South Korea’s LG Electronics has filed patent infringement lawsuits against Turkish home appliances manufacturer Arcelik and its German affiliates Beko Deutschland and Grundig Intermedia.

“The suits centre on the unlicensed implementation of LG’s freezer door-ice making technology featured in a number of the companies’ refrigerators sold in Europe,” LG said in a statement on September 25.

Shares in Arcelik, owned by Turkey’s largest industrial group Koc Holding, declined 0.49% d/d to TRY18.42 per share on the day news of the lawsuits broke.

“Legal action became the final option after negotiations with Arcelik, Beko Deutschland GmbH’s and Grundig Intermedia GmbH’s parent company, failed to make headway,” LG furthered.

LG’s freezer door-ice making technology was originally developed by LG for its Side-by-Side refrigerator models and is included in a portfolio of more than 400 patents specifically relating to door-ice making technology, according to the statement.

Arcelik has 23 production facilities in nine countries and operates 17 R&D centres. The company has more than 3,000 patent applications. It has sales and marketing offices in 35 countries.

According to a presentation on the company’s website, Beko is the largest player in the European free-standing white goods market and the second largest in home appliances brands across the continent.

Collapse in consumer demand

In Turkey this year, amid the country’s dire economic straits brought on by the currency crisis that broke out in summer 2018, consumer demand and sentiment collapsed. Like automotive producers, white goods manufacturers have been among industrial players that have taken the brunt of the misery.

Nevertheless, benefiting from the government slashing the special consumer tax on white goods and its big export business, Arcelik’s net profit grew by 52% y/y to TRY219mn (€35mn) in Q2 while revenues rose by 29% y/y to TRY8.43bn, the company said on July 29 in a stock exchange filing.

The Q2 profit was below the market’s average expectation of TRY252mn and Seker Invest’s estimate of TRY243mn. The gap was attributable to a higher than expected effective tax rate of 23% in Q2 compared to 13.3% in Q1, Fulin Onder of the Istanbul-based brokerage said in a research note.

In H1, revenues grew by 30% y/y to TRY15.3bn while net profit rose by 39% y/y to TRY444mn.

Arcelik updated its domestic white goods market contraction forecast for 2019 to 15% y/y from the previous 5% y/y while it kept its 2% y/y growth estimate for the global market. The company also cut its revenue growth estimate to 20-25% y/y for 2019 from the previous 25-30% y/y.

Ratings affirmed

Fitch Ratings in July affirmed Arcelik's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BB+', one notch below investment grade, with a Negative Outlook.

The affirmation followed the downgrade of Turkey's sovereign Long-Term IDR from 'BB' to 'BB-', three notches below investment grade, and the Country Ceiling to 'BB-' from 'BB+'.

The ratings of Arcelik are above the Turkish Country Ceiling, reflecting Fitch's expectations that Arcelik has sufficient structural enhancements that would mitigate transfer and convertibility risks. Nevertheless, the negative outlook reflected Fitch's expectation of prolonged stress on cash generation compared with Arcelik management's expectations, driven by higher financing costs, plus increased inventory and receivable collection days in the domestic market.