In 2016, it's proving difficult to make money in the smartphone business unless you are one of the top selling manufacturers. We know that the two largest device manufacturers, Samsung and Apple, produce a profit from each smartphone sold. A little over a year ago, LG also produced a (tiny) profit from each device sold and every other non-Chinese manufacturer lost money – from HTC to Motorola to Sony. Chinese businesses are not required to disclose their earnings with the same amount of detail as other companies. In 2016, LG is losing millions from its mobile division. A similar story in 2013 saw the business losing money on its mobile division and LG reinvented its mobile products and this reinvigorated outlook helped the business in 2014, but just two years later the smartphone market is a very different, and difficult, place to be.
There are a number of reasons why it's difficult to make money on smartphones in 2016. To simplify it, it is difficult for manufacturers to differentiate their products from other manufacturers. Some manufacturers, chiefly Chinese, are able or willing to sell their smartphones at a cheaper price than competitors for a similar on-the-box specification. This could be because the company is building market share, or simply operating the smartphone division on a very slender margin such as Xiaomi as it has other ways to generate profits. Some manufacturers offer less than full software support, so the device you might buy will probably never receive a software update, as a way to save money. We have seen the cost of hardware components falling as their abilities and specification improves and for the majority of people, a mid-range smartphone is very much good enough. We are also seeing customers stretch out the time between upgrades, moving away from the two year cycle to currently two and a half years. A device that was good enough in 2014 is likely still considered good enough in 2016 and perhaps even 2017.
To bring the topic back to LG, the company has a challenge on its hands. The company's 2016 flagship is a little different to the mainstream competition: LG used a box of similar or at least comparable components and decided to build something that made much of a "modular ability." The G5 is not modular, but has a half-baked idea that customers can improve the device by adding in functionality to the device. It's a nice idea on paper that simply hasn't been adopted by customers and the few optional accessories made available are not very appealing. As such, then, the G5 is a fine device hampered by a less than premium build and some development costs to recoup. However, flagships should not be fine devices. They should be brilliant devices and give customers a definite "wow factor" when handled. We know that manufacturers can build a great device for not very much money, such as OnePlus and the OnePlus 3, so the big names need to offer a compelling reason why customers should pick their device.
For 2017, LG may need to reinvent its G-range of devices, having relatively recently gone through the reinvention process after 2013's difficult year. LG's strategy of offering a number of mid-range models each with a particular strength, such as the processor speed or the camera, and cleverly marketed with X-Men advertising sounded good in isolation. Unfortunately, it does not appear to have worked when the devices are compared to the competition. LG are also facing the difficulty of turning a profit in a fiercely competitive market and to avoid becoming an "also-ran" in the smartphone industry. The industry needs strong, sharp competitors to encourage the ongoing evolution of the device.
At some point, if not already, the parent LG may step in and take action to stop the mobile division from racking up significant losses. This could result in the smartphone division being downsized so that it only releases relatively few devices a year. One of LG's weaknesses appears to be a lack of focus and direction and narrowing the company's development into a smaller range of products could address this. It could see an end of LG's side projects, such as developing their own mobile chipset (the Nuclun), but such action should hopefully avoid LG's smartphone division spending the next few years as an undead manufacturer: losing millions but propped up by the larger company to save face. We have already seen LG's "new momentum" plan within the business, which has restructured senior management, but we likely will not know the effect this has on devices and, ultimately, profits for some months yet.