"Next Year Annual Growth Expected at 3.1%"
Achievement Marks First Surplus in 2 Years
Orders Reflect Performance for at Least 3 Years
LG Electronics is moving toward achieving an operating profit margin of 3% in its automotive components (electric and electronic devices for vehicles) business after 10 years. The company has steadily increased its order backlog and sales, expanding its scale, and improved profitability by turning a profit for the first time on an annual basis last year. It is forecasted that the annual operating profit margin will exceed 3% next year. There is also analysis that quarterly operating profit margins have already surpassed 3%.
According to automotive industry research, the operating profit margin of domestic automotive parts companies is in the 3% range. The average operating profit margin of the top 100 companies was 3.02% in the first half of last year and 3.28% in the first half of this year. If LG Electronics’ VS Division records an annual operating profit margin of 3% next year, it means raising profitability to the average level of automotive parts companies within two years of turning a profit. The operating profit margin is the ratio of operating profit to sales.
LG Electronics stated that its VS (Vehicle Components) Business Division is expected to achieve an order backlog of 100 trillion KRW and annual sales of 10 trillion KRW by the end of the year. In the process of building an order backlog of 100 trillion KRW, LG Electronics initially secured some orders with relatively low profitability to increase workload in the early stages of the business. Subsequently, by attracting global automaker customers such as Hyundai Motor Company, General Motors (GM), and Renault, it gradually increased 'profitable' orders. Typically, once an automaker order is received, the company has about three years to conduct parts research and development (R&D), production, and supply.
The company’s performance is fully reflected for at least three years from the contract date. This means that the operating profit margin is likely to increase during the three years following the contract. An LG Electronics official said, "In the early stages of the automotive components business, we had to show our capabilities to automakers, so we focused on increasing order volume. After reaching a certain level, we gained negotiating power. The current performance reflects orders secured two to three years ago."
Jo Joo-wan, CEO of LG Electronics, is speaking at the 'IAA Mobility 2023' press conference held in Munich, Germany, on the 4th of last month (local time). [Photo by Yonhap News]
Raising the operating profit margin of the VS Division is a long-standing goal for LG Electronics. When announcing its preliminary Q3 results on the 10th, LG Electronics mentioned, "We expect the automotive components business to smoothly establish itself as a core business leading the overall company growth soon." The order backlog and sales have been steadily increasing since the early stages of the business. Market interest was focused on when profitability (turning a profit) would be achieved. Although the company succeeded in turning a profit at the end of last year, it is evaluated that the operating profit margin needs to be raised to the 3-5% range to reach a level that drives company growth.
The VS Division’s annual operating profit margin was -14% in 2021 and 2% last year. The estimate for this year is 1.6%, and 3.1% for next year. Quarterly figures were 2.5% in Q2 last year, 4.1% in Q3, 1.3% in Q4, and 2.3% in Q1 this year, averaging 2.6% in the last four quarters. Excluding a one-time cost of 151 billion KRW incurred during the GM 'Chevrolet Bolt TV' recall in Q2 2021, the Q2 operating profit margin would be 3.4% (otherwise -2.3%). The forecast for Q3 is 4.8%, and Q4 is 2%. The quarterly operating profit margin estimates maintaining the 2-3% range and the annual estimate exceeding 3% indicate that the market interprets LG Electronics VS Division’s achievement of a 3% operating profit margin as a matter of time.
Jo Joo-wan, CEO of LG Electronics, visited the Magna booth at the "IAA Mobility 2023" exhibition held in Munich, Germany, on the 5th of last month (local time), and spoke with Markus Knabel, Senior Marketing Manager of Magna International, Jorg Gottendorst, Senior Vice President, and Eun Seok-hyun, Head of LG Electronics VS Business Division. [Photo by Yonhap News]
It is analyzed that having already established three major business models?vehicle infotainment (VS Division), e-powertrain (LG Magna), and lamps (ZKW)?is acting as a stable growth engine. Infotainment sales account for about 60% of the total. Once LG Magna’s e-powertrain plants in Mexico (second half of this year) and Hungary (2025) are completed, the concentration in the automotive components business portfolio is expected to ease. LG Magna has strengths in advanced driver-assistance systems (ADAS) and autonomous driving-related solutions.
On the 5th of last month (local time), Cho Joo-wan, CEO of LG Electronics, met Diba Ilunga, President of Magna Powertrain, at Magna’s booth during the 'IAA Mobility 2023,' Europe’s largest motor show held in Munich, Germany. He said, "We will strengthen our position in the global automotive components market through collaboration with Magna and actively respond to the future mobility era, including electric vehicles and autonomous driving."
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