LG Elec says "carefully watching" Nokia

SEOUL Mon May 26, 2008 8:06am EDT

A South Korean walks past the logo of LG Electronics at its headquarters in Seoul July 18, 2005. REUTERS/You Sung-Ho

A South Korean walks past the logo of LG Electronics at its headquarters in Seoul July 18, 2005.

Credit: Reuters/You Sung-Ho

SEOUL (Reuters) - LG Electronics (066570.KS), the world's No.4 handset maker, is closely watching rival Nokia (NOK1V.HE) amid talk the top-ranked mobile phone maker may cut its prices and re-enter the South Korean market later this year.

Shares in LG Electronics tumbled more than 8 percent on Monday as investors gauged the impact of potential price cuts by Nokia. But an LG executive said the firm was generally positive about the industry this year.

"We are interested in the Korean market and investigating it, but we have not unveiled any products for that market," said Nokia spokesman Kari Tuutti, declining comment on future pricing.

LG shares ended down 3.8 percent, while Samsung Electronics (005930.KS), the world's No.2 handset maker, closed down 4 percent. The main Korean market .KS11 fell 1.5 percent.

"We are carefully watching Nokia," Chang Ma, LG's vice president for marketing strategy, told Reuters in an interview.

Analysts were split on the impact of a Nokia move.

"Nokia's handset price cuts, if they actually happen, will certainly not be applied universally to all its models," said Lee Sung-june, an analyst at SK Securities.

"Besides, Nokia and LG's handset strategies are different in that while Nokia is more about offering cheaper models, LG is more focused on technologically advanced models."

John Park, analyst at Daishin Securities, noted that since LG had benefited from Nokia losing market share in North America, the Finnish firm's possible expansion in that market could be a factor to watch for LG.

Ma said LG was also ready to seize any opportunities arising from difficulties at third-ranked Motorola Inc MOT.N and No.5 manufacturer Sony Ericsson (6758.T) (ERICb.ST).

Motorola has been losing market share to rivals after failing to follow up its blockbuster Razr phone, and Sony Ericsson saw its profit halved in the first quarter as demand slowed for its more expensive camera and music handsets.

"We see some risks from the economic slowdown, the rise of raw material prices and the possibility of unexpected moves by competitors, but we will compensate these risk factors with our product portfolio and our marketing strength," Ma said.

LG sold a record 24.4 million phones in January-March and looks set to beat its target of 100 million phones for the year.

First-quarter operating profit margin on handsets was 15.9 percent on a parent basis, almost double the previous quarter's 8.3 percent and against 6.6 percent a year earlier.

Ma said he expected the handset division to post a "double digit" operating profit margin in the second quarter.

"The handset business remains strong in LG's overall earnings, accounting for as much as 80 percent of operating profit throughout 2008," said Daishin's Park, though he added that handset marketing costs would likely grow and eat into margins in the third and fourth quarters.

In a separate interview, the head of LG's display division said the company's plasma business had suffered from lower than expected demand this year, but hopes to improve operating profits during the rest of the year.

"We are aiming to post better second-quarter operating profit ... from the first quarter," said Simon Kang, responsible for LG's plasma business, which makes screens for LG's own televisions and for external customers. "We also expect to post better operating profit in the second half from the first."

Kang acknowledged that demand from China had been slower than initially expected due to the snowstorm early this year and the recent earthquake.

LG is expected to post 2008 net profit of 2.5 trillion won, more than double last year's 1.2 trillion won, according to Reuters Estimates.

(Additional reporting by Tarmo Virki in HELSINKI and Park Jung-yun and Park Ju-min in SEOUL; Editing by Ian Geoghegan)

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