Last week, Samsung and LGE, which account for more than a third of global TV shipments and revenues, announced their Q1’12 earnings. After barely breaking even in 2010, profit margins at the two companies TV businesses were just over 2% in 2011. With TV sales slowing, the big question was whether profits would once again go away.
The two companies showed strong performance, with LGE reporting 4.1% operating profit margin in its HE (Home Entertainment, which is mostly TV) business and Samsung reporting 5.0% from CE (Consumer Electronics, also mostly TV). What has enabled the Korean brands to improve their profitability?
- With Japanese brands such as Sony, Sharp, Toshiba, and Panasonic suffering profit losses, Samsung and LGE were not compelled to reduce their prices to be competitive. As a result, both have been able to avoid selling money-losing products.
- Tight inventory management from the end of last year helped save huge marketing expenses when liquidating old models to make room for new models.
- Samsung and LGE immediately responded to market changes with low-cost models.
- Premium models, with 3D capability, LED backlights and Smart functionality are driving profits with strong unit market shares.
With the Korean brands improved profits, they can be expected to become more aggressive in capturing share from other brands and increase pressure on Japanese TV brands, especially if the global TV market does not grow, as expected. This is one of the reasons Japanese brands are exploring closer collaboration with Taiwanese panel makers.
Over the past few years, it was seen as an impossible mission to make more than 3% margin in the TV set business, as Japanese set makers experienced increasingly worsening losses. In such an atmosphere, few expected Apple to enter this low margin category with a branded TV product. However, the opinion is starting to change and some in the TV industry, now believe that if Apple enters the TV category it may improve the margin structure as a game-changer, driving innovation and higher margins.