While LG Electronics is engaging in fierce competition with emerging powerhouses in China in its core businesses of TVs and home appliances, the results in the new business sectors such as business-to-business (B2B) and automotive electronics are showing a disappointing performance compared to expectations. The home appliance division has stagnated for several years, and recently, the growing influence of Chinese companies has led to increasing losses, while the new businesses require further investment to achieve economies of scale.
The biggest issue is that the profitability of LG Electronics’ TV and home appliance business, which has been regarded as a leading manufacturer, is deteriorating more rapidly than expected. This also reflects that Chinese companies are pushing LG Electronics into a challenging competition in both developed and emerging markets where LG Electronics had established dominance. Jo Joo-wan, CEO of LG Electronics, noted at the IFA 2024 last year that "the quality level of Chinese home appliances has greatly improved" and that "they have almost caught up."
◇ TV and home appliance businesses stagnate for 7 years… automotive electronics business also in a holding pattern
On the 23rd, LG Electronics announced that it recorded 22.76 trillion won in revenue and 135.4 billion won in operating profit for the fourth quarter of last year on a consolidated basis. Revenue increased by 0.1% compared to the same period last year, but operating profit fell by 56.7%. This was 65.9% lower than the market forecast of 397 billion won. Excluding the performance of its consolidated subsidiary LG Innotek, LG Electronics recorded an operating loss of 113.9 billion won in the fourth quarter.
Kim Chang-tae, Chief Financial Officer of LG Electronics, said during a conference call after the earnings announcement that "there were some regrets in profit margins for the fourth quarter and the second half due to factors such as a significant increase in logistics costs and increased exchange rate volatility." He explained that unexpectedly high increases in global maritime freight rates and one-time expenses for inventory normalization occurred in the latter half of the year. However, LG Electronics has recorded operating losses in the fourth quarter for five consecutive years, excluding the exceptional years of 2020 to 2021 when it enjoyed the benefits of the COVID-19 pandemic. The persistent downturn in the fourth quarter due to seasonal business conditions continues.
In particular, in the fourth quarter of last year, all major business divisions except the TV sector incurred losses. The Home Appliance and Air Solution (H&A) division recorded fourth-quarter sales of 7.4153 trillion won and an operating loss of 117.3 billion won. Oh Kang-ho, a researcher from Shinhyeon Investment & Securities, analyzed that "the poor performance of the business-to-consumer (B2C) sector has deepened, and overall expenses such as logistics and inventory normalization costs increased, leading to subpar results."
The fourth-quarter sales of the Home Entertainment (HE) division amounted to 4.3716 trillion won, with operating profit of 37.3 billion won reported. Although it turned to profit compared to the same period last year, it fell more than 70% short of the initially expected operating profit. The increased marketing expenses due to intensified competition with Chinese TV manufacturers had a significant impact. Kim Jong-bae, a researcher from Hyundai Motor Securities, stated, "Despite the seasonal peak period for TVs, the performance fell short of expectations," adding, "The high prices of LCD panels remain a burden."
The fourth-quarter sales of the Vehicle Component Solutions (VS) division totaled 2.6554 trillion won, with an operating loss of 20 billion won. While sales increased by 2.4% compared to the same period last year, profitability deteriorated and resulted in a turnaround to losses. LG Electronics stated, "We expect that for the next 2 to 3 years, due to stagnation in demand for electric vehicles compared to earlier expectations, sales and profitability will be weaker than originally planned." The B2B Solutions (BS) division, which is also responsible for business-to-business services, experienced weakened IT demand, leading to fourth-quarter sales of 1.2483 trillion won and an operating loss of 123.1 billion won, further widening its losses.
◇ “We must resolve chronic seasonal downturns to improve competitiveness”
Regarding this earnings shock, securities analysts have commented that the company’s new businesses being promoted by LG Electronics are underwhelming. Park Sang-hyun, a researcher from Korea Investment & Securities, mentioned that "the effects of new businesses such as B2B and subscription home appliances for the home appliance (H&A) sector, and webOS for the HE division, which were expected to mitigate the seasonal performance, were below expectations" and highlighted that "the downturn in core businesses like home appliances, TVs, and automotive electronics has become pronounced."
LG Electronics emphasized on this day that "fundamentals are strengthening," but securities analysts provided a contradictory assessment. They argue that the persistent impact of seasonal downturns on performance indicates that the company's fundamentals are not healthy.
Park Hyung-woo, a researcher from SK Securities, noted, "Recently, the expected operating profit for LG Electronics on a consolidated basis has dropped to the 250 billion won range, and they have reported disappointing results below this mark." He added that "the seasonal pattern of a higher first half and lower second half has repeated again, and particularly in the fourth quarter, a large amount of costs have become apparent." He pointed out that "the pattern of reflecting large expenses at the end of the year and seeing profits rise in the first quarter has been a recurring situation, and this seasonal pattern continues to act as a significant variable for LG Electronics' stock price."
LG Electronics plans to improve its performance this year with a strategy focused on "maximizing efficiency." Regarding the burden of logistics expenses that hindered the fourth-quarter performance, it stated that "additional reductions in maritime freight rates are expected as we move into the latter half of the year" and that "we will proceed primarily with semi-annual contracts and ensure maritime freight competitiveness through additional bidding in the second half." Furthermore, it mentioned, "We will enhance supply chain optimization and operational efficiency to prepare for risks such as global supply chain restructuring and exchange rate volatility," adding that "while continuing investments in future growth areas, we will maximize operational efficiency through selective concentration considering strategic priorities."