LG – End of an era

LG finally throws in the towel.

• LG has finally thrown in the towel on smartphones in an admission to what has been patently clear for many years which is that had no chance of creating a stable smartphone business.
• I have followed LG’s mobile phone efforts for over 17 years and when this business was all about hardware and miniaturization, LG was a major player.
• In the early days, it released some of the best looking, smallest and lightest phones which caused its market share to fluctuate wildly in line with whether its product cycle was a hit or a miss.
• Then came smartphones and hardware became much less important which was a transition that LG really struggled with.
• This is why it was one of the first to use Google’s Android software as it long recognised that deep down, this was its Achilles heel.
• The problem of course is that everyone (except Apple) started using Google’s Android and the Google Ecosystem that followed it meaning that any points of differentiation that LG could eke out were rapidly disappearing.
• Furthermore, the fact that almost all devices became slabs of black glass made the situation even more difficult.
• Consequently, for the last 10 years, LG has bumbled along at the back of the pack, never really making any money and certainly not offering a positive return on capital invested.
• However, in other areas such as TVs, consumer white goods and automotive components it is faring much better and so it is in these areas where I expect that it will now focus.
• Its issues were further compounded by the rise of the Chinese manufacturers who went from making cheap, low-quality devices to becoming proper device makers in their own right.
• For example, some of Huawei’s latest flagship products have rivalled or even beaten the best the Samsung or Apple had to offer in terms of hardware firmly putting to bed the notion that only the big guys can make great flagships.
• Until it was hobbled by the US Government, Huawei was a real challenger to Samsung and had closed the gap in terms of volume and hurt its handset profitability significantly.
• With Xiaomi now getting into the global game (see here) and Oppo and Vivo pressuring it from underneath, it made no sense at all for LG to continue.
• Hence, the market for smartphones will continue to get more competitive and the edge that LG once had has long since gone.
• Commodity margins of 2-4% are the best it could ever really hope for given that all of the value from these devices accrues to Google rather than LG.
• It’s a sad day for LG but not one that it will regret.