Can LG survive in the smartphone market?

January 21st, 2014

SmartPhonesSince the introduction of smartphones, and tablets soon after, the technology industry has undergone a significant shift in the demand structure towards smartphones/tablets (mobile devices) and away from traditional TVs/PCs. We define this as demand polarisation. After spreading through developed markets from 2010, last year has been marked by rapid demand polarisation in China and other emerging markets.

This means that demand growth of mobile devices will begin to decelerate from this year, resulting in inventory issues and higher ASP pressure on component makers. Ultimately, we expect a fierce price competition among mobile device manufacturers.

LG needs to prepare for the following worst-case scenario. Apple is expected to launch the next version of its iPhone in 2H14F, which is largely anticipated to have a larger screen size of 4.7~5.5”. If Apple prices the new model at the current iPhone level, we think Samsung may react by lowering the price of its flagship models in order to protect the market share. Such price competition among industry leaders will hurt rest of players including LGE by forcing a lower ASP and eventually driving them into more losses.

Thus, we think it would be difficult for LGE to generate meaningful profit from its smartphone business in the near-term. In the long-run, however, we believe the OPM between smartphone makers will largely converge in the 5~15% range. In our view, LGE has the technology leadership and sturdy vertical integration to survive through and
overcome the process of convergence.

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