Possible End of LG Electronics' Mobile Business: The Calm Before the Storm for Partner Firms

[경향신문]
“We’ve been making only LG cell phones for over a decade. What do we do?”

B, an executive at A, an LG Electronics partner company for mobile phones located in the greater Seoul area, let out a sigh as he spoke with the reporter over the phone on January 24. After Kwon Bong-seok, president of LG Electronics, announced on January 20 that the company was open to all possibilities in connection to rumors that the company was withdrawing from the mobile business, partner companies that had supplied LG with cell phone parts have been nervous for fear that orders would dry out.

If LG does withdraw its mobile arm, it can trigger a domino reaction in the current pyramid outsourcing structure, forcing companies to suffer damages starting with primary partner companies and spreading to secondary and tertiary subcontractors. Reportedly, LG Electronics has hundreds of partner firms for its mobile business, so LG withdrawing its mobile business can affect tens of thousands of employees and their families.

A has been with LG Electronics throughout the history of its cell phone, from the Chocolate phone and Prada phone in the late 2000s to G3 in 2014. B recalled, “At that time, we were really busy trying to meet the demand.” Since the technology competition between cell phone manufacturers was fierce, the company could not receive orders from competitors like Samsung. If the company loses the orders from LG, the company’s workers will be out of work and the production facilities will be useless. B said, “Our products are not like nuts and bolts, which you make and sell to a number of buyers.” He explained, “Since we make products customized to LG cell phones, if LG shuts down its mobile business, we have to start from scratch too.”

In the current outsourcing structure, if primary partners like A lose their orders, it triggers a chain reaction, forcing secondary and tertiary contractors to suffer damages, too. D, an executive of C, a secondary partner firm located in the Seoul metropolitan area said, “Demand shrunk significantly when LG Electronics moved its cell phone production factory to Vietnam two years ago. And now they’re talking of withdrawing from the mobile business altogether. We have a lot on our minds.” Currently, LG cell phones account for 30% of the sales of C. D said, “It doesn’t end with just us suffering the damage. Tertiary contractors who supplied us with materials and resources will also suffer.”

Companies that recently entered the LG Electronics Science Park in Magok-dong, Seoul and companies that moved to Vietnam along with their production facilities in 2019 may also have to tear down their facilities after only a few years.

Currently in the industry, the Vietnamese company VinSmart, Chinese smartphone companies, U.S. IT companies like Google and Facebook, and even automobile companies like Volkswagen are being mentioned as potential buyers. What will happen if the company that acquires LG’s mobile business also continues the contracts with LG’s partner companies?

B said, “They could continue the contracts for the production of existing products, but for new products, they will seek out new firms that better fit them,” and added, “It will only delay the time when we run out of work.” Damages are expected even if LG decides to reduce some of its business, instead of selling its entire mobile arm. B said, “It will be better than the company selling the mobile business, but companies that produce models that the company decides to end will suffer significantly.”

LG Electronics faced opposition from its partners on several occasions while it recorded 23 consecutive quarters of sales deficits since 2015. In 2016, partner companies argued that LG blamed its partners for the failure of the smartphone G5, and partner companies opposed again when the company relocated its factory in Vietnam.

In an e-mail that Kwon sent to his employees on January 20, he promised to maintain employment contracts and told the employees that there was no need to be nervous. But so far, there has been no message to partner companies that have worked with LG for over a decade. B said, “When I ask LG Electronics for some answers, all I hear is the reply, ‘we don’t know yet.’” This day, an LG Electronics representative said, “When the direction of our business is determined, we will inform our partner firms,” and added, “The direction for our business operations has not been determined, so for now, there is nothing more that we can say.”

If LG Electronics withdraws its mobile business, the Fair Trade Commission is likely to investigate the possibility of any unfair damages to partner companies. A representative of the Fair Trade Commission said, “We can check the period of the contracts between LG Electronics and its partner companies and check to see if the contracts are legally binding.”