Will LG Mobile's bet with outsourcing and 5G pay off?

LG is hoping that outsourcing its smartphone production and 5G will revive its mobile business. Will it work?
Written by Cho Mu-Hyun, Contributing Writer

LG Electronics' mobile business isn't ready to throw in the towel. And the goal post here isn't high either; the company is aiming for solvency, if nothing else.

The business has posted 22 straight quarters of losses as of the third quarter of 2020. In total, it has accumulated 4.23 trillion won (around $3.9 billion) in operating losses for the past five and a half years.

In October, at its third-quarter conference call, LG said it would shift its strategy by expanding the use of original design manufacturers (ODM) for its smartphone production to mid-tier models, in addition to its low-tier devices. The company also said that the wider rollout of 5G networks would help expand smartphone shipments. But will this be enough for a turnaround?


ODMs both design and manufacturer their customers' products, with the customers' labels then being attached when the product is complete. This differs from original equipment manufacturers (OEM) like Foxconn that manufacture iPhones for Apple but does not design them.

Using ODMs saves costs in two ways. The first is that the customer can reallocate the resources that go into design and development to elsewhere. Second, the ODM procures most of the components it needs by using its own suppliers, usually based locally, at a much cheaper rate than the customer potentially could.

The use of ODMs has been a widely held practice by Chinese smartphone makers for years. This is because Chinese consumers prefer to have a wide range of smartphone choices available for them at various price points. In China, smartphone life cycles are also relatively short in comparison to the rest of the world.

Samsung has also used ODMs more widely in its smartphone production than before, which has been in large part due to the need to defend its market share against Huawei and other Chinese rivals.

On Monday, LG said it made further organisational changes to its mobile business to increase outsourcing production for low to mid-tier smartphones. The company formed a new division dedicated to ODMs, while at the same time scrapping many of its core divisions that focused on advanced research and quality control.

The company began using ODMs, based in China, in 2018 for some of its smartphone production, but the volume was negligible, people familiar with the matter said. But this year, around half of LG's smartphones were produced by these ODMs and that amount will increase even more in 2021, they said.

Samsung and LG avoided the use of ODMs for a long time due to concerns over quality control and their desire to control their own supply chain. But in the case of LG, which no longer ranks within the top five in global smartphone shipments, affiliates like display panel maker LG Display and camera module maker LG InnoTek have now for years relied on Apple more than LG Electronics for their revenue from smartphones.

In other words, for LG, there is no supply chain to control, or protect. And with a mature smartphone market where there is little wriggle room to differentiate in hardware specs, and where ODMs are competent enough to churn out quality low to mid-tier smartphones, LG now has nothing to lose by outsourcing more of its production.

In hindsight, perhaps this should have been done sooner.


There are some things working in LG's favour, however. The company still ranks within the top three in smartphones for two key markets -- the US and South Korea, where 5G networks have rolled out and coverage is expected to widen in the coming years.

According to Strategy Analytics, during the third quarter in the United States, Samsung had market share of 33.7%, followed by Apple's 30.2%, while LG had 14.7%. In the same time period in South Korea, Samsung had a 72.3% share, LG had 9.6%, and Apple 8.9%.

LG also received an "honorable mention" in Apple CEO Tim Cook's opening statement to the House Judiciary Subcommittee on Antitrust in July, as a company Apple was in "fierce competition" with in smartphones. This is despite Chinese companies like Oppo, Vivo, and Xiaomi shipping more units than LG globally. In the US at least, the LG brand is better known.

The company this year launched the LG Wing, a swiveling dual-screen smartphone, which is the first model of its premium series, Explorer Project. A second model in the series, a rollable smartphone, will launch next year. The series won't contribute much to shipment totals which the LG Velvet, coupled with 5G, is designed to do, but it was launched more to keep brand relevancy.

With the 5G market just beginning to open up, LG will have an established brand to work with in key markets, while Chinese companies will have limited access to the US and certain mature markets due to the ongoing US-China trade war. It is highly unlikely that LG will beat Oppo, Vivo, and Xiaomi in shipment totals in any meaningful way, but managed correctly, it will be able to sustain its smartphone operations due to the current global business environment.

Despite low morale at the mobile business itself, the top leadership at LG has been adamant that the business continues, sources told ZDNet. This stems from leadership's belief that smartphones will play an important role in the 5G era in sync with other electronic devices, they said. 

Mobile business aside, LG is still a powerhouse in TVs and home appliances, which have seen a jump in demand due to the pandemic. 

In a statement, the company told ZDNet: "LG is and has been increasing its focus on higher-end models in addition to improving operational efficiency and market responsiveness by reorganising production sites and expanding its ODM portfolio. While it will take some time to see the full effect of this strategy, early signs give us reason to be optimistic that LG will continue to be a disruptive player in the smartphone industry."


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