SEOUL -- LG Electronics is small fry compared to compatriot Samsung Electronics in market caps, but it stands head and shoulders over the domestic giant in white goods, thanks to its success at home and in the U.S.
The South Korean company posted a record operating profit in its home appliance business in the three months through March.
Operating margin in the segment grew sharply for LG in 2016, after the company began turning out more upscale appliances and aggressively marketing them as such. The figure, which stood between 2% and 3% until 2015, hit 7.4% in 2016 and has stayed above 8% ever since. This compares with 2019 same-sector figures from Samsung at 5.8%, Panasonic at 2.1% and Haier Electronics Group at 4.5%.
As stay-at-home consumers continue to spend more on household goods due to the new coronavirus, LG has become more visible in the market.
In a conference call following the announcement of January-March results, Scott Sim, head of the company's investor relations, said the impact of the virus on its business will be limited if infections peak in mid-May. In fact, economic activity has been gradually returning to normal in the U.S. and Europe since then.
Consolidated net income at LG Electronics grew 88% from a year ago to 1.09 trillion won ($907 million), driven by high-priced appliances and brisk sales of OLED, or organic light-emitting diode, television sets. The won's depreciation against the dollar in March also lifted profits.
In 2016, LG steered away from mass-market products and began focusing on high-end consumers, introducing Signature, its premium appliance brand for refrigerators, washing machines and clothes dryers. For TV sets, the company focused on high-definition OLED products, shifting from liquid-crystal displays.
LG also rolled out its Styler clothing-care system -- a completely new type of home appliance -- after nine years of research and development. The thin, tall cabinet uses steam to remove wrinkles and odor from clothes while sanitizing in the process. The popularity of Styler has prompted rivals, including Samsung, to follow suit with similar products.
"We've expanded the weight of premium products," said Kim I-kueon, head of financial planning for the company's home appliance and air conditioner unit. Kim said LG has established itself as a high-end appliance brand, mainly in the U.S. and South Korea. Premium products, including Signature appliances, now account for over 50% of revenue in the business.
The company expects earnings to slump in the three months to June due to suspended operations at European and U.S. outlets, as well as overseas factories. But Kim expects business to start normalizing after June, as consumers buy new items or replace old ones.
Despite the brisk performance of its mainstay business, LG Electronics' share price remains stilted. While revenue reached about $50 billion, the company's market cap is still below $10 billion, due mainly to a prolonged slump in LG's smartphone business. In contrast, Samsung Electronics' cap is nearly $280 billion.
LG's smartphone business recorded an operating loss of 237.8 billion won on revenue of 998.6 billion won in the three months to March. Unit sales have continued to slump in the face of stiff Chinese competition. As a result, the company has not been able to allocate funds for development that is sorely needed to come out with hit gadgets.
LG Electronics has tried to reduce costs by shifting production to Vietnam and relying more on outsourcing, but its smartphone business has recorded consecutive operating losses over the past 19 quarters.
LG Electronics is a leading member of the LG group, the fourth-largest conglomerate in South Korea. Still, corporate value remains less than half that of group members LG Chem and LG Household & Health Care, which are valued at 2.2 trillion won and 2.1 trillion won, respectively.
In addition to its smartphone business, LG Electronics is weighed by troubled LG Display, in which it has a 38% stake. The company needs to drastically reform its smartphone and display businesses while continuing to focus on premium appliances.