Wednesday, August 6, 2008

Nokia's Price Cut Poses Threat to LG

Price cuts by Nokia, which controls 40 percent of the global handset market, are
putting bigger pressure on its smaller rivals, including LG Electronics, which
has focused on pricey camera and music phones.

According to industry
sources, the Finland-based mobile phone manufacturer unexpectedly decided to
lower prices by up to 10 percent for some music and multimedia phones in

Global mobile phone makers are now facing an increasingly fierce
battle for a greater market share as the demand for such premium phones shows
signs of a slowdown in the world’s two biggest consumer electronics market _ the
U.S. and Europe. The U.S. and European economies are suffering from macro
economic troubles because of the deepening global credit crunch ignited by the
U.S. subprime housing loan woes.

"The latest decision by the world’s top
handset manufacturer will pressure us on whether to join the move or not. We are
watching the market situation with interest," an LG spokesman said

"If we hesitantly implement the price cut plan with Nokia,
then the bold move might hurt our phones’ premium image or drag down the share
in the key North American and European markets," the official said, adding LG
still needs to strengthen its brand image for better competition with Nokia and
Samsung Electronics on the global market.

LG Electronics CEO Nam Yong
earlier clarified that the company may have to cut its handset prices if Nokia
moves to do so first. Citing market principles, Nam said price competition was
inevitable unless LG created a unique value to differentiate its phones from
those of Nokia.

Analysts say the Finland maker has always been tactical
with its pricing and the recent price cut decision comes amid Nokia’s aggressive
preparation for its ``SuperNova’’ phone at reasonable prices with integrated
music players.

"What seems interesting is that Nokia reduced prices on
multimedia phones. The multimedia segment is where LG has been injecting massive
capital for marketing to raise its share in key markets, increasing worries over
lower profits on our mobile division," a high-ranking LG official

Sales of the world’s No. 4 handset maker’s 11 models of touch-based
multimedia phones reached the 7 million mark at the end of June for the first
time driven by good performances by its Viewty, Venus, Voyager and Prada
multimedia phones. But LG has already faced a tough battle in large part due to
the successful introduction of Apple’s 3G iPhone.

"Although Nokia’s
decision will directly impact Sony-Ericsson due to overlapping phone portfolios,
the aggressive pricing by Apple, as well as Nokia will lead to further margin
pressures in the longer term on LG," the official said.

Citing such
factors, Goodmorning Shinhan analyst Steve Lee forecast LG to see operating
profits at its handset division to fall by around 5 percent this year because of
the price cuts.

Gartner, a market research firm, also expects phone sales
in the third quarter to be more than the second quarter

"Cost-control and putting pressure on supplier pricing are the
business norm of operators. Hence, mobile device vendors are experiencing
increased pressure on device pricing," the firm said.

In the second
quarter, LG sold a 27.7 million phones compared with 24.4 million in the first.
The quarterly operating profit margin for its mobile phones was 14.4 percent on
a global basis, compared with 13.9 percent in the first quarter.

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