December 29, 2016 12:00 pm JST

Rivals Samsung and LG head toward an unlikely alliance

Japanese electronics makers are on guard over possible new South Korean threat

KENICHI YAMADA, Nikkei staff writer

SEOUL A possible partnership between longtime rivals Samsung Electronics and LG group could mark a new chapter in South Korean industry and spell trouble for Japanese electronics companies.

Samsung, South Korea's electronics leader, has asked LG to supply it liquid crystal display panels for TVs and batteries for smartphones from 2017. This is significant in that the companies rarely work together, with their last partnership dated nine years ago.

The gears were put in motion when Sakai Display Products, a joint venture between Sharp and its Taiwanese parent, Hon Hai Precision Industry -- also known as Foxconn Technology Group -- announced that the Japanese manufacturer will stop supplying Samsung with TV-use LCD panels sometime in 2017. The announcement came after SDP, bleeding red ink, tried unsuccessfully to negotiate a price increase with Samsung, said sources familiar with the talks.

This put Samsung in somewhat of a bind, as most panel manufacturers have already locked in their buyers for 2017 and have little capacity remaining to accept extra orders. Its options limited, the company turned to LG Display, which holds a leading 27% share of the global market for large LCD panels.

In the first half of 2016, Samsung bought panels for an estimated 1.2 million TVs from SDP and Sharp, which turns out panels in Kameyama, Mie Prefecture. That would represent about 6% of Samsung's global TV output in that period. Though it is uncertain whether LG Display would be able or willing to strike a deal of that size, the company is thought to be open to the idea.

If they partner in 2017, it would be the first tie-up between Samsung and LG group companies in nine years. In 2009, when South Korea's economy was still feeling the effects of the global financial crisis, the conglomerates agreed to team up in panel procurement, partly because that is what the government wanted. But the deal was never put into action; the size of the panels targeted under the agreement was too small -- about 20 inches -- to benefit either company.

NEED TO SUCCEED This time, however, Samsung has a real need to see this partnership succeed. Probably because it anticipated SDP's move, Samsung reduced its panel purchases from SDP and Sharp in 2016. The previous year, it bought roughly 5 million panels from them. But it has continued to purchase 40- and 60-inch panels from SDP and therefore needs to find a new supplier for those sizes.

Samsung has also shown interest in working with LG in smartphones. After ending production and sales of its fire-prone Galaxy Note 7 high-end smartphone, Samsung began sounding out LG Chem as a potential battery supplier.

Samsung purchased batteries for the Note 7 from a Samsung group company and Amperex Technology, a Hong Kong subsidiary of Japanese electronics company TDK. Samsung is still investigating the cause of the fires, which some have attributed to faulty batteries. The South Korean company apparently wants to ensure a flexible response to potential hardware problems by increasing the number of battery suppliers.

It is possible that the new Galaxy S8 smartphone, scheduled for release next spring, and subsequent models may come equipped with LG Chem lithium-ion batteries.

Since Samsung Electronics Chairman Lee Kun-hee fell ill in May 2014, the group has effectively been run by his only son, Vice Chairman Lee Jae-yong. Those two-and-half years under the younger Lee have seen some changes at Samsung.

One is its stance on takeovers. For years, the group achieved its growth independently without relying on acquisitions. Recently, however, it decided to acquire an autoparts company for $8 billion. Furthermore, Samsung has announced it is considering shifting to a holding company structure, revealing its willingness to re-examine the management structure.

A successful tie-up with LG would mark the latest shift under the new regime.

Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 311,034.25M
Shares: 159.91M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 59,804.83M
Shares: 17,328.73M
Asia300

LG Display Co., Ltd.

South Korea

Market(Ticker): KRX(034220)
Sector:
Industry:
Distribution Services
Electronics Distributors
Market cap(USD): 9,262.91M
Shares: 357.81M
Asia300

LG Chem Ltd.

South Korea

Market(Ticker): KRX(051910)
Sector:
Industry:
Process Industries
Chemicals: Specialty
Market cap(USD): 18,180.30M
Shares: 70.59M
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