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LG Exits the Smartphone Business

The next big topic is “LG Exits the Smartphone Business.” This has just been announced, and of course, there’s a lot of hand-wringing in South Korea and so on—wherever LG has their production facilities because it’s not a small business. It’s a multibillion-dollar business. Even though it’s losing money and hasn’t made money for a long time because it’s been squeezed out by Samsung and Apple at the top end and by Chinese manufacturers at the low end, it’s still a multibillion-dollar business with a multibillion-dollar supply chain. Careers are made and probably ended in this business. People have maybe worked here for most of their lives. Families have built their futures on a salary that would come from this business to send their children to university. Political leaders have staked their careers on ensuring that LG keeps the plants open because massive unemployment makes them look like poor political leaders.

There are a lot of entrenched interests doing everything that they can right now to tell LG, “Yeah, you’re losing money. It’s not good for you, but it’s good for me, so why don’t you keep it open?” In a sense, they’re asking LG’s profitable business lines to subsidize its unprofitable business lines.

We can even take that thinking further. Let’s assume there’s an LG factory making some profitable product in Berlin. They’re asking that profitable factory in Berlin to subsidize the unprofitable factory, maybe in Korea, that’s making unprofitable phones. They’re asking workers in Berlin to give up a bigger share of their profit-sharing or bonus structure, whatever incentive program exists, so that they can transfer that money to subsidize employees that are producing something the world doesn’t actually want.

In a manner of speaking, the world is now asking LG to take money from successful employees and give it to employees who cannot make something the world wants to buy. If your spouse is a terrible cook and wants to open a restaurant, would you encourage your family to give them the money if you know they’re never going to make food that people will want to eat? If you think they can improve, that’s a different case, but let’s assume they can’t improve.

Let’s assume they’re on a street where there’s a low-cost Chinese restaurant competing with great food at a great price. On the other side of them, there’s a Michelin-starred restaurant serving fancy food at a top-end price point. Next to them, there’s a restaurant at their price point serving better food. You probably wouldn’t let your spouse open a restaurant there because it’s a bad business decision.

This is basically what the world is asking LG to do, but we should be celebrating what LG is doing because they’re making the call to withdraw from a place where they cannot compete. They’re liberating their suppliers. They’re basically throwing a party for the suppliers and saying, “I don’t want you to spend the rest of the year and the next two years planning and building things for a phone that’s not going to sell. I’m going to free you to now start to date other potential customers so maybe you can find a good fit and start building products and components for them so that as they grow, you grow. I’m liberating you to find a better way.” It’s the same thing with these employees.

If LG stays in the smartphone business, let’s assume the smartphone business consumes $2 billion of capital a year. That’s $2 billion a year that LG won’t deploy to a business where it could maybe get a 10%, 20%, or 30% cash margin. Now, would you take $2 billion and put it in a bank account, which has no interest, and maybe the bank will even charge you for the privilege of keeping the money? No, you wouldn’t do that.

LG is doing everything right. They’ve done a very brave thing, and they deserve all the credit for that. I would ask them to be bold and exit other categories and products where they know they cannot win. That’s the decision they have to make. It’s the right decision they have to make. It’s the only decision they can make if they want to be a world leader.

For SCR-Advanced members, we have a big update coming where we’re going to have a very detailed analysis on how to respond to competitive threats. For Insiders, we have a very big update coming as well.

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #24. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here

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