From THE HINDU group of publications
Thursday, November 22, 2001


LG picks up the gauntlet

Ratna Bhushan

Neha Kaushik

Technology. Kwang-Ro Kim, the Managing Director of LG Electronics India Pvt Ltd (LGEIL), would bet his last buck on it. Its what will help us tide through the industry slump, he says. And its what the consumer electronics and home appliances chaebol is banking on to meet the market -- a phrase reverberating across the corridors of LGEILs sprawling office on the outskirts of Delhi.

The newly defined mantra is cost-innovation -- from implementing higher technology efficiencies, to reducing design-related frills, to purchasing cheaper components, to more effective HR policies. It requires a lot of skill to cut costs. And Im glad to say that without denting profits significantly, we have managed to cut consumer prices of air-conditioners by 20 per cent, and of colour televisions (CTVs) by 15 per cent, says Kim triumphantly. Pitches in Pradeep Tognatta, Head, Sales & Marketing, LGEIL, We are preparing ourselves for another 7-8 per cent reduction in prices across all categories.

On the immediate agenda now is the commencement of its digital management system (DMS), a cost-cutting technique that would lead to shorter assembly lines, higher productivity, and reduced manufacturing costs by 30 per cent. The implementation of DMS is expected to result in an additional five per cent reduction in prices across CTVs, refrigerators and washing machines at the least. To be brought in at LG Electronics manufacturing base in Greater Noida for CTVs in the first half of 2002, DMS is to be subsequently extended to refrigerators and washing machines. The DMS exercise is a follow-up of the Six Sigma exercise LGEIL had initiated late last year, with the objective of cutting costs across processes other than manufacturing.

Apart from the technology edge, the Rs 1,795-crore LGEIL (turnover for the period between January and October 2001), is banking on its grassroots-level marketing to edge out competing heavyweights such as BPL, Samsung, Videocon and Whirlpool, which are all breathing down its neck. Meanwhile, industry dynamics have already claimed their first victim. The Chinese invasion that had threatened to turn the industry upside down with rock-bottom pricing has all but fizzled out.

According to Brand Scan 2001, a comprehensive study of consumer durables conducted by the Chennai-based Francis Kanoi Marketing Research earlier this year, whats worked in LGs favour is its positive image on the technology platform. Interestingly, the chaebol is not known to dominate the technology platform in any major market where it competes with names such as Sony, Philips, Panasonic and Sharp.

Among refrigerators, LG has outperformed other brands on the status parameter since 1999 although on a small base, acquiring the status of the fourth most favoured refrigerator brand in the country. According to the study, LG has become the fourth most favoured brand among intending buyers, overtaking Videocon, BPL and Allwyn. On top-of-mind awareness, Kelvinator and LG were the only two brands that showed an upward movement on top-of-mind awareness within this category.

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In the case of washing machines, while Videocon leads the pack, the one brand dominating growth is LG -- from 46 per cent in 1999, to 67 per cent in 2000, to 78 per cent in 2001. The study adds that LGs penetration and perception is not restricted to just high-income segments, but villages and lower-income households too. But, on the advertising front, it is Whirlpool that outperforms LG.

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And while the study reveals that LG has been the fastest growing CTV brand since 1999, its cracking the stronghold of the Bangalore-based BPL - the most preferred brand of CTVs among intending buyers, a title that LG is gunning for now.

Acknowledging that the southern region has been the Achilles heel in LGs scheme of things, Kim adds, The South is where we need to catch up on. We are improving our distribution network there, and once the facility in Chennai becomes functional we are sure to assume leadership. The northern region continues to account for the majority of the chaebols sales -- at 37 per cent.

The new year will be significant in that sense, with the chaebols new manufacturing bases ready to get off the block. While the contract-manufacturing base in Chennai will produce CTVs and air-conditioners, the Nasik factory will be involved in the manufacture of only CTVs.

Since the company is taking the contract-manufacturing route instead of setting up its own factories, the investments involved will not be too high. Similar contract manufacturing at Mohali, Kolkata and Bhopal for CTVs were commissioned earlier this year.

Apart from supplementing its capacity at Greater Noida (on the outskirts of Delhi), the expansion strategy is in line with LGs long-term plan of turning India into an export hub for several South Asian countries. Apart from existing exports markets in Sri Lanka, UAE, Bangladesh and Philippines, the chaebol is hopeful of tapping the markets of Hong Kong, New Zealand and South Africa next year for exports. The export target -- $20 million the following year, against the current $10 million. Another recent move towards broadbasing penetration has been setting up areas offices in 50-plus regions across 83 territories.

On the distribution front, LG is training its sights on the institutional and Government segment anew. The idea is to grow sales from the institutional segment from five per cent now to 10 per cent in the next one year. Also, the next one year will see another 15 LG Shoppes (exclusive outlets), up from the current 35.

Meanwhile, the chaebol is taking a reality check and correcting past mistakes. For example, the company has decided to sell vacuum cleaners through retail outlets rather than take the direct selling route on the lines of Eureka Forbes.

That model didnt do too well, admits Kim.

Another strategic decision has been deferring its proposed IPO indefinitely till the market recovers. LGEIL was planning to raise $25 million from the IPO sometime this year, by offloading 25 per cent equity stake in the company. Instead, it intends to raise funds through non-convertible debentures (NCD), the proceeds of which will part finance the expansion plans.

While dishwashers, laptops and mobile phones have been identified as potential categories where LG is likely to enter in the next one year, the company wants a tighter grip on the volumes segment. While the low-priced Sampoorna CTV brand has been relaunched as Cine Plus at a Rs 5,000-7,000 tag, sub-300 litre refrigerators have just started rolling out. The target, outlines Kim, is to increase off take from the rural market by 20 per cent the following year, currently accounting for Rs 900 crore. A budget of Rs 10 crore has been allocated for rural marketing in the next one year.

Meanwhile, the companys line-up of Internet-compatible products such as refrigerators, washing machines and microwave ovens will be showcased late next year.

LGs health-centred communication, too, may be taken forward to be given an eco-friendly tack. Also, LGs sales head, Tognatta, does not rule out reducing advertising and promotion budgets in the forthcoming months, currently hovering around Rs 100 crore. Even if we do cut advertising expenditure, our sheer presence in the market would see us through. We have crossed the minimum threshold required for advertising pull, says Ganesh Mahalingam, General Manager, Marketing, LGEIL.

And while dealers Catalyst spoke to say the currently on festival promotion has not helped sales offtake much as is the case with every other player in the industry, Tognatta brushes off the charge. The season has just about begun. And the market is showing positive signs from last month onwards, he says.

The targets, meanwhile, are etched on the wall -- usurping the throne among consumer electronics and home appliances in 2003, and topping the Rs 5,000-crore turnover mark by 2005.

So what if LGEIL falls short of expectations? LG India, after all, contributes only five per cent to the chaebols global sales. The goal is important, but so is the process, signs off Kim with his trademark mix of caution and aggression.5

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