It is difficult to expect LG Electronics Inc. to resume the operation of its smartphone production line in South Korea. This is because the nation’s “cellphone industry ecosystem” which links large smartphone manufacturers with component producers has actually collapsed.
It was a foregone conclusion that LG Electronics, which has been struggling with a snowballing deficit and a rapid decrease in smartphone sales, has decided to stop domestic production. The number of the company’s major cellphone component providers in the country is estimated to have shrunk to one 15th compared to its best year due to the sharp decline in domestic production.
Currently, LG Electronics’ domestic production accounts for only 15 percent of its total output. As domestic production falls every year, an increasing number of companies have come away from the supply chain, with many of them relocating their plants to other countries such as Vietnam and India. When its foldable phone sold well, the number of LG Electronics’ partner firms reached 1,000 but it has dropped to 200 to 300 now.
What's more serious is that a considerable number of smartphone parts companies has failed to find solutions to overcome the dramatic fall in supply and is forced to close down their business because of financial difficulties. In short, firms which have a higher dependence on domestic supply of LG Electronics are more likely to go out of business.
Some say that the low price marketing strategy of LG Electronics also adversely affected parts suppliers, in light of the nature of the cellphone market which entails great marketing expenses. A case in point is LG Electronics’ large-scale marketing activities when it released the G7. An official from the component company said, “With the G7’s low price marketing strategy, subcontractors were forced to reduce the unit price. Parts companies were under additional pressure as their profitability got worse after lowering the unit price in order to lower the factory price and sales were low. Another official from a parts supplier also said, “When Samsung Electronics plans to sell 10 million units, the company shoulders the responsibility even by taking over its inventories. On the other hand, LG Electronics dumps most of its inventories on subcontractors and consequently the losses of parts producers increase.” This is why LG’s parts suppliers have been unable to secure the ability to develop new technologies through research and development (R&D).
A sense of crisis in the smartphone component industry caused by LG Electronics seems to be spreading to Samsung Electronics’ parts firms. A rumor is circulating in the industry that even Samsung Electronics’ primary vendors have gone bankrupt, amplifying the sense of crisis. An official from one of Samsung Electronics’ secondary vendors said, “These days, things are not good in Vietnam as well. The amount of orders placed by main contractors is smaller than before.”
LG Electronics’ decision to stop smartphone production in Korea is highly likely to raise concerns over the ever-worsening performance of Korea’s manufacturing industry even more. The manufacturing industry is already in a dilemma owing to higher minimum wages, shorter working hours, the global economic slowdown and the stagnation of the key industries. Kim Jong-ki, director of the new industry division at the Korea Institute for Industrial Economics & Trade (KIET), said, “The domestic cellphone industry has been led by two companies – Samsung Electronics and LG Electronics. LG Electronics’ production suspension will weaken the industrial foundation and competitiveness.” The government is keeping an eye on how LG Electronics’ decision will affect domestic component producers.