LG Display sees a brighter picture with OLED
With the technology having boosted its TV business, the group now eyes smartphones
KIM JAEWON, Nikkei staff writer
SEOUL -- Apple's plan to switch from conventional liquid crystal display, or LCD, screens on its iPhone series to more advanced organic light emitting diode, or OLED, panels for its next generation iPhone models to be introduced next year appears to represent a bonanza for Samsung Display, which is the world's biggest producer of OLED mobile phone panels, with a market share of more than 90%. The unit of the South Korean electronics giant Samsung Electronics has been supplying them for Samsung smartphones as well as to other phone makers since 2010.
But Apple's move also represents an opportunity as well as a vindication for LG Display, which has become the world's largest producer of large OLED TVs and has been seeking to enter the market for small OLED panels in a major way. LG Display, the South Korean rival to Samsung Display, knew that Apple, with its emphasis on finding dual suppliers to ensure both production security and cost competitiveness, would be the means to achieve that goal.
The Nikkei Asian Review reported earlier in July that the U.S. smartphone maker is scheduled to use OLED displays for all new iPhone models starting in the second half of 2018.
LG Display announced on July 25 that it would nearly double investment in OLED production of both mobile and TV screens to 15 trillion won ($13.35 billion) by 2020. This could allow the company to steal a march over crosstown rival Samsung when it comes to the OLED technology sector. LG Display can soon claim to have a strong position in both the OLED smartphone and TV panel segments, while Samsung continues to debate whether to enter OLED TV production even as it currently dominates the small-size OLED display industry.
The company's contribution to its parent LG Electronics and the bigger LG Group is considerable. The panel maker in the second quarter ponied up 279.3 billion won in profit to LG Electronics, which owns a 37.9% stake in LG Display. It chipped in more than half of LG Electronics' 514.9 billion won net profit for the quarter.
In 2015, it racked up about a fourth of the LG Group's 114.2 trillion won in revenue, according to data from the Korea Fair Trade Commission. The panel maker accounted for an even bigger portion of the group's net profit that year, 30% of 3.2 trillion won.
OLED is emerging as the next big battleground in screen technology, which until recently has revolved around LCD. OLED displays are thinner and more flexible, allowing smartphone makers to produce devices that are curved and sleek in design. In addition, OLED offers better color contrast and energy efficiency than LCD panels. Because OLED eliminates the need for bulky backlights, TVs as thin as a credit card can be produced.
LG Display would not comment on whether it had secured an agreement with Apple to produce OLED panels for its smartphones. Apple imposes strict confidentiality terms on its suppliers. But analysts said there could be no other explanation for the investment decision and speculated that Apple will provide additional investment capital to LG Display to expand its production facilities. "It makes sense for Apple to cooperate with LG because it cannot accept a situation where it relies exclusively on Samsung for the panels," said an industry observer. LG Display has previously been a major supplier of LCD panels for Apple iPhones, according to analysts.
"We decided to mass produce plastic OLED panels because our customers made a commitment at some level," said Han Sang-beom, the LG Display chief executive, at a press conference in Seoul on July 26. Plastic OLED panels are flexible ones suitable for smartphones and auto displays, another big potential growth area.
The latest tranche of 7.8 trillion won was committed to OLED production at the company's main facility at Paju, which is northwest of Seoul and close to the North Korean border. About two-thirds of the investment will be earmarked for small-size OLED panels, with the rest for OLED TV screens.
Han, a 62-year-old former electronics engineer, has been the driving force behind LG Display's decision to become the first major company to manufacture OLED TV panels. Many saw it as a risky gamble. The initial production failure rate was high due to the complexity of the technology. This resulted in expensive prices for OLED TVs that limited consumer appeal despite the superior picture quality they offered. It has only been within the last two years that the failure rate has fallen enough to allow LG OLED TVs to become more affordable.
Samsung has postponed OLED TV production because it concluded that market demand could not justify the investment cost, while analysts say that Samsung's OLED TV production technology is less efficient than that adopted by LG Display. Instead, Samsung has opted for an intermediate technology, known as quantum dot, to produce TV picture quality similar to that of OLED. QD technology as well as another emerging technology, MicroLED, represents a potential threat to OLED if they can offer a better picture but at a cheaper price.
Han decided to aggressively move toward OLED because profit margins for LCD TVs have become razor thin due to increased competition from Chinese TV makers. OLED TVs offered the advantage of fatter earnings once they achieved market acceptance due to LG's first-mover advantage. OLED was also seen as way to differentiate the LG brand from Samsung in the global TV market.
Nonetheless, LG Display remains the world's largest producer of LCD TV screens, although it will not expand production in this segment. "We are betting all of our resources on OLED. LCD should [be] a backup for it," said Han, who predicted LCD TVs will still account for 65% of the company's total TV panel production by 2020.
"We think the structural [industrial] transition from LCD to OLED is clear as shown by its aggressive adoption in smartphones and steady market share gains in premium TV sets," said Chris Chang, an analyst at Nomura, an investment bank. "We expect OLED to contribute about 25% to [LG Display's] revenue by 2019, stemming from LG Display's position as the sole supplier of OLED TVs and No. 2 supplier of mobile OLED panels."
LG Display has been seeking to grow the global OLED TV market by supplying OLED panels to Chinese TV manufacturers, including Skyworth Digital Holdings and Hisense Electric, as well as Panasonic of Japan and Philips brand TVs under Taiwan's TPV Technology. As part of its latest investment push, it said that it would add OLED production at a reported cost of 2.6 trillion won to its LCD plant in Guangzhou, China, which opened in 2014, with 30% funding provided by a Guangzhou government development agency and Skyworth. Han indicated that LG Display was in talks with other Chinese partners as well in setting up OLED TV production in China.
The large size of LG Display's investment in OLED has been met with caution by the market. The share price of LG Display fell 2.99% to 30,800 won on July 28, the seventh consecutive day of losses, and down by 17.5% from 37,350 won on July 19.
The benchmark KOSPI dropped 1.73% to 2,400.99 on July 28 due to a sell-off by foreign investors. The weakening share price also reflects a mixed financial performance.
LG Display's earnings in the second quarter fell below market expectations when they were released on July 25. Revenues increased 13% to 6.6 trillion won in the quarter from a year ago, lower than the market consensus of 6.8 trillion won. Although its operating profit rose by an eye-popping 1,712% to 804 billion won during the same period, it fell short of failing of a market estimation of 859.3 billion won. Net income rose 8% to 737 billion won. The company has had to face increasing headwinds including a stronger won against the dollar and slowing global demand for smartphones and large-size TVs.
LG Corp., a holding company controlled by the founding Koo family, has interests ranging from electronics (LG Electronics) and telecommunications (LG Uplus) to chemistry (LG Chem) and cosmetics (LG Household & Health Care).
While LG -- known as Lucky Goldstar until 1995 -- was once seen as being evenly matched against Samsung in the electronics sector, it has since fallen behind. LG was forced to divest its semiconductor unit as part of a government-led corporate restructuring program in the wake of the 1997 Asian financial crisis, while Samsung was allowed to keep its chip business which has since become a major cash cow. LG was also late in spotting the potential of smartphones when they first made their appearance nearly 10 years ago. Although LG's leadership in OLED will not narrow the gap much with Samsung, it does represent a victory for its foresight in committing itself to the technology.
The LG Group is also enjoying another advantage over Samsung, which was caught up in the corruption scandal involving former South Korean President Park Geun-hye and is now under government pressure to streamline its operations and make them more transparent.
LG is viewed as a model for the corporate reforms that the government wants other conglomerates to emulate. For example, it has adopted a holding company structure for its businesses instead of the cross-shareholding system that binds together other big business groups. Fair Trade Commission Chairman Kim Sang-jo, a fierce critic of the conglomerates, or chaebol, has said that LG has the best corporate governance structure because it is simple to understand and encourages equitable shareholdings.
LG companies are also known for their good work environment. The group, under its founding Koo family, has emphasized the slogan "harmony" in contrast to Samsung's reputation for encouraging a cutthroat competitive corporate culture. This comparison is summed up in a saying, "If you want to become an executive, join Samsung. But if you want to be an employee, join LG."
On July 27, LG Group Vice Chairman Koo Bon-joon, younger brother of Group Chairman Koo Bon-moo, attended a casual dinner meeting with Moon, where Koo introduced LG Display's 100 billion won fund to support its subcontractors in a bid to help the government's efforts to create jobs and protect small businesses.
The group is now trying to curry favor with the new administration of South Korean President Moon jae-in, who wants to curb the dominant power of the chaebol and promote workers' rights.