Dear Shareholders, Customers, and Business Partners:
On behalf of all employees at LG Electronics, I would like to express my sincere gratitude for all your support and help to make 2006 another milestone year. In 2006, we capped off almost 20 years of double-digit revenue increases. Our presence could be felt across the globe, and we are now one of the world's leading consumer electronics companies. Consumers around the world enjoy our innovative and exciting products in just about every aspect of their lives — from trend-setting mobile phones to flat panel TVs, refrigerators, washing machines, computers, and much more.
While we continued to build on our global presence, sales, and brand in 2006, it was a mixed year for us in terms of overall financial performance. Our revenue was up 11% to US$38.5 billion, but operating profit fell from US$1.2 billion to US$883 million, representing a drop in our operating margin from 3.5% to 2.3%. By business unit, the Digital Appliance division continued to perform well on the back of innovative, top-quality products such as the steam washer. Our Mobile Communications division also ended the year with a strong momentum, driven by steady progression into distribution markets and strong sales of 3G phones and hit products such as the Chocolate phone. However, the unexpected, sharp decline in flat panel TV prices in the second half of 2006 had a major impact on profits.
In 2007, we are more optimistic about the industry outlook in our product segments, especially in the Mobile Communications and Digital Appliance divisions. However, we expect Digital Display division will face another challenging year. As such, we are focusing our business strategies to successfully address available opportunities. You will see many more innovative products that bring technology and design to consumers around the world. Additionally, all our managers are working hard to align the enthusiasm and dedication of our employees with these strategies.
LG Electronics is a global leader in many consumer electronics categories, some of which are the most competitive in the world. The unrelenting demand for product innovation and downward price pressures mean that only the strong can survive in this industry. Our ambition is to be one of the global "Top 3" consumer electronics and telecommunications companies by 2010. If we achieve this goal in the areas of shareholder returns, profitability, growth, revenue, and market share — in that order — then we will become one of the shapers of our industry, creating value for our shareholders, customers, and our people.
I am confident we will get there. Reaching this goal, however, will require enthusiasm and dedication from our people in order to create real value. To harness this passion, our strategy will be based on six key areas:
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1. Achieve 20% ROIC by 2010
We must focus our strategies on what creates value for our shareholders. The high investment requirements, coupled with the increasingly competitive nature of the consumer electronics business, mean that we need to focus on strategies that will improve margins, drive supply chain efficiencies, and utilize our global network of assets efficiently. Growth is wonderful, but we cannot pursue it at the expense of profits and shareholder returns.
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2. Optimize the business portfolio to become “Top 3”
Today, we operate in over 100 countries, across 30+ product categories. In some of these, we maintain undeniable success. In those where we do not, we must quickly assess how to improve our position, or make plans to exit.
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3. Serve the “polarizing” consumer market
Across most consumer categories, we see a distinct "polarization" occurring. Companies stuck serving the "middle" without clear differentiation will lose out. We need to focus on creating premium, inspirational products to win at both ends of the market.
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4. Innovate in design as well as technology
Consumer electronics is no longer about utilitarian "brown goods" and "white goods." In all product categories — from handsets to washing machines — consumers expect the latest technological features, packaged in designs that will make them passionate about these products.
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5. Invest in building a clear, global brand identity
Our brand is now one of the most recognized consumer electronics brands across the world. However, we must continue to invest in building a clear brand identity, one that successfully creates a real emotional bond with our consumers.
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6. Develop the best, global talent pool
We focus our strategy on shareholder value and develop products that create consumer value, and these things are not possible unless we have the most talented and motivated employees working for us across the world. We want to make LG Electronics the employer of choice around the world, a place where the best people want to come and work, and our competitors want to come and recruit
Achieving our strategic goals will not be easy. It will require sustained, fundamental changes to many of the things we do. I am confident that our people are up for the challenge.
We have already initiated many changes to help us achieve these objectives. As such, I am sure that 2007 will be another milestone year for LG Electronics, marked by continued increase in global sales and recovery in profitability.
You will see many trend-setting, product innovations from all our business units. To cultivate our innovation pipeline, we are expanding R&D investment in core business sectors such as mobile phones and flat panel TVs, as well as new, exciting businesses such as car infotainment and home networking. Together with this investment in technology, we are also improving our product design capabilities. We want to extend our global leadership to create stylish products that consumers clamor to own. All of this must then be communicated in a clear brand message. 2007 is the year we will unveil our new brand communications strategy to capture the hearts and minds of consumers.
While I am excited by the innovations in store for 2007, I also realize that we have to remain focused on rejuvenating profitability. To this end, we have already launched a number of initiatives aimed at improving our pricing mix, reducing the cost of goods, streamlining supply chains, and efficiently utilizing our assets. Many of these initiatives will positively affect our 2007 results, while others will continue to bear fruit in 2008 and beyond.
We have also launched several initiatives to globalize our HR systems, as well as significantly upgrading our organization. All senior managers working for LG Electronics around the world have a consistent set of strategies and measurements to improve our performance this year.
I am inspired by the opportunities that lie ahead and am firmly committed to making LG Electronics one of the global "Top 3" in every business that we pursue. We have a strong foundation from which to build on. With the right focus, strategies, and people, I am confident we will get there. I would like to thank you once again for your support.
Yours sincerely,
Vice Chairman & CEO
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