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Korean Cell Phone Industry at Crossroads
A model demonstrates various kinds of TV phones made by LG Electronics.
Korea's cell phone manufacturers had a hard time both locally and globally in 2005 and have another tough year ahead battling fierce competition.
The domestic market is estimated to have contracted 12.5 percent last year with just 14 million units sold here from 16 million handsets in sales in 2004.
In the global arena, the nation's cell phone exports increased as much as 11 percent in 2005 at $24.8 billion in comparison to $22.4 billion a year before.
However, the seemingly robust double-figure growth rate is not impressive at all for Korean handset vendors, which reaped about 44 percent year-on-year growth in 2004.
``Korean players did not retreat last year as they were stuck in a stalemate but they failed to progress, either. Now they are at the crossroads _ they can take off once again or can get stuck in a backwater,'' said Kevin Lee, an analyst at Woori Securities.
In order to win out in the global race, Lee claimed the country's big two phone producers _ Samsung Electronics and LG Electronics _ are required to streamline their global strategies.
``They are likely to forge new growth tactics to remain competitive in the stiff rivalry among top-notch players. They will be forced to do so this year,'' Lee said.
2005: Lack of Growth Momentum
Korean handset makers chalked up a 25-percent rise in cell phone exports last year at 200 million units, from 160 million phones in the previous year.
Samsung, the world's third-largest mobile phone provider, headed the expansion by shipping 100 million units and the fourth-biggest player LG also exported 70 million units.
However, the global market grew as fast with the world's demands for cell phones expanding up to 16 percent to 780 million units last year from 670 million in 2004.
As a result, they hardly picked up any market share. Samsung now accounts for roughly 13 percent of the market while LG carves out about 7 percent, almost the same compared to 12 months ago.
Nokia is a runaway leader with a share of about 30 percent while runner-up player Motorola has widened the gap with Samsung this year by exploiting almost a fifth of global sales.
``Early last year, many foretold the two Korean behemoths would raise market share at a rapid rate. But they were plainly wrong,'' Lee said.
He pointed out that Samsung and LG should establish more proactive strategies in the low-run markets where Nokia and Motorola gained notable successes last year.
``Without tapping into the emerging markets with competitive price tags, their market share would not be likely to soar in the foreseeable future,'' he projected.
In the local market, companies have suffered from a lack of growth momentum throughout last year as the full-way number portability system triggered less demand than expected.
Starting last year, mobile customers were allowed to switch their carriers but could keep their old numbers regardless of operators.
When number portability was phased in for limited carriers, in Jan. 2004, the new system prodded people to change their phones en masse in that year.
But such a buying spree did not take place last year, causing the annual handset sales here to plunge to 14 million units, down 12.5 percent from 16 million units in 2004.
Economist Greg Roh at Korea Investment and Securities expected the figure would recover to 17 million units this year thanks to new services on cell phones such as the digital multimedia broadcasting (DMB) that debuted here last year.
DMB enables people on the road to enjoy crystal-clear video, CD-quality audio and data through in-car terminals or handheld gizmos like cell phones.
``As Samsung and LG are expected to roll out DMB-enabled phones in bulk quantities this year, the market will gain steam. And the resurrection of the long-awaited handset subsidies is also encouraging news,'' Roh said.
Handset subsidies have been outlawed in Korea since March 2003 to cool down competition among wireless carriers, which had provided handsets at giveaway prices at the time.
The ban was stipulated by a three-year sunset regulation, which will expire late March and the government plans to let wireless carriers offer subsidies for those who maintain their subscription for longer than two years.
Under the plan, the government expects a take-up of the cell phone market since almost 20 million mobile users are eligible to get financial help from wireless operators when they purchase phones.
Samsung Electronics president Lee Ki-tae shows off the firm's new cell phone during a session with analysts in Seoul, last November.
In the global market, however, Korean players seem to lack a new growth engine to drive their sales in 2006.
Over the past several years, they were able to emerge as international contenders on the strength of their technical prowess but such a development model now comes under suspicion.
``Samsung and LG emerged to be major players from minnow firms in the global scene thanks to their knack at cranking out color-screen models and built-in camera-embedded phones,'' said Lee at Woori Securities.
Lee said they are now in the mode of desperately searching for the next big thing to help their advance once again as a new gaggle of technologies come barging into the wireless party.
``Video-capable phones might be the answer as the third growth phase but the hitch is that it will take some years for it to be mainstream across the globe,'' he added.
Indeed, Samsung and LG expanded their footing substantially via color-monitor phones in 2001 and camera phones from late 2003 to early 2004.
However, DMB-powered TV phones are at the nascent stage even at Korea, which boast of the state-of-the-art mobile infrastructures and tech-savvy users.
In this climate, Lee points out Samsung and LG should cut corners by slashing the number of new models and make a foray into the low-end markets, to which they had paid little attention.
``Samsung and LG should weather difficulties this year by putting forth efforts for both top-tier and low-run markets. Then they will be able to win out in 2007 through a new Holy Grail _ TV phones,'' Lee said.
They seem to be taking such advice. In particular, Samsung that has focused merely on the first-rate market vows to make an inroad into the entry-level market.
During Samsung's session with analysts about its growth strategy in last November, Samsung president Lee Ki-tae articulated the firm's commitment to attacking the top-end market.
``We will continue our tactics of maintaining a premium brand. Through raising awareness of our high-end products in the minds of end users, we will sustain high-flying selling prices and profitability,'' Lee said.
At the same time, however, Lee insinuated Samsung's intention to wade into less profitable markets like India or those in South America by showing off several models priced at about $100.
``The $100 models are cheap by global standards. But in developing countries, they are expensive. With these phones, we plan to attack entry-level markets,'' Lee said.