iPhone to upset applecart for Samsung, LG in H2

By Jennifer Tan and Rhee So-eui - Analysis

SINGAPORE/SEOUL (Reuters) - South Korean phone makers Samsung and LG enjoyed a stellar start to 2008 but the launch of Apple's much-hyped new iPhone is set to dent their sales and profit margins later this year.

A strong portfolio of phones helped LG Electronics' sales grow at almost four times the annual industry average in the first quarter, while Samsung Electronics expanded at twice the rate, data from Strategy Analytics showed.

But the Korean companies could hit a speed bump in the coming months as the progressive global rollout of Apple Inc's third-generation (3G) iPhone shaves a few percentage points off their profit margins and crimps sales of their top models, analysts said.

"You don't need an analyst to tell you that a low subsidized price for the most-anticipated gadget ever is going to move huge amounts of iPhones in the finite number of channels through which they'll sell," said Yankee Group analyst John Jackson. "It will hurt the Koreans in key high-end segments."

Rivals Motorola and Sony Ericsson are also expected to face a tough time against the next-generation iPhone which melds a phone, iPod media player and web browser, and offers faster Internet access on advanced wireless networks.

It will sell for as low as $199 when it goes on sale from July 11, half the price of the original model, thanks to heavy operator subsidies.

"Now is the time for Korean makers to trim the fat from cellphone prices -- how can their $700-$800 phones compete with the iPhone?" asked Daiwa Securities analyst Jae Lee.

HEAD-TO-HEAD

Samsung has four sleek touch-screen phones -- the Omnia, the Haptic, the F490 and the Instinct -- lined up to take on Apple. LG offers three touch-screen models -- the Prada, the Viewty with a five-megapixel camera, and the Voyager.

Frost & Sullivan analyst Daniel Longfield estimates Samsung and LG's iPhone lookalikes could suffer up to a 20 percent fall in sales volumes competing head-to-head with Apple's device.

"If a carrier sells both the iPhone and Samsung or LG's models, you would expect a solid 10-20 percent decline in those model sales," Longfield said.

Handset profits for both Samsung and LG probably peaked in the second quarter and are likely to fall in the second half, analysts said.

Operating margins at Samsung's telecoms division rose to a strong 16 percent in the January-March quarter, from 11 percent in the fourth quarter. LG achieved a handset operating margin of 14 percent on a global basis in the first quarter, versus 8.8 percent in the previous quarter.

"Samsung and LG's margins in the second half will be 1-2 percentage points lower than the first half as they cut prices of their high-end models," said John Park, a Seoul-based analyst with Daishin Securities.

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