Supply of Chips Tight at LG Unit

APRIL 20, 2011 THE WALL STREET JOURNAL

By JUNG-AH LEE
SEOUL -- In a clear sign that electronics companies are scrambling to secure components following the recent earthquake and tsunami in Japan, South Korea's LG Electronics Inc. said Tuesday its home appliance division is seeing a supply-demand imbalance in chips from Japan and the company is seeking alternative suppliers.
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"We've been sourcing about 70%-80% of semiconductors for our home appliances from Japanese companies but we are fast diversifying the suppliers," Lee Young-ha, president of LG's home appliance division, told Dow Jones Newswires in an interview.

Mr. Lee said the recovery in Japan will help global chip supplies return to normal within two or three months. Lee said Hynix Semiconductor Inc. is one of the companies LG has asked for more supplies, but declined to name others.

Toshiba Corp., in which LG previously relied on for half of its chip supply, said Monday one of its main chip-making factories in Iwate Prefecture, northern Japan, has resumed partial production after it was hit by the earthquake.

"We will continue to make efforts to diversify our supply chain even after the situation improves there (in Japan)," said Mr. Lee.

The disasters in Japan have fueled supply worries across many business sectors, including electronics, as global technology giants are heavily dependent on Japanese parts makers.
Mr. Lee also said LG may raise the prices of its home appliances by about 5%-10% in the near term due to higher raw material costs.

"The costs of raw materials, including copper and steel, have risen around 20%-30% recently, which is faster than we had feared," Mr. Lee said. "Since the pace of the raw material prices is outstripping our cost cutting efforts, we can't help but follow the global trend (of raising prices)."
Major overseas rivals Whirlpool Corp. of the U.S. and Sweden's Electrolux AB have already raised prices in order to pass on the increased cost burden of raw materials.

Still, Mr. Lee said the division's earnings would continue improve this year after bottoming out in the fourth quarter of last year, helped by new high-margin product releases such as energy-efficient appliances and products that can be controlled through smartphones and tablet PCs.

In the fourth quarter of last year, LG Electronics swung to a net loss, weighed down by its struggling handset business and sluggish demand for flat-screen televisions amid stiff competition and weakness in European markets. However, sales from its home appliance unit rose 14% to 2.819 trillion won from 2.479 trillion won while its operating profit rose to 78 billion won from 12.2 billion won a year earlier.

LG, South Korea's second-largest consumer electronics maker after Samsung Electronics Co., will report its first-quarter earnings results on Wednesday next week.