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How LG Chem Is Changing Its Formula


Like its global rivals, LG Chem, South Korea's largest chemical company, has been riding the China wave. More than half of LG's petrochemical sales are in China, where the company is the largest maker of the synthetic resins used in everything from computer monitors to bathtubs. China revenues jumped 56%, to $2.4 billion, last year. The mainland business contributed to a 29% rise in LG Chem's global sales of $8.7 billion and a 31% jump in profits, to $883 million. Yet President No Ki Ho knows that this wave will soon recede as competitors step up production, so he's looking for a new one to ride.

His strategy? Turn his old-line chemical manufacturer into a maker of materials for digital gadgets. Since 2003, LG Chem has been beefing up its production of rechargeable lithium-ion batteries -- mostly used in mobile devices -- and of polarizing film, needed for liquid-crystal displays to show images. The digital division's revenues nearly doubled last year, to $1.2 billion. Now, No aims to quadruple them, to $4.9 billion, by 2008. That would make LG the top supplier of polarizers in the world and put it on a par with Sanyo Electric Co. of Japan for leadership in rechargeable batteries. Longer term, LG also wants to be a crucial player in fuel cells, solar cells, and components for other types of flat-screen televisions and monitors. By then, LG Chem hopes its digital division will account for 35% of revenues, up from 15% today. No expects the expansion will make LG Asia's No. 3 chemical company in 2008, up from eighth this year. "Chemical materials for display devices and next-generation energy will be the sweet spot of our company in the future," No says.

Even so, investors haven't latched on to the story. The poor short-term prospects of the battery business and fears that the petrochemical industry peaked last year have depressed LG Chem's stock of late. But Park Jeong Bae, analyst at Hana Securities Co., predicts that LG will prosper. "The ongoing restructuring will lead to an almost ideal business portfolio for LG, paving the way for steady growth," Park says.

BIG AMBITIONS

No's vision -- particularly for batteries -- is ambitious. Sanyo's market share is nearly 30%, about triple what LG has. Rising prices for raw materials such as cobalt pushed LG's battery business into the red last year, while Sanyo enjoyed an estimated 6% profit margin. Competition is fierce: Sony (SNE) and Matsushita Battery Industrial are bigger than LG; local rival Samsung SDI Co. is about the same size; and China's BYD and Lishen are expanding aggressively as more electronic gadgets are made in China. "LG certainly has strong potential, but there are many variables that could go wrong," says Park Chul Wan, director in charge of battery research at the state-funded Korea Electronics Technology Institute.

LG Chem, though, is determined to leapfrog its rivals. By 2010, LG expects to pour $1 billion into a plant at Ochang, south of Seoul, for next-generation batteries and other new gadgets. Some $2 billion is earmarked for research and development over the next five years, and the plan is to double the number of R&D engineers, to almost 4,000, by 2008. By contrast, both Sony and Sanyo, beset with financial difficulties, aren't likely to spend as aggressively on research and facilities.

Another big advantage LG has is its tie to LG Electronics. The sister company is the world's leading manufacturer of LCD TVs and the No. 5 cell-phone maker, and its joint venture LG Philips LCD is the largest LCD panel maker. "With a global handset maker and a panel maker serving as captive customers, it's just a matter of time before LG Chem emerges as a key IT component provider," says Lee Jeong Heon, chemical analyst at Dongwon Securities Co. in Seoul. Already Koreans have beaten their Japanese rivals in handsets and displays. No is betting he can wrestle his way to the top spot in making the key components of both.

By Moon Ihlwan in Seoul


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