Why Samsung and LG Scare Motorola

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Apart from its distinct look and feel, the handset also sports a 5 megapixel camera, Movie Maker software enabling the user to create music videos, and a Google (GOOG) package allowing access to the Internet, Gmail, Google Maps and YouTube videos. (BusinessWeek, 8/29/07).

Such eye-grabbing products have allowed LG to seize market share and improve margin. The company's first-quarter operating profits from its handset business quadrupled, to $444 million on sales of $3.2 billion, up 36%. Its profit margin improved dramatically to 13.9% from 4.7% a year earlier. Little wonder LG shares have jumped 56% this year, the best performing among the world's five biggest mobile-phone makers. "Our product lineup has begun striking the right chord with consumers," crows Chang Ma, LG's vice-president in charge of marketing strategy.

Weaker Currency Helping Koreans

The stellar performance compares with a sharp plunge in shipment growth and earnings suffered by Sony Ericsson. The Japanese-Swedish venture's first-quarter net income was halved, to $212 million, while sales slipped 7.6% to $4.2 billion. The growth in its device sales was a mere 2% against 64% a year earlier, with its operating margin almost halving to 7% from 13% just three months earlier. "With Motorola and Sony Ericsson fumbling, Samsung could focus on narrowing its gap with Nokia and LG could cement its lead over Sony Ericsson," says electronics analyst Chun Seong Hoon at brokerage Hyundai Securities in Seoul.

Sure the Korean companies are benefiting partly from a weaker currency (BusinessWeek, 3/28/07) that makes their products more competitive in overseas markets.

Samsung says its overall three-month operating profit of $2.6 billion, which include earnings from chips, liquid-crystal-display panels, and TVs, was boosted by nearly 12% thanks to the Korean won's 3.7% fall in value against the dollar and 7.4% decline against the euro in the first quarter. Yet analysts say Samsung's 16% profit margin in its telecom unit, up 13% from a year earlier, stemmed largely from its product superiority, efficient supply-chain management, and rapid expansion in emerging markets.

Riding the iPhone Wave

Now both LG and Samsung are poised to capitalize on the industrywide buzz over the touch screen interface and multimedia devices created by Apple's iPhone. Telecom analyst Tina Teng at researcher iSuppli points out Apple's high-priced iPhone and the company's determination not to compromise its business style won't really help Apple gain share in the handset market although it will remain a "strong influence" in setting industry direction. Apple's phone market share slipped to 0.6% in the first quarter from 0.7% in the previous quarter.

So, while the iPhone has grabbed most of the headlines, analysts and industry officials believe other phone makers offering less expensive devices with similar capabilities will likely benefit. In other words, the Koreans. "Certainly both Samsung and LG have reacted fast," notes Teng. According to David Steel, Samsung's marketing vice-president, Apple "has opened a great opportunity for us to talk to all the carriers in the U.S."

The big question is, can the Koreans keep expanding their presence in fast-growing emerging markets, where Nokia is dominating? LG is just beginning to enter these markets in earnest. In the past 18 months Samsung has successfully managed to make inroads in India, the Middle East, Africa, and other developing markets, increasing overseas production to 59% this year from 39% two years ago. In the first quarter of this year, emerging markets represented 45% of Samsung's sales of 46.3 million phones.

A Huge Hurdle for Motorola

"We are quite optimistic about our strategy," says Steel, pointing to 42% sales growth last year, when the industry grew by 12%. "Again this year, our plan is almost three times an estimated industry growth of 9%." Such breakneck growth could well pose a huge hurdle for Motorola and Sony Ericsson as they try to stage a comeback.

Moon is BusinessWeek's Seoul bureau chief.