Analysts: LG mobile division expected to report fourth consecutive quarter of losses

To say that LG had a surmountable challenge in considering 2016’s flagship smartphone is arguably an understatement. Facing increased competition from rival OEMs around the globe is one thing, but Samsung’s decision to launch a gloriously glass Galaxy last year meant the bar had been raised considerably even on the home front. To make matters more muddling, LG became the first major smartphone seller to release a modular device in the form of the G5, with this in turn having its own considerations and compromises to contend with.

Due to the timing of the LG G5’s release – basically early April – it meant that the seminal smartphone could not factor into first quarter fiscals, other than – as The Verge pointed out – to mount losses due to marketing costs.  In its Q1 earnings report however, LG explained that at the very least, it expected that the next quarter could see the mobile division break even. Unfortunately, a new report indicates this is unlikely to happen, either.

The Korea Times points out the problem quite plainly:

LG Electronics is expected to report an operating loss at its mobile division led by the company’s co-CEO Cho Juno for the second quarter of this year, extending its losing streaks for the fourth straight quarter.

The report also notes that at the end of Q1, LG had reduced its mobile division to 7,321 staff members. As of Q2 2015 it had 8,041 people. The company is not planning to make major cuts in G-flagship smartphones, but rather is sending staff to its profit producing vehicle component (VC) division which accordingly saw an increase of roughly 1,000 staff members. during the same period.

According to an official recently moved to the VC division,

The biggest difference between Samsung and LG is that Samsung Electronics has realized the ‘economies of a scale’ in its handset business, meaning Samsung is well-situated to seek profitability by making some changes. But LG Electronics is nowhere to be seen. LG Electronics is in deep trouble, which is unlikely to be addressed in the near future.

A report by Daishin Securities paints an even more problematic picture, stating that

LG Electronics may report a 100 billion won operating loss during the second quarter and we expect LG to report 37 billion won and 18 billion won operating losses in its handset business for the third and fourth quarter of this year.

LG needs to overhaul its smartphone business from the starting point. Market leaders plan to release new phones with a new form factor in late 2017, at the earliest. This will put further pressure on LG.

A study by Counterpoint Research has indicated LG shipped 13 million smartphones in the first quarter of the year, which represented a 12.3% decrease over the same period last year.

Curiously however, The Korea Times has indicated that the trouble LG is facing with the G5 handset is not apparently due to consumer apathy, but rather a supply management issue:

LG released its first modular-type G5 in late March and the initial response to the new G5 was impressive. But LG failed to continue the positive traction due to tight supplies.

For those that have followed the Nexus smartphone line in the past, they may recall that supply issues also severely plagued the Nexus 4 when it released, and extended – though to a lesser degree – with the Nexus 5 the following year. Google itself had to apologize and cited LG as being the cause of the problem. To be fair however, few might have anticipated the massive demand for the Nexus 4. And with respect to this year’s G5, making a modular smartphone, and one made of metal at that, is no small task.

Wrap Up

Today’s lackluster LG news comes amid a report – also by The Korea Times – that Samsung has decided to make a major change to its mobile division as the company is now going to be placing priority on profit performance. This, in contrast to the above-mentioned comments from an unnamed LG VC employee paid a somewhat problematic picture for South Korea’s other big OEM.

While things may improve later in the year if a follow-up to the well-received LG V10 is released, LG is apparently having trouble and needs to address the issue immediately.

What do you think? Should the G5 have been the smartphone savior for the Korean company, or was it a poor product to push? What can LG do to solve its problems?