LG Smartphones Record 21 Consecutive Quarters of Losses... Deficit Narrowed

Q2 Preliminary Earnings Expected Operating Loss of Approximately 210 Billion KRW
Reduced Deficit Due to Marketing Cost Cuts and Production Base Relocation Effects

[Asia Economy Reporter Han Jinju] LG Electronics' MC Business Division, which is in charge of the smartphone business, recorded losses for 21 consecutive quarters. Despite the impact of the novel coronavirus disease (COVID-19), the scale of the losses is estimated to have decreased.

On the 7th, LG Electronics announced its preliminary results for the second quarter, reporting sales of 12.834 trillion KRW and an operating profit of 439.1 billion KRW. This represents a decrease of 17.9% and 24.4%, respectively, compared to the same period last year. The securities industry analyzes that the MC Business Division achieved an operating loss in the range of 210 billion KRW. The operating loss slightly decreased compared to the first quarter (237.8 billion KRW) and the same period last year (313 billion KRW).

It is encouraging that the loss margin was reduced despite the overall contraction of the global smartphone market. In May, LG Electronics launched the mass premium phone 'Velvet' domestically and introduced the V60 ThinQ and mid-to-low-end smartphones K61 (domestic product name Q61), K41S, and 51S overseas. Although domestic and international sales were disrupted due to COVID-19 and other factors, the reduction in offline marketing costs appears to have contributed to reducing operating losses.

LG Electronics' relocation of its production base to Vietnam and expansion of ODM (Original Design Manufacturer) also contributed to the decrease in operating losses by reducing labor costs. The securities industry expects the ODM ratio of the MC Business Division to increase by more than 70% this year. Since the smartphone market has shown signs of recovery since May, it is expected that the loss margin can be further reduced in the second half of the year.

Until last year, LG Electronics' MC Business Division had a structure where operating losses increased and sales decreased. Operating losses were ▲778.2 billion KRW in 2018 and ▲1.0098 trillion KRW in 2019. The operating loss ratio last year was 41.4%, up from 28.8% in 2018. The MC Business Division's annual sales were 7.8762 trillion KRW in 2018 and 5.9667 trillion KRW in 2019. The operating loss ratio for the second quarter is expected to improve to around 17%, compared to 24% in the previous quarter and 19% in the same period last year.