8K OLED SMART TV: PRODUCT PLAN ALLEN DAWSON GENNIE NEO SEBASTIAN SEAR GIULIA SORIELLO

MSIN207P: PRODUCT, TECHNOLOGY and OPERATIONS SCENARIO WEEK 4

09/03/2016

8K OLED SMART TV

1. CORE TEAM

2. ORGANISATION STRATEGY Company:LGElectronicsDivision:LGElectronicsTV&HomeEntertainmentLGElectronicshaspositioneditselfasadominantplayerinthemarketforpremiumconsumerelectronics.SincethelaunchoftheirfirstOLEDTVmodelin20131,LGhasdemonstrateditsambitiontopavethefutureofOLEDtechnology.LG’sinitialfocusoncreatingmomentuminnext-generationOLEDtechnologyhasnowgivenwaytothegoalofexpandingthemarketpenetrationofOLEDTVs,retainingitsstrongleadershiproleintheglobalOLEDTVmarketwithover90%marketshare.2LGaimstoconsolidateitsofferingandtechnologicalcapabilitiesbyexpandingthelinewithnewmodels.OperationsfortheupgradeoftheirM2productionfacilityforOLEDTVsstartedin20143,andthecompanyhasannouncedaninvestmentof$9billiontobuildanewmanufacturingfacilityofOLEDdisplays4whichwillreadyformassproductioninthefirsthalfof2018.5

1http://www.flatpanelshd.com/article.php?subaction=showfull&id=13647949892http://www.oled-info.com/displaysearch-35200-oled-tvs-sold-q1-2015-90-lg-electronics3http://www.forbes.com/sites/johnarcher/2014/11/12/oled-for-everyone-lg-explains-how-its-making-oled-tvs-affordable/#68e1f08620984http://www.bloomberg.com/news/articles/2015-11-26/lg-display-to-spend-more-than-10-trillion-won-on-new-panel-plant5http://www.flatpanelshd.com/news.php?subaction=showfull&id=1448894534

Department Assigned

Marketing&Sales SebastianSear

Operations AllenDawson

Engineering GiuliaSoriello

Finance GennieNeo

3. PORTFOLIO

3.1LGproductreleasesEveryJanuary,themainplayersintheelectronicsindustryshowcasetheirnewestproductsandtechnologicaladvancementsattheinternationalConsumerElectronicsShow(CES)heldinLasVegas,Nevada.CESisanimportantwindowtounderstandthefutureoftheindustry.TheroadmapinExhibit1highlightsLG’shighestspecificationTVsannouncedatCES.2014markedtheexitofPlasmaTVs,andtraditionalLCDdisplaysaregraduallybeingphasedout.AlthoughamarketforLEDvariationsofLCDdisplaysstillexists,thefutureforLGTVsappearstolieintheemergingOLEDplatform.

3.2DiscontinuedproductsWehavecollecteddataonLG’smostrecentlydiscontinuedTVmodelseriesinordertoestimatetheaveragelifespanofaLGTV6:- Todate,noneoftheproductseriesreleasedin2015havebeendiscontinued- SomemodelsoftheLBxxxxseries,releasedin2014,havebeendiscontinued- SomemodelsoftheLAxxxxandLNxxxxseries,releasedin2013,havebeen

discontinued

Ontheotherhand,somemodelsfromtheUBxxxx7andGAxxxx8lines,releasedin2014and2013respectively,arestillonthemarket.ThissuggeststhattheminimumlifecycleofanewLGTVisapproximately2-3years.Althoughnotexplicitlystated,theprimaryreasonfordiscontinuingaproductseriesappearstobetheimprovementofvisualortechnologicalcomponents.Oncetheproducthasbeenincrementallyimproved,itisre-releasedwithanewuniquelinenumber.

3.3CompetitorsExhibit2highlightsthehighestspecificationTVmodelseriesreleasedbythreeofLG’smaincompetitors:Samsung,SonyandSharp. 6http://www.lg.com/uk/discontinued-tvs7http://www.flatpanelshd.com/article.php?subaction=showfull&id=13969415068http://www.flatpanelshd.com/article.php?subaction=showfull&id=1364794989

Wecanobservethatthe4KLEDdisplaymarketisrelativelysaturatedandthatPlasmahasnotprovenaplatformofinteresttotheindustryoverthepastfiveyears.WhileSamsungisinvestinginQuantumDottechnology,LGisdominantintheOLEDspace.8Kresolutiondisplaytechnologyisanimmediateareaofsignificantopportunity.InSeptember2015Sharpannouncedtheworld’sfirstcommerciallyavailable8KresolutiondisplayTV.9AtCES2016,LGandSamsungannouncedthattheyweretofollowsuitbyintroducingtheirown98-inchLED8KTVmodels.10

4. PRODUCT DESCRIPTION & POSITIONING

4.1Productconcept

WesuggestthatthenextnaturalstepinLG’sproductstrategy,tosustainitsstrategicfocusonOLEDtechnologyandstrengthenitsleadingroleintheOLEDTVmarket,istointroducethefirstcommerciallyavailableOLEDdisplayTVwith8Kvisualcapacity.

The8KOLEDSmartTVbuildsonthesamespecificationofourlatestOLEDTVmodel,OLED65G6P,showninExhibit6.Themajorimprovementistheadvancementfrom4Kresolution(3840x2160)to8Kresolution(7680x4320).ThemodelrunsonthelatestavailableLGoperatingsystemavailable,whichatthetimeoflaunchwillbe

9http://www.bbc.co.uk/news/technology-34267210http://www.engadget.com/2016/01/08/8k-attack-lg-and-samsungs-super-high-res-tvs-are-here/

Figure1

WebOS4.0.NewversionsoftheLG’soperatingsystemarereleasedapproximatelyeverytwoyears;followingthistimeline,weexpectasecondlaunchoftheproductrunningontheupdatedoperatingsystemtwoyearslater,intimefortheOlympicGamesinJapan.

4.2Technologyrequirements

Fig.2showsthelifecycleofTVtechnologyandthecurrentpositionofthemostcommonlyusedplatforms.

OLEDtechnologyandotheremergingvisualplatformslikeQuantumdotcurrentlyrepresentthebiggestbusinessopportunities.OLEDisstillinitsdevelopingphases,butit’srelativelyadvancedandconsolidatedcomparedtoQuantumdot,andhasbeencommerciallyavailablesince2013.ThespecificationsofthedifferentplatformsareshowninExhibit7. LGhasacompetitiveadvantageonOLEDtechnology,thankstoitsinitialinvestmentinWRGBWhiteOLEDtechnology,whichmorecost-effectivecomparedtoRGBOLEDtechnologyusedbycompetitors.Reportsestimatethatthecostofproducinga55-inchpanelistwiceashighusingRGBOLEDthanWRGBOLED.11ThecompanyhasobtainedapatentagreementwithUniversalDisplayandhassignedaOLEDTechnologyLicenceAgreementandSupplementalMaterialPurchase

11http://www.cnet.com/uk/news/lg-says-white-oled-gives-it-ten-years-on-tv-competition/

Figure2

Agreement,whichwillbeineffectuntilDecember31,2022.12ThemaindifferentiatingOLEDtechnologiesaretheOxideTFT,WRGBandSolidPhaseEncapsulationsystem.LGhasmadesignificantinvestmentsinitsproductionfacilities,recentlylaunchingtheM2productionplantandannouncingasecondproductionfacilityforOLEDflexiblescreens.Itiscurrentlytheonlycompanyabletohaveaproductionyieldrateofalmost80%.13Theestablishmentofthesefacilitiesaimstodriveupproductionandreduceproductioncosts.Thetechnologyneededtodevelop8KresolutionOLEDTVsisalreadypresent.Thedevelopmentprocessinvolvesconvertingthebottomemissionstructurewhichiscurrentlyappliedto4KOLEDTVstothetopemissionstructurewithahigherapertureratio.14Theprocessfromdevelopmenttoreleasetocombine4Kresolution–firstintroducedbyLGin201315–withOLEDtechnologytookapproximatelytwoyears.Weexpectthesametwo-yeardevelopmentprocessforthe8KOLEDSmartTV.

4.3Customersegments

Theteamhasidentifiedfourkeycustomersegmentsforconsumerelectronics:

1. VisualEnthusiasts,whoarewillingtopaymoreforbetterviewingquality2. TechGeeks,whoappreciatesmartTVsandcarefullyselectoperatingsystems3. SizeMatterscustomers,whopreferlargerTVscreensandarenotnecessarily

interestedinsmartTVs4. BudgetBuyers,whoseprimaryconcernisthepriceoftheTVandarenot

interestedinspecialfeatures

Withthe8KOLEDSmartTVwearetargetingmainlytheVisualEnthusiasts.

12http://optics.org/news/6/1/3513http://www.oled-info.com/lg-says-oled-tv-yields-over-80-wrgb-puts-it-years-ahead-competitors14http://www.ubiresearch.com/the-key-technology-to-realize-8k-oled-tv-is-transparent-hybrid-encapsulation-technology/15http://www.flatpanelshd.com/article.php?subaction=showfull&id=1364794989

4.4MarketAnalysis

LG’scurrentcompetitorsareSamsung,Sony,Panasonic,SharpandemergingChineseplayersTLCandHeisen.LGanditscompetitorsappeartocatertoallfourcustomersegments.WewillfurtheranalysethecompetitionforhighresolutionandlargescreenTVs.Sharpisthefirstcompanytoreleaseandsell8KresolutionTVatasellingpriceofapproximately$133,000.ItusesIndiumGalliumZincOxideTechnology,alow-powermethodofenhancingpixelbandwidth16.Samsungintroduceditsfirst8KresolutionTVthatusesQuantumdotwithUltraBlackTechnologyatCES2016.17ThecompanyhasmovedawayfromOLEDtechnologyin2013afterfacinghighproductioncostsandlowyieldrates;thefinaldecisiononwhethertheywillmassproduceOLEDdisplayswillcomeinMay2016.18Themarketfor8KTVslookspromising.Thediffusionof8KTVsisexpectedtoincreasefrom2,700unitsshippedworldwidein2015to911,000in2019.19 16http://www.techtimes.com/articles/85244/20150916/forget-4k-tv-sharp-outs-8k-tv-and-heres-what-you-have-to-spend-to-enjoy-one.htm17http://www.gottabemobile.com/2016/01/08/8k-tv-from-samsung-lg-show-off-the-future-of-tv/18http://www.sammobile.com/2016/02/23/samsung-display-will-decide-on-mass-production-technology-for-oled-tv-panels-in-may/19http://press.ihs.com/press-release/technology/global-8k-tv-shipments-approach-one-million-units-2019-ihs-says

Figure3

20

Weconsidertheaboveforecastfiguresinassessingthetotaladdressablemarketofthe8KOLEDSmartTV,whichisfoundbymultiplyingthepredictedunitssoldbythepriceofout8KOLEDSmartTVatthecorrespondingyear.ThecalculatedCAGRis328.59%.Weexpectthemarketgrowthtoslowdownto100%inthefourthyear,2021.Basedonthesefigures,weexpectthesalesvolumeof8KOLEDSmartTVstostartat5,000unitsandincreaseatthesamerateasthemarket(328%)forthenexttwoyears,slowingdownto150%inthefourthyear.ThemarketforOLEDTVshasbeengrowingrapidlysinceLGfirstintroducedtheworld’sfirstOLEDTVin2013.A700%increaseinsaleswasrecordedbetweenthefirstquarterof2014with4,600unitsandthefirstquarterof2015with35,200units.21TheOLEDTVmarketisexpectedtogrowfurtherfrom400,000unitsin2015to7millionunitsin2019.22

20http://press.ihs.com/press-release/technology/global-8k-tv-shipments-approach-one-million-units-2019-ihs-says21http://www.oled-info.com/tags/market-reports/displaysearch22ibid. 22

Figure4

4.5DevelopmentmodelWebelievethataWaterfalldevelopmentapproachismoresuitablefortheproductionandsalesofthe8KOLEDSmartTV.LGalreadyhasallthetechnologyandproductionrequirementsinplacefordevelopingthe8KOLEDSmartTVandwebelieveitismoreimportanttofocusontheendproducttopresenttomarketratherthanrushingontiming.Moreover,giventhenatureoftheproduct,testingandafter-the-factchangescanaggravatedevelopmentcostsanddisrupttheproductionlines.

4.6 ProductDevelopmentOverviewPlan

Weadvicetoschedulethelaunchthe8KOLEDSmartTVduringCES2018toallowmaximummediacoverage.Weproposeasecondlaunchdatein2020,intimefortheOlympicGamesinJapan.ReportsestimatedthatLG’s8Ktelevisionswouldbepricedatlowest$20,000.23GiventhatthepricedifferenceofLG’s4KTVand4KOLEDTVisdouble,weproposetosetthelaunchpriceof$40,000forthe8KOLEDSmartTV.Initially,thiswillmostlikelyappealtoonlyasmalltargetgroup.However,weexpectamasscommercializationoftheproducttooccurinthesecondhalfof2020,carryingonthroughto2022.

5. BUSINESS CASE

5.1Revenue

Weidentifiedthetotaladdressablemarket(inUSD)bycalculatingtheCAGRofunitsalesof8KTVs,whichis328%.Wecalculatedastartingmarketsizeof$312million,whichisexpectedtogrowto$12.48billionin2018,$21.8billionin2019,$62.4billionin2020and$78billionin2021,withLGmaintainingasteadymarketshareof2-3%.BasedonthelaunchquantityofLG4KTVsin2013–with650unitssoldinthefirstquarterandapproximately5,000unitssoldinthefirstyear–weprojectedaninitialsalesvolumeof5,000units.Weproposealaunchpriceof$40,000witha$10,000reductioneveryyear.Ourexpectedrevenueis$200millionin2018toreach$2.3billionin2021.

23http://www.hollywoodreporter.com/behind-screen/ces-8k-tv-what-do-853541

5.2CostofsalesanddevelopmentcostsProjectedexpenseshavebeencalculatedbylookingathistoricaldatafromtheannualreport24:thepercentageofcostofsalesis78%ofnetsales;MarketingandSalesexpensesamountto12%ofnetsales;AdministrationandGeneralexpensesare2%ofnetsales.LGhadanR&Dexpenseof$267.4millioninDecember2015,whichamountstoapproximately$1.7billionayear.25ConsideringthatTVsmakeupforoverathirdoftherevenueofLGDisplays26,weestimatethattheR&Dcostswillbe$300million. Thisdoesnotincludethecostofdevelopinganewoperatingsystem,whichisindependentofthisspecificproductanddoesnotconcernthisteamdirectly.

5.3ProfitMarginandNPV

Grossprofitmarginisexpectedtobe22%forallfouryearsweplantomarketourproduct.NPVofcumulativecashflowis$94million.

6. DECISIONS REQUIRED ItisalogicalstepforLGtoreleaseitsfirst8KOLEDTV,allowingfurtherdevelopmentoftheOLEDplatformandsustainingamarketmonopoly.Lookingforwardtothefuturedevelopmentandlaunchoftheproposedproduct,weasktheProductApprovalCommitteetoauthorisethemoveforwardstotheplanningphase.Thekeydecisionsareoutlinedinthephasereviewsectionoftheproductdevelopmentoverviewplan[Exhibit5].

24http://www.lg.com/global/investor-relations/reports25https://ycharts.com/companies/LPL/r_and_d_expense26http://uk.reuters.com/article/uk-lg-display-results-q-idUKBREA3M0A020140423

APPENDICES EXHIBIT1–LGProductReleasesRoadmap

EXHIBIT2–CompetitorsRoadmap

EXHIBIT3–CompetitionSpace

EXHIBIT4–BusinessCase

1. Marketsizeandsales

BASEUNIT 2018 2019 2020 2021 TOTAL

Totaladdressablemarketsize 12,480,000,000 21,864,690,000 62,473,220,000 78,091,530,000 174,909,440,000

Ourmarketshare 2% 3% 3% 3% 3%SalesVolume(pcs,

recognizedvolume)

5,000 21,430 91,845 229,612 347,886

UnitPrice 40,000 30,000 20,000 10,000 14303(weight.avg.)Estimatedprice

erosion - -25% -33% -50% -100%(2004-2008)

NetSales 200,000,000 642,885,000 1,836,893,881 2,296,117,351 4,975,896,232Materialandlabor

perunit 31,200 23,400 15,600 7,800 11157(weight.avg.)

Subcontracting&partneringcosts

perunit- - - - 0(weight.avg.)

Othercostsperunit - - - - 0(weight.avg.)

DirectCostsperunit 31,200 23,400 15,600 7,800 11157(weight.avg.)

ProfitabilitySPCperunit 31,200 23,400 15,600 7,800 11157(weight.avg.)

Totalcostofsales 156,000,000 501,450,300 1,432,777,227 1,790,971,534 3,881,199,061

Grossmargin 44,000,000 141,434,700 404,116,654 505,145,817 1,094,697,171

Grossmargin% 22% 22% 22% 22% 22%

2. Costs

OPERATINGEXPENSES

2017

2018

2019

2020

2021

TOTAL

GrossR&Dexpenses 300,000,000 - - - - -Marketing&Sales

expenses - 24,000,000 77,146,200 220,427,266 275,534,082 597,107,548

Administration&Generalexpenses - 4,000,000 12,857,700 36,737,878 45,922,347 99,517,925

Otherexpenses - - - - - --GrossOperatingExpensestotal 300,000,000 28,000,000 90,003,900 257,165,143 321,456,429 696,625,473

NetOperatingExpensestotal 300,000,000 28,000,000 90,003,900 257,165,143 321,456,429 696,625,473

3. Profitmargin,ReturnonInvestmentandNPV

SUMMARY 2,017 2,018 2,019 2,020 2,021 TOTALAddressable

market - 12,480,000,000 21,864,690,000 62,473,220,000 78,091,530,000 174,909,440,000

Marketshare - 2% 3% 3% 3% 0

Sales - 200,000,000 642,885,000 1,836,893,881 2,296,117,351 4,975,896,232

GM - 44,000,000 141,434,700 404,116,654 505,145,817 1,094,697,171

GM% 0% 22% 22% 22% 22% 22%

OPEX 300,000,000 28,000,000 90,003,900 257,165,143 321,456,429 696,625,473Gross

contribution-

300,000,000 16,000,000 51,430,800 146,951,510 183,689,388 398,071,699

Cumulativecontribution

-300,000,000 -284,000,000 -232,569,200 -85,617,690 98,071,699 -

Grosscontribution 0% 8% 8% 8% 8% 8%

Netcashflow -300,000,000 50,786,978 118,498,095 302,101,775 273,984,155 745,371,003

Cumulativenetcashflow

-300,000,000 -249,213,022 -130,714,927 171,386,848 445,371,003

EXHIBIT5–ProductDevelopmentOverview

EXHIBIT6–Specificationsof OLED65G6P

EXHIBIT7–SpecificationsofOLEDandQuantumdottechnologies27

Wordcount:1958,excludingfootnotesandappendices.

27http://www.hephnertv.com/oled.html