Similar sales, different profits: LG outpaces Samsung in home appliances

Home appliance companies are struggling with slowing demand, low-cost Chinese competition and soaring chip prices, but Samsung Electronics and LG Electronics are seeing different profitability results.

Industry experts attribute the difference to the companies' distinct profit structures, which have evolved over several years.

LG Electronics' operating profit from its home appliance divisions — the Home Appliance Solution (HS) Division, the Media Entertainment Solution (MS) Division, which oversees its TV and monitor businesses, and the Eco Solution (ES) Division, which handles heating, ventilation and air conditioning — reached a combined 2.33 trillion won ($1.69 billion) in the first and second quarters, according to its first-half report released Sunday. Combined sales during the period were 29.85 trillion won ($21.6 billion).

Samsung Electronics' home appliance businesses — the Digital Appliances (DA) Division, which handles home appliances, and the Visual Display (VD) Division, which oversees TVs and monitors — posted 190 billion won in operating profit during the same period. The divisions' sales were 28.8 trillion won.

While the two companies posted similar sales, the gap in operating profit exceeded 2.14 trillion won.

The disparity was also evident in inventories. LG Electronics' inventories, excluding LG Innotek, rose 4.3 percent from 9.3 trillion won at the end of last year to 9.7 trillion won in the first half.

Inventories at Samsung Electronics' Device eXperience (DX) division — encompassing its smartphone, TV and home appliance businesses — surged 43.5 percent, or 8.87 trillion won, from 20.4 trillion won at the end of last year to 29.26 trillion won.

Industry experts say competition in home appliances now hinges on profitability and new revenue sources, not just sales.

LG Electronics is credited with leveraging strong sales of its premium products to secure better prices on key components, then passing those cost savings on to its midrange and lower-priced products. The company has also secured stable demand through business-to-business sales to builders and other corporate customers.

Revenue streams that are less vulnerable to market cycles have also helped, including appliance subscriptions and webOS, its smart TV operating system. Its early adoption of ecosystem co-manufacturing — a model in which a company collaborates with external manufacturers throughout production — has also helped control costs, industry sources say.

Experts say Samsung Electronics has continued to grow in sales, but has seen profitability deteriorate because it has been unable to fully pass higher costs on to consumers.

Roh Tae-moon, president and head of Samsung Electronics' DX division, identified expanding market share, improving the company's underlying business structure and preparing innovative products as key priorities at a management briefing on Wednesday.

But local companies are not the only ones struggling. The global consumer spending slump has even caught up with Chinese appliance makers that had previously maintained strong growth.

Haier Group, China's home appliance maker, expanded through acquisitions of New Zealand's Fisher & Paykel Appliances, GE Appliances in the United States and Italy's Candy. Despite the expansion, it saw its first quarter net profit fall 15.2 percent from the previous year to 4.65 billion yuan ($692 million).

“Surging memory chip prices are increasing cost pressures and inflation is weakening consumer sentiment, which leaves the home appliance and TV markets increasingly vulnerable to macroeconomic factors,” said Ko Eui-young, an analyst at iM Securities. “Success in new businesses such as cooling solutions and robotics will lead to a reassessment of corporate value.”

BY KIM SU-MIN [[email protected]]