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LG sticks with smartphones despite $2.5bn in losses

Mobile devices are key to South Korean company's AI and smart home ambitions

LG has made a splash with its OLED TVs, but its smartphone business has been bleeding red for years. 

SEOUL -- It was a moment LG Electronics could be proud of. The South Korean company, long overshadowed by compatriot Samsung Electronics, showed off its 65-inch roll-up TV at this year's CES in Las Vegas, drawing applause from the crowd and proving again its prowess in manufacturing cutting-edge display panels.

But LG's success in high-end TVs stands in sharp contrast to its troubles in the smartphone market, where it struggles to survive amid competition from Apple, Samsung and, increasingly, Chinese players like Huawei Technologies.

Kwon Bong-suk, head of LG's TV segment, is credited with boosting sales of premium sets. In January, he began his latest assignment: turning around its loss-making smartphone business.

"President Kwon will transplant the success of OLED TVs ... to the mobile communications division," the company said in a statement. Kwon will serve as head of both divisions.

LG is under intense pressure to turn around its smartphones business, logging about 2.8 trillion won ($2.5 billion) in losses over the past three years, while Samsung earned about 33.1 trillion won in the sector over the same period.

Some observers are suggesting that LG should pull out of the industry if it cannot compete with Apple and Samsung on innovation or Huawei on cost. Some are also questioning whether it makes sense for LG to put one of its best executives in charge of its worst business.

But LG is sticking with mobile, believing that smartphones are a crucial test bed for cutting-edge consumer technology and a key pillar of its artificial intelligence ecosystem.

"Smartphones are not our sole business. Its technology is related to automotive electronics and home appliances," CEO Jo Seong-jin said at a press conference at CES. "We are not considering pulling out of the market."

Smartphones are a key device for controlling AI-based automotive electronics and smart home systems. LG has developed its own smart home system called ThinQ, which connects and controls its home appliances.

Analysts agree that the company cannot abandon smartphones due to their critical role in AI and the "internet of things," but also say LG must address its problems in the sector.

"The company's dilemma is that it cannot give up the smartphone business because [the devices] will be at the heart of the internet of things," said Kim Ji-san, an analyst at Kiwoom Securities. "LG is under pressure to fundamentally change its system to diffuse risks."

Kim said that spinning off the smartphone business is a realistic option for reducing risks without giving up the technology.

LG Chief Technology Officer I.P. Park outlined the company's AI ambitions in a keynote speech at CES. "Our vision in the coming age of AI is to become a lifestyle innovator that serves a truly intelligent way of living."

The Consumer Technology Association, host of the event, predicts that LG's ThinQ AI platform, which was launched last year, will play a decisive role in the future of the company as it sets its sights on autonomous vehicles, smart homes, smart cities and robotics.

Speaking at the IFA in Berlin last year, CEO Jo gave an example of the kind of customized services users could expect from the platform. "Your home will know what kind of day you had at the office and will roll out the welcome mat by preparing the perfect environment for when you walk in the door."

But for now the company faces a harsh reality. Operating profit for October-December fell 79.5% on the year to 75.3 billion won, while revenue dropped 7% to 15.8 trillion won. The company will disclose its earning by sector on Jan. 31.

Analysts attribute the poor performance to LG's massive losses in its smartphone business, which are eating into profits from home appliances and TVs, LG's two cash cows.

"Even though home appliances and TVs are performing well, poor sales of smartphones pulled down the earnings guidance more than expected," said Roh Kyoung-tak, an analyst at Eugene Investment & Securities.

"LG's smartphone business was hit hard by its high exposure to the U.S. and emerging markets amid trade tensions between the U.S. and China, as well as the economic slowdown in emerging markets."

The U.S. market accounts for half of LG's smartphone shipments, followed by emerging markets at 36%.

The disappointing earnings have also pulled down the company's market value. Its shares fell to 65,900 won on Monday, down 38.4% from a year ago and far below the benchmark Kospi index, which fell 17.5% during the same period.

But analysts say 5G smartphones could offer new opportunities for LG in the U.S. market. Huawei faces scrutiny there due to trade tensions between Washington and Beijing, while Apple does not yet have any plans to release 5G smartphones, which can process data about 20 times faster than 4G models.

"I am sure that development of 5G is an important opportunity for the company because only Samsung Electronics and LG Electronics can cope with the advanced markets in the early stage," said Kim at Kiwoom.

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