The reason why Korean manufacturers oppose legislation on mobile device distribution

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The reason why Korean manufacturers oppose legislation on mobile device distribution

디지털데일리 발행일 2013-12-05 13:52:24

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- Transaction data of LG Electronics and LG U+ offers a glimpse at the reanson

By Yun Sang-ho crow@ddaily.co.kr

Digital Daily

Mobile phone manufacturers continue to oppose the government move to legislate a law for restructuring the distribution system of mobile devices and attempt to abort the legislation. The ‘bill on the improvement of the distribution system of mobile devices’ (the subsidy regulation act or the mobile phone distribution act, in short), is pending at the National Assembly. Manufacturers cite various reasons for their opposition but they have one goal. The transaction data of LG Electronics and LG U+ offer a glimpse at their intention. Since both LG Electronics and LG U+ are affiliated with LG Group, they are obliged to make public their transaction figures.

LG U+ purchased 1 trillion and 100 million won worth of goods and services from LG Electronics and sold 2.2 billion worth of goods to LG Electronics during the first three quarters of this year. A majority of goods that LG U+ bought from LG Electronics were smartphones. LG Electronics’ mobile phone sector achieved 9 trillion and 370.8 billion won sales around the world during the same period. This means that sales to LG U+ accounted for 10.7 percent of the total sales of LG Electronics during the period from January to September this year.

LG Electronics sold a total of 52.3 million mobile phones throughout the world during the same period. On the other hand, fewer than 20 million handsets are expected to be sold in Korea this year. LG U+’s share in the domestic market is a little more than 10 percent, which means that it sold 2.2 million mobile phones in Korea during the first three quarters, at most. From this, it is possible to estimate that domestic sales of mobile phones of LG Electronics accounted for only about 5 percent of its total sales volume.

LG U+ is No. 3 mobile communication service provider in Korea. By country, the United States and China are the world’s largest mobile phone markets. From a common-sense point of view, the list of major customers of LG Electronics should include several mobile carriers of these two countries. But LG Electronics’ mobile phone business is more dependent on LG U+ than any other carriers in the world. LG U+ is one of the top six customers of LG Electronics in terms of total revenue. The other five are such electronic goods stores as Sears, Best Buy, Goldiran, Home Depot and Hi-Mart. Korea’s No. 1 mobile service provider, SK Telecomm is not included in the top 5 list. From these facts, it is possible to infer that LG Electronics secures seed money by selling expensive mobile devices in Korea through the company in the same LG Group, LG U+, and expand business by selling low-end handsets in overseas markets.

The same could be said for Samsung Electronics and Pantech. However, their data are not available because unlike LG Electronics, they do not deal with a mobile service provider belonging to the same business group. Samsung Electronics recently had a hard time since the problem of higher domestic prices of its mobile devices than those for overseas markets was raised in a session of parliamentary inspection by the National Assembly’s Science, ICT, Future Planning, Broadcasting and Communications Committee. It was alleged that the factory price of ‘Galaxy Note 3’ in Korea is 290,000 won higher than the price in the U.S. market and that Samsung makes an average of 265,314 won in profit from selling a smartphone in Korea.

When the bill is passed by the National Assembly, it would be difficult for Samsung or LG to dominate the domestic market any more. The new law would allow more rooms for the foreign manufacturers that do not offer subsidy or have no distribution networks of their own in Korea. It would be impossible for Korean manufacturers to concentrate on the production and sales of high-end handsets. They would have to sell low-end phones, too. In some cases, they may have to lower the prices of high-end devices. The high-end phone market in Korea, where about 20 million sets are sold annually, would shrink and more importantly, would be shared by more manufacturers. Restructuring of the domestic market would be a disaster to the Korean handset manufacturers.

The current smart phone distribution system in Korea supports global business of its mobile device manufacturers at the expense of domestic consumers. Is the system rational? Would Korean families be able to be relieved from the burden of high communication costs when Korean manufacturers grow to a global level? Samsung Electronics is the world’s No. 1 mobile phone and smartphone manufacturer. According to Strategic Analytics (SA), a global market research company, Samsung has maintained its position as the world’s No. 1 mobile and smartphone manufacturer since the first quarter of 2012. But the prices of Samsung phones in Korea have not changed much.