What was expected has come. LG Electronics is expecting a profit decline of 15% for the second quarter of this year. Though the company has yet to disclose the contribution of each of its businesses, analysts in South Korea almost unanimously believe the lower-than-expected sales of its OLED TVs will be a major cause for the decline.
LG is already carrying the burden of its loss-making mobile business which has been in the red for over two years. If the South Korean electronics maker doesn't change strategy for its TV business in a timely fashion, as it failed to do with mobile, its record-breaking home appliance business may have to carry the company forward on its own.
Declines in sales and free exchanges for burn-in
LG's OLED TV growth has stalled dramatically in 2019. According to IHS, LG sold 500,000 units of OLED TVs in the first half of 2017, an impressive increase of 97% from the year prior. In 2018, this rose even further to 1.06 million units, a rise of 112%. But for the first half of 2019, it expects sales of 1.27 million units, only a rise of 20%. In other words, its bullish streak has effectively stopped.
The sales decline is a direct result of rival Samsung's QLED push that began gaining tail-wind late last year. LG shipped 344,000 OLED TVs in the first quarter of 2018; in the second quarter it shipped 369,000; on the third 332,000; and on the fourth 519,000, according to IHS. The company is expected to have shipped 381,000 units and 397,000 units for the first and second quarter of this year, respectively. Samsung's QLED TV shows a more dramatic rise. In the first quarter of 2018, the conglomerate moved 337,000 QLED TVs. In the second quarter this rose to 538,000 units; and the third quarter 644,000; and on the fourth quarter almost 1.1 million. In the first quarter of 2019, Samsung moved 896,000 QLED TVs, over double the previous year. In the second quarter it is expected to have moved a million units, again double the amount from a year ago.
It's not just revenue that is in decline, but profits. One major cause of profit declines is due to customers returning their OLED TVs from burn-in, at least in South Korea.
LG needs to offer better warranty for OLED burn-in
LG currently offers a one-year warranty for its OLED TVs but burn-in is not included as a reason for compensation. In other words, if an OLED TV suffers from burn-in, it is the customer's fault, not the company's. However, unofficially, the company has been offering extra warranties for customers who complain strongly, according to sources at a major electronics retailer for the firm in South Korea. LG has also sometimes offered free exchanges for customers who had OLED TVs with serious cases of burn-in, they said. Despite the extra costs, these off the books compensations are hitting profits. More and more customers are lashing out at the company via social media, posting pictures of their OLED TV with clear burn-in marks, which is hinting at the issue possibly snowballing. Compared to a year ago, more and more videos of OLED TV burn-in have been posted on popular platforms such as YouTube by consumers.
There is a case that LG can learn from however, which happened recently to none other than LG itself.
The company has been wrapped in a scandal in South Korea caused by malfunctioning cloth driers that was revealed earlier this month. The condensers in LG's dual invertor heat pump cloth driers, branded Tromm, sold in its home country allegedly didn't wash out dust properly. Dust would clog up the condenser and would cause a stink from not being deposed properly as advertised.
The South Korean electronics maker initially denied the allegations. But as more video proof of the malfunction surfaced online, the company relented and offered 10-year warranties and offered a general apology for customers. LG did not admit, however, that there was a malfunction in its driers.
Thousands have joined a petition on local closed social media app Band demanding for LG to acknowledge the problem, while threatening to report the malfunction to local fair trade regulators. A separate online petition was also filed to the Blue House, South Korea's equivalent of the US's White House, demanding the company recall the driers and fully compensate consumers with over 28,000 signatures. The situation is continuing to escalate.
LG either needs to offer longer warranties for its OLED TVs, which are not cheap, or include burn-in as part of its official customer return policy, or best, do both. Pre-emptively putting the burden on itself rather than the customer seems a better option than facing a possible class action lawsuit -- especially since LG continues to claim burn-in is not a serious issue.
Put customers first: drop TV prices
LG Electronics is the major vendor for OLED TVs, with its affiliate LG Display the sole supplier for OLED panels, which means as a near-monopoly, it can effectively adjust the price as it sees fit. The company, understandably, is waiting for its affiliate LG Display to ramp up its production rate to increase supply to bring panel prices down. But with Samsung harrying the company with a renewed marketing campaign for QLED TVs and aggressive pricing for ultra-large TVs, its time LG made a choice between market share or profitability.
This is the same dilemma LG's mobile business has been faced with. When the company's G5 smartphone, its modular phone, failed in the market, the company had a choice -- to give-up the premium sector where Apple and Samsung was forming a duopoly or launch price-competitive models early to protect market share. It made that choice too late and belatedly dropped its phone prices at a time when upstart Huawei had already flooded the market with low to mid-end smartphones to secure market share.
LG's OLED TV situation is more optimistic compared to the one it faced in the mobile market however. OLED TVs remain popular with customers and brand loyalty is still a factor going in the favour of LG. The main ire for customers though, who have sometimes even willingly ignored the possibility of burn-in, has been price. LG's OLED TVs are mostly 20-50% pricier than Samsung and other vendors' offering, in spite of the recent price drops. The South Korean electronics giant needs to give up profitability for the short term and pre-emptively lower the price on its own, even drastically, ahead of the holiday seasons of the third and fourth quarter. As the only major vendor for OLED TVs in the global market, the price drop would not dent the TV's premium brand image as much as it would have done for smartphones as it continues to market OLED as being superior to LCD like it has done for the past seven years.
Coupled with an improved warranty policy that puts customers first, not its profits, it may still have at least a fighting chance against Samsung's QLED push. LG is already six months behind its rival, so it is now or never.
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