The Chip That Broke the Camel’s Back

Was the component shortage the final straw for LG?

Yesterday, LG Electronics officially announced that it was exiting the handset business. Its decision to pull the plug on its smartphone business comes after its mobility unit reported nearly six consecutive years of losses totalling about $4.5 billion.

The news is no surprise, but is certainly difficult to hear. LG can be called a venerable member of the global handset club, breaking new ground and working hard to become a top global phone brand. But as the company noted in its press release announcing its exit, the handset business has become “incredibly competitive”. It has indeed.

At one time, LG was the third largest phone-maker in the world, but with competition from Apple and Samsung at the top of the market and a growing number of very capable Chinese brands, LG’s status  and sales volumes were squeezed. As brands such as Xiaomi, OnePlus, Oppo and Vivo gained respect, pressure piled on LG.

The question during the past few months wasn’t if LG would leave the mobile business, but how. Rumours had circulated that LG was in talks with various handset manufacturers about carrying on with LG-branded smartphones. But given the high value of the LG logo on other consumer electronics products and major appliances, LG’s leadership probably decided that the money offered wasn’t worth the loss of control and any potential damage to its reputation.

We don’t doubt this was an extremely difficult decision for LG. The company hung on year after year, trying to come to market with fresh ideas in the sea of smartphone sameness. It worked hard to develop devices like modular phones and swivel phones; the audience didn’t bite.

It’s no coincidence that this decision comes amid a global chipset shortage that’s forcing manufacturers to outmanoeuvre each other in a mad scramble for parts (see Insight Report: Root Causes of the Semiconductor Supply Shortage). Unlike its domestic rival Samsung, LG has undoubtedly found it hard to secure stable chip supplies and other components for its smartphones. This added hassle of bringing devices to market, and doing so at a loss, is likely to have been a major factor in LG’s cut-or-continue decision. It further highlights the incredible advantages of scale: major component suppliers such as Qualcomm will cater to the likes of Apple, Samsung and Xiaomi first.

In January, when LG first publicly announced that it was weighing up options for its mobile unit, we wrote that the situation echoed the dramatic collapse of Nokia, a company that once dominated the global market for handsets (see This Decade’s Burning Platform).

LG’s news should send a warning to many companies eager to get into the smartphone business. The big numbers — some 1.5 billion units are sold each year — attract big interest, like flies to a bright light at night. But for many of those eager companies, that light turns out to be a zapper. Proceed with caution.

LG joins a host of other once-dominant phone-makers in pulling out of this market, including BlackBerry, Ericsson, Mitsubishi, Motorola, Nokia, Palm, Panasonic, Philips, Siemens and others. Although some of these brands have been reincarnated through licensing deals, in their heyday they were top-five players in the lucrative segment for mobile devices. And let’s not forget some massive companies that quickly gave the handset business a try, such as Facebook and Amazon. If you blinked, you may have missed these.

LG’s decision to quit the incredibly competitive mobile phone sector will enable the company to turn its attention to growth areas such as electric vehicle components, connected devices, smart homes, robotics, artificial intelligence and business-to-business solutions and services. LG is still a very influential company in many sectors.

There was a time when LG was part of an exclusive handset trinity, along with Nokia and Samsung. Now just one remains. We hope Samsung takes note on how fickle the audience can be.

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