Korea / Special Sits, Pairs, Index Rebalancing, Clepsydra Capital

Sanghyun Park

I investigate special situations, pairs, and index rebalancing trades in Korea.

Korea / Special Sits, Pairs, Index Rebalancing

Equity Bottom-Up

<ul><li>I honestly do not know why LG came up with this modular type smartphone strategy. On one hand, this is quite innovative. Surely, this is something new. But on the other hand, this modular concept is just too much for LG to handle. That is to say, the concept is marvellous but it requires 'Super-Capability' to build and operate third-party (or exclusive partner) ecosystem. Without this ecosystem, the realistic market that LG can actually target with G5 is too narrow. In the worst case, LG will only have to bear a substantially high amount of initial cost for this new concept smartphone.</li><li>The question of why is still lingering in my head. Why?? My guess is that LG's G5 smartphone strategy may be linked to what Google plans to do with Project Ara. Everyone agrees that Google, unlike LG, has the kind of 'Super-Capability' to build and operate third-party (or exclusive partner) ecosystem for physical modules. Google is expected to release its Ara smartphone sometime this year. LG's G5 may rather serve only as a test-bed for Project Ara.</li><li>Was this pre-arranged between LG and Google? In fact, last July Google was rumored to take over LG Electronics by becoming its major shareholder (<a href="http://www.businesskorea.co.kr/english/news/industry/11518-flat-denial-rumor-spreading-about-google%E2%80%99s-takeover-lg-electronics%E2%80%99-shares" target="_blank">the link for the news article about this rumor</a> / source: Business Korea). Both companies denied this take-over rumor. But both still need each other. LG's MC is still suffering from extremely low profitability. Even if this G5 becomes a success, the highest operating margin that LG can expect for its MC division will be around 2.0 to 2.5 percent given its market position on the global stage and the nature of this higher-end product. In other words, LG Electronics will continue to struggle to find strong momentums to turn around its MC division.</li><li>Hence, I may come to this conclusion. That is, LG's G5 may be the starting point for the new kind of close partnership between LG and Google although I am not still quite sure whether this new partnership may lead to Google's acquisition of LG's MC division or not. </li></ul>

I honestly do not know why LG came up with this modular type smartphone strategy. On one hand, this is quite innovative. Surely, this is something new. But on the other hand, this modular concept is just too much for LG to handle. That is to say, the concept is marvellous but it requires 'Super-Capability' to build and operate third-party (or exclusive partner) ecosystem. Without this ecosystem, the realistic market that LG can actually target with G5 is too narrow. In the worst case, LG will only have to bear a substantially high amount of initial cost for this new concept smartphone.The question of why is still lingering in my head. Why?? My guess is that LG's G5 smartphone strategy may be linked to what Google plans to do with Project Ara. Everyone agrees that Google, unlike LG, has the kind of 'Super-Capability' to build and operate third-party (or exclusive partner) ecosystem for physical modules. Google is expected to release its Ara smartphone sometime this year. LG's G5 may rather serve only as a test-bed for Project Ara.Was this pre-arranged between LG and Google? In fact, last July Google was rumored to take over LG Electronics by becoming its major shareholder (the link for the news article about this rumor / source: Business Korea). Both companies denied this take-over rumor. But both still need each other. LG's MC is still suffering from extremely low profitability. Even if this G5 becomes a success, the highest operating margin that LG can expect for its MC division will be around 2.0 to 2.5 percent given its market position on the global stage and the nature of this higher-end product. In other words, LG Electronics will continue to struggle to find strong momentums to turn around its MC division.Hence, I may come to this conclusion. That is, LG's G5 may be the starting point for the new kind of close partnership between LG and Google although I am not still quite sure whether this new partnership may lead to Google's acquisition of LG's MC division or not. 

LG's G5, Is This a Signal for New Kind of Future Partnership with Google?