LG Elec faces more pain after Q3 loss

SEOUL, SOUTH KOREA: Smartphones aren't so smart for LG Electronics.

A record quarterly operating loss by the South Korean company shows it faces an uphill task to turn around its mobile phone business and puts more pressure on its new chief executive.

Like No. 1 handset vendor Nokia, LG has lost the race to Apple in the fatter-margin market for expensive cellphones, while No. 2 rival Samsung Electronics is also giving it a tough fight.

Intensifying price competition among flat screen TV makers such as Sony Corp and Panasonic Corp in the run-up to Christmas is also dealing a double whammy to LG, the world's No. 2 TV brand.

"I think the greatest problem with LG's smartphone strategy was that it misjudged the market and responded late. But because it is investing considerably in research and development in that area, LG will probably catch up in the smartphone business," said Nam Dae-jong, an analyst at SK Securities.

The results are the first since Koo Bon-joon, a member of LG's founding family, took over as CEO of the group's flagship firm this month, with a mission to turn around its loss-making handset operations and restore sales growth.

Koo has replaced the heads of the struggling phone and TV divisions and made it mandatory to start internal meetings and briefings with chants of: "Let's be sure to become No.1."

LG shares ended up 1 percent in a steady wider market .KS11 as the losses were not as severe as some had expected, with few analysts predicting a loss of 250 billion won.

"Its shares have underperformed due to weak earnings performance, and much of it is probably factored in," said Shim Hong-seop, equity division head at Kyobo AXA Investment Managers.

"Shares are near their bottom, but they will not likely bounce significantly either given their current weak shape."

The stock has slid 16 percent so far this year versus a 13 percent gain in the market. Analysts have been slashing estimates. Over the past 30 days, the market has cut this year's estimates for LG's operating profit by a mean 11.3 percent, according to Thomson Reuters StarMine.

LG swung to a record operating loss of 185 billion won ($164 million) in July-September from a profit of 851 billion won a year ago, matching a consensus loss forecast of 185 billion won.

It is expected to show another loss in the current quarter with the handset unit likely to report a third straight quarterly loss. Profit margins at its TV business halved to 2.3 percent from a year ago as it offered steeper discounts to hold market share and fight competition.

On Thursday, Japanese electronics maker Sharp Corp cut its full-year forecast to bring it closer to market expectations after its quarterly profit dropped 24 percent.

No quick fix

Losses from the handset business snowballed to a record 304 billion won and margins plunged to a negative 10 percent, hit by a weak lineup of smartphones and growing development and marketing costs to prop up faltering sales of low-priced models.

"I think its mobile division may not turn around easily. The mobile business... is expected to enter a recovery phase from the second quarter of next year," said David Min, an analyst at KTB Securities.

LG is betting its Optimus One model, running on Google's popular Android platform, and Optimus 7 based on Microsoft's Windows system, both unveiled in October, will help it win market share in the smartphone market.

The low-end Optimus One smartphone, which has received some good reviews in Korea, has sold 200,000 units since its launch three weeks ago. LG aims to sell at least 10 million units of this model but it faces pressure as rivals lower prices.

LG's handset shipments fell 7 percent from the second quarter to 28 million units as growing sales of smartphones eat into sales of feature phones, LG's stronghold.