Smartphone Bust: LG Electronics Closes South Korean Phone Plant, Shifts Production To Vietnam

Slowing smartphone sales and collapsing semiconductor exports in South Korea have taken a toll on LG Electronics Inc, reported Reuters.

South Korea’s economy contracted in 1Q, marking its worst performance since the global financial crisis.

On Thursday, the South Korean based electronics company released a surprising statement, detailing that it has suspended all smartphone production in the country and will transfer resources to Vietnam, which follows a list of multinationals reorganizing their complex supply chains as a global synchronized slowdown gains momentum in 2Q.

The restructuring of its money-losing mobile phone business comes as LG, once ranked third in global smartphone sales, has been dramatically reduced since the smartphone bubble peaked several years ago.

"Their existence may be barely noticeable in the global smartphone market, but they have solid presence in the U.S. market. It’s too early for them to close the whole business when fifth generation (5G) networks are starting," said analyst John Park at Daishin Securities.

In US markets, LG is ranked third in smartphone sales, with 17% share as of 3Q18, after Apple and Samsung Electronics dominate the top spots.

The phone maker has recently seen negative returns on its smartphone segment, said in a statement that shifting production to Vietnam would boost output by 83% to 11 million smartphones in the back half of the year.

Exports of smartphones, Vietnam's largest export earner and mostly produced by Samsung Electronics, fell 4.3% in 1Q. LG's transition is occurring in an overall slowdown, could weigh heavily on operating expenses.

"The global smartphone market has been witnessing a decline over the past few years, and like most other markets, Vietnam has been inevitably affected by this slowdown," said Kim Yang-jae, an analyst at KTB Investment & Securities.

Capital Economics said that Vietnam's subdued growth outlook points to weaker smartphone exports for 2019.

"Weaker global demand and a downturn in the technology sector have contributed to slowdown in export growth over the past few months, and are likely to weigh on exports over the next couple of quarters."

With the smartphone industry faltering, Nasdaq Smartphone Index Fund (FONE) dropped 25% in 40 weeks from the 55-handle put in on March 2018. Price has since rebounded from the 41-handle to the 61.8%-Fib, or the 50-handle earlier this month. Resistance is expected to develop between the 50 to 52 handle, as there are currently no signs of a turnaround in the industry.