LG struggles in smartphone market

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A struggle to keep up with rivals in the smartphone market cost LG Electronics in the second quarter, when the South Korean manufacturing group said it sales fell by a tenth, dragging is share price down. Two years ago LG vowed to overtake Samsung to become the world’s second-biggest mobile phone maker. But in contrast with its local rival, LG has struggled to keep up with the pace of innovation in that market. Revenue fell by an annual 28. 6 per cent in LG’s mobile communications division, which recorded an operating loss of $49. m – its fifth loss in the past seven quarters.

Cost cuts helped the group to report a net profit of $138m, up 46 per cent from the same period of 2011 – but this was still lower than analysts had forecast. The struggles in the mobile arm were the main factor behind an 11 per cent decline in group revenue, to $11. 2bn. LG is pinning its hopes for its mobile operation partly on a leading presence in phones using the next-generation LTE broadband system.

Sales in the group’s home entertainment arm, its largest division, fell 6 per cent to $4. 8bn. But improved margins in that business, coupled with increased demand for 3D televisions, meant operating profit more than doubled to $188m. The company predicted that strong demand from developing markets would cancel out the falling sales in the first half to deliver revenue growth for the full year. It gave a more cautious outlook for the mobile phone division, however.

Last November LG revealed plans for a rights issue of $950m to fund investment in the division – a plan that was greeted with disapproval from investors, who sent the company’s stock down 14 per cent following the announcement. The group cited subsequent investment in marketing as a major reason for the mobile division’s return to lossmaking territory in the second quarter – but it declined to forecast a return to profit in the second half. LG promised to “continuously launch new LTE models in the developed markets” and said overall smartphone demand would increase.

However, it predicted that competition would intensify in the third quarter “with competitors launching premium flagship models” – a veiled reference to the anticipated launch of the iPhone 5 by Apple, which overtook LG last year to become the world’s third-biggest mobile phone maker by sales. The group’s pre-tax profit for the period was $205m, up from $130m in the second quarter of last year. The shares closed 2 per cent lower at Won56,100. They have lost 52 per cent of their value since the beginning of last year.

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