By Ben Cavender and Siwen Chen
Because of its reliance on exports, Korea has had a tough time through the global financial crisis. Combined with internal political strife and an unstable North Korea, the downward spiral of the Won to a low of 1570 KRW to 1 US Dollar in March 2009 has left a lot of Koreans worried that their economy is in an irreversible tailspin. The cheap Won, however, has made Korea a perfect travel destination for anyone seeking great food, hotels, and culture at bargain basement prices and it has also made Korea’s electronics giants like LG Electronics (OTC:LGERF) and Samsung (OTC:SSNLF) extremely competitive through the global economic slump by letting them cut prices and take market share from Japanese rivals like Sony (NYSE:SNE) that are hamstrung by the high Yen.
The end of 2008 and the first quarter of 2009 have been dismal for the consumer electronics industry as a whole, triggering the bankruptcy of Circuit City. Demand in the US, Europe, and much of Asia has evaporated and electronics makers have been forced to take aggressive cost cutting and restructuring measures in a bid to shore up their operations.
Mobile phone sales were down 9.4% in the first quarter of 2009 and the companies to feel the squeeze the most were Motorola (MOT), and Sony Ericsson which saw their market share reduced from 10.2% to 6.2% and from 7.5% to 5.4% respectively. Nokia (NYSE:NOK), the world’s number one handset maker also saw a decrease in market share from 39.1% to 36.2%.
In contrast, Korean brands Samsung and LG are showing signs of a good year. Samsung actually increased sales to over 51 million units in Q1 2009, a 9.1% year on year increase, while growing market share from 14.4% to 19.1% overall. LG increased sales from 23.6 million units in Q1 2008 to 26.5 million units in Q1 2009 and grew market share from 8% to 9.9% making it the world’s number three handset maker behind Nokia and Samsung.
LCD TVs tell a similar story. After a year of aggressive cost cutting major brands like Sony's Bravia line and Panasonic (PC) have nowhere to go as they have already discounted heavily and are captive to the strength of the Yen. In contrast Samsung and LG have been able to be a little bit more aggressive and it shows.
For Q1 2009 global TV shipments were 43.3 million units, down 6% year on year while revenues dropped more as electronics brands cut costs to maintain sales. Samsung has maintained its position as global leader with 22% of total revenues while LG has leapfrogged Sony to take over the number 2 spot with 13.3% of revenues.
LG Display (NYSE:LPL), the world’s number 2 LCD panel maker, which has a strong presence in China, has also recently increased its expectations for China from 20 million to 24 million units compared to 15.7 million units in 2008 on the back of continuing demand in the China market and government stimulus aimed at increasing consumer spending. China continues to increase its demand for flat panel televisions and it now represents 21.3% of the market on a unit basis.
For investors looking at potential targets within the consumer electronics industry the Korean powerhouses are worth a look. Both LG and Samsung look to be well positioned for future growth and have made a stronger push in China compared to their competition. The weak Won has also allowed them to stay competitive and aggressively pursue consumers without destroying long term profits. Investors looking for more diversified exposure to Korean companies should also consider an index fund like iShares MSCI-South Korea Index Fund (NYSEARCA:EWY).
Ben Cavender is a Senior Analyst and Siwen Chen an Associate Business Analyst with the China Market Research Group (CMR).