Struggling LG Innotek LED Unit Could Hurt LG's TV Business

LG Innotek CEO Hur Young-ho

Flat screens using LED backlights are slimmer, more power-efficient and offer sharper images than those lit by traditional cold cathode fluorescent lamps (CCFLs).

Since Mar 2009, LED backlit LCD TVs are currently at the focus of the television industry’s competition. There are pioneers like Samsung, Sony, Sharp and LG who are the major suppliers of LCD TV in the past. They are now working on plan how to pursue the champion of this huge dollar valued Consumer sales. According to the LCD TV shipment data, Samsung was the No.1, followed by Sony, Sharp and LG as the world largest LCD TV supplier in 2008. In this year, Samsung maintains No.1 and LG is the 2nd and followed by Sony and then Sharp as the Rank of World LCD TV shipment . And this will be likely the same for next year.

Led by Samsung Electronics, the global LED TV market has rapidly been increasing as consumers are allured by the enhanced picture qualities and energy saving features amid signs of economic recovery. Sep 09, Kang Shin-ik, LG's television chief, had said it would sell 7 million units of LED TVs in 2010. LG Electronics had lowered its LED TV sales target for 2010 to 5 in a third quarter earnings briefing last month.

"It is difficult to predict the global LED TV market as the segment has been on a faster expansionary track. That's why our target sales are having flexibility," an official at LG Electronics said.

The troubles at LG Innotek is leading to uncertainties over LG Electronics' LED backlit LCD television business, with the consumer electronics maker continuing to adjust targets seemingly every other week.

LG Electronics’s LED chip provider is LG Innotek is not able to meet the demand of LED for LGE. LG Electronics, being the world's second-largest flat-screen television maker, is worrying that they are not afford to be lagging behind of in LED backlit LCD TVs business.

Improving cost competitiveness is critical for LG Electronics as one of the South Korea’s biggest Conglomerates, has been forced to go for intensive vertical integration in order to get the best production cost for LCD TV. On the other hand, Samsung has been facing with this headache, just been a bit smarter to have the LCD TV being launched into the market earlier with the LED-backlit models.

LG Innotek and LG Display is handling the chips and LCD screens business respectively would be a way to run their core business effectively and independently.However, recent struggles of LG Innotek continues to see its stock prices plummet with 40% drop and its ability to supply LED chips was questioned by LG Electronics.

The drop in stock prices reflects the worries of investors over LG Innotek's capability to finance its LED business and uncertainties over the market conditions for LED products.LG Innotek, which makes LED components and LCD modules, said it planned to invest about $970 million by the end of 2010 to boost its production capability.

Company officials are struggling to find ways to raise more fund for its LED business including plans to issue new shares. At the end of October 2009, LG Innotek's debt-to-equity ratio stood at 64 percent, and the company has already issued bonds worth more than 100 billion won combined.

It will be challenging for LG Innotek to finance its aggressive LED capital expenditure with only EBITDA (Earnings before interest, taxes, depreciation and amortization) earnings and debt. A sharp deterioration of the company's printed circuit board (PCB) margins, higher competition and rising inventories amid the approaching year-end season are also expected to weigh on the company's profit structure, analysts said.

Some say the lowered target was due to insufficient chip capability from Innotek. However, we could receive the necessary components by expanding our outsourcing channels.The Innotek spokesmen said the company was on a stable route to strengthen its LED chip abilities and added that more related measures would come.Additionally, LG Display is planning to absorb the LCD module operations of LG Innotek.

Innotek, in return, will receive a cash infusion that will allow it to concentrate on LEDs. "LG Innotek will earn 1.5 trillion won in LED sales in 2012. Still, they are in the process of vertical integration of our LED businesses from LED backlighting, wafers, chips and packaging to module operations.LG Innotek, which merged with another LG Group component-producing arm, LG Micron, in July, has LG Electronics, LG Display, Nokia, Motorola and Japan's Sharp as its biggest clients.

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Source Korea Times.