Life's good for LG

Kwang-Ro Kim, MD,
LG India

How the Korean consumer electronics giant's second coming in India paid off.

LG Electronics India's marketshare dropped in January 2005 "" for the first time since the company was set up in 1997. But Managing Director Kwang-Ro Kim isn't worried.

"The dealers must have met their targets in December itself, so they took it easy in January," he explains.

Were it any other company, the managing director's insouciance would appear to border on foolhardiness. But this is LG, a company that can afford to take it easy.

Even after the blip in sales in January "" LG's marketshare in refrigerators fell fractionally from 28.6 per cent the previous month to 28.1 per cent "" the Korean consumer electronics brand is still the preferred white goods brand in India "" across categories and sub-categories.

Whether it is refrigerators, air conditioners, washing machines or colour televisions "" LG's dominance over the white goods market is complete.
 

LG: looking great
Category	Marketshare in volume terms
	LG	No. 2 player
Refrigerators	27.2	21.2 (Whirlpool)
Colour TVs	25.5	15.1 (Samsung)
Microwave ovens	41.4	19.7 (Samsung)
Washing machines	34	13.8 (Whirlpool)
Marketshare in % for April 2004-January 2005 Source: ORG-GfK

That's pretty decent going for a company whose first experience in the Indian market was nothing short of disastrous. In its earlier avatar, the Korean company came to India as Lucky Goldstar.

This was in the early 1990s, and the rules at the time didn't permit foreign companies to start independent ventures. So Lucky Goldstar took on not one, but two joint venture partners. The first partnership ended acrimoniously while the second never took off from the ground.

In 1997, the Foreign Investment Promotion Board finally gave the Korean company permission to set up its own factory to make washing machines and refrigerators.

Rechristened LG Electronics, the new company "" a 100 per cent subsidiary of the Korean chaebol "" swung into action and set up a state-of-the-art manufacturing facility at Greater Noida, Uttar Pradesh.

There's been no looking back since then. In October 2004, LG set up a second manufacturing facility at Ranjangaon, near Pune, which makes white goods as well as cellular phones "" the first GSM handset manufacturing facility in India.

Another facility, exclusively for GSM handsets, is being set up and will start operations in August. Turnover is also on the upswing: starting from Rs 150 crore in 1997, LG registered a turnover of Rs 6,500 crore last year and is targeting Rs 9,000 crore in 2005.

So, what went right?

Off with the old

Perhaps the most important step was to leave behind the baggage of the past.

As Lucky Goldstar, the company's biggest fault was that it did precisely what other white goods brands of the 1990s were doing: some half-hearted advertising and pushing the products only when the consumer entered the store.

Activities that "pulled" potential buyers into showrooms were conspicuous by their absence. Once it got the permission to operate as a wholly-owned subsidiary, though, all that changed. Within just five months, LG products were available across the country, compared to the average two years competitors took for a nationwide launch.

An advertising blitzkreig followed. And the momentum hasn't let up since. LG is one of the most aggressive advertisers in the white goods industry, spending close to 5 per cent of its revenue on marketing activities "" that's Rs 130 crore last year.

A close tie up with cricket ensured the brand building exercise would score well on consumer recall "" apart from signing on leading Indian cricketers, LG also launched a cricket game on one of its television models. Point of sales promotions were also extensively advertised to ensure customers were tempted to visit the stores.

Importantly, for LG, a nationwide launch meant just that. A penetrative distribution strategy ensured that products were available even in smaller towns and cities, breaking the chain of urban dependency that plagues most white goods manufacturers.

More than 65 per cent of last year's Rs 6,500 crore revenue came from non-urban sources; up from under 60 per cent the previous year. The industry average? Twenty-five to 30 per cent. Add the fact that the rural markets accounted for a remarkable 30 per cent of total sales and it's clear that LG's strategy is working. "We push rural marketing," agrees Kim.

How does it do that? LG reaches into the hinterland through a pyramidal sales structure. Branch offices in larger cities set up central area offices (CAOs) in smaller towns; these in turn reach out to even smaller towns and villages through remote area offices (RAOs) "" at last count, the company had 51 branch offices, 87 CAOs and 78 RAOs.

Each RAO has servicing, marketing and sales teams at its disposal and an individual budget for marketing activities in its territory. The executive in charge has independent decision-making powers "" he can decide the tenor and scale of brand promotions in his area, without having to cross check every little detail from the head office.

Technology, too, is being used to the hilt to ease their jobs. The RAOs and CAOs are all electronically connected through a V-SAT and Intranet network.

And where earlier decisions about putting up large hoardings could be approved only after a visit from the head office, LG has provided all its branch managers digital cameras "" now they just click images of suitable locations and get them approved electronically.

Bells and whistles

For customers, though, the direct approach is preferred. The advantage of an extended distribution network is that marketing executives can keep a finger on the pulse of the market. Promotions and finance schemes are designed to suit the needs of local customers.

In a small town in Uttar Pradesh, for instance, last year LG offered select households a free 15-day trial of a 50-inch flat screen television during the cricket season. The TV set costs close to Rs 1 lakh, but several families took the bait and considered buying the TV "" at which point the showroom staff offered them carefully planned finance schemes.

Of course, it's not just the finance schemes that are tailormade. LG has been careful right from the start to offer customers a "value-plus" proposition.

Explains KSA Technopak Principal Harminder Sahni, "LG has always taken the stand that 'We're selling the AC, not the remote. The remote comes as part of the package.'" Which is why, he adds, the company does not qualify as a "budget" models company. "LG does not sell no-frills product; it gives you all the bells and whistles," Sahni says.

LG recognised the need to do that early on. Kim "" who's been with LG India since 1997 "" points to a basic characteristic of Indian consumers: "They are very price sensitive. They want the best quality at reasonable prices." Accordingly, LG introduced its economy range in the country, which Kim predicted would be "easily accepted".

The company was ready to do battle on two flanks: it offered modern, features-packed products, at the same time keeping its margins wafer-thin. Even competitors accept the merit of the tactic.

"LG has been a price warrior while retaining its brand equity," points out Ajay Kapila, vice president, sales and marketing, Electrolux India. "Our success is the result of hard work and commitment. There's no miracle involved," says Kim.

The hard work was on the features, which were carefully chosen "" and adapted "" to appeal to Indian audiences. For instance, Kim points out that consumers in southwest India prefer big sounds and big bass outputs.

Accordingly, LG India created Ballad, a flat screen television model that sells only in the subcontinent and comes equipped with 2,000 watt speakers.

Similarly, refrigerators in India have smaller freezers and big vegetable compartments "" Indians prefer fresh food and a significant proportion are vegetarian. Colours, too, are chosen keeping market preferences in mind. White refrigerators, for instance, don't sell well in Kolkata and Punjab "" while the sea air in Bengal corrodes the paint, the masalas used in Punjabi cooking discolour the fridge.

So LG offers a range of bright colours in these markets. The cricket game in TV sets wasn't the only "go local" innovation: LG also offered on-screen displays in five languages and large capacity semi-automatic washing machines that would suit Indian families.

The research for these adaptations and innovations is done in-house. LG invests significantly in local R&D "" last year the company spent over Rs 100 crore on research.

"We want to be independent of Korea," states Kim. It's working towards that: already 70 per cent of its product line is produced locally, with the rest imported from China, Korea and Taiwan. In refrigerators, 95 per cent of the components are localised. All of which also help keep prices down.

On with the new

But that was in the past. "Economy" and "value-for-money" are no longer going to be the cornerstones of LG's India strategy. In the next five years, says Kim, the company will concentrate on building itself as a premium brand, targeting 10 per cent of its earnings from super-premium products.

That includes products like the Whisen range of wall-mounted air-conditioners (Rs 50,000 and above), Dios refrigerators (Rs 65,000 and above) and X-canvas plasma TVs (Rs 1 lakh and above).

LG has already set up 75 exclusive showrooms for these products, which were launched earlier this year, with more in the pipeline. This year it will spend upward of Rs 20 crore promoting the super-premium sub-brands. "High-end products need high-end outlays," smiles Kim.

Perhaps, but industry analysts have their doubts whether exclusive showrooms for such big-ticket items will bring in the bucks. "When it comes to consumer durables, people prefer comparison shopping. I will be surprised if the stores make money," comments KSA's Sahni.

Meanwhile, there's the imminent departure of the man who built up LG India to its present height. Kim, who was last year promoted as head of LG South West Asia, is likely to move up within the parent organisation some time soon. "I am preparing to leave," he admits. Will that make a difference to LG's growth curve? Kim doesn't think so.

"The system is working, so things will continue as they are," he says. That thought finds an echo in Sahni, who points out "Kim may be leading from the front, but LG couldn't have achieved what it has without a strong team."

The challenge now will be to integrate the new incumbent's working style with the existing culture of the organisation "" and work on the new marketing strategy. If LG meets that head on, then, like its tagline says, Life's Good.

BENDING OVER BACKWARDS

Flexibility and adaptability have proved indispensable for LG Electronics India. Whether in the showrooms or on the shopfloor.

At the Greater Noida unit, multi-product lines ensure that in-demand products can be given priority "" in summers and during the Diwali season, for instance, the line makes more TV sets; during the winter, it switches to washing machines.

Of course, multi-product lines come with their set of problems, but LG encourages the shopfloor workers to seek solutions at their level.

Consider, for instance, when the line is switched from TV sets to microwave ovens. All fittings on the TV are done from the back, while a microwave requires work from the front.

When the lines are switched "" the process takes less than 10 minutes "" the workers don't move to the other side. Instead, they've placed mirrors strategically so that they can continue working on the same side, looking at the reflection.

Other solutions are less elegant, but their relevance is undoubted. At LG, each TV set on the line needs to be checked by switching on remote control.

Earlier, workers on the line would have to pick up the remote each time a set came down the conveyor line. Now, they've created a small slot at the edge of the line for the remote, which has been jigged so that the "on" button is always pressed.

Suggestions from workers on the shopfloor have not just helped improve productivity "" the line target is to increase TV production from 2,600 sets to 4,000 a day, within the next couple of months "" they've also helped in keeping costs down, says Vipin Gupta, head of research.

Earlier, for instance, there were different packagings for 20" and 21" TV sets. Since they're both nearly the same size, now the same size carton is used to pack both types of TVs "" a sticker outside indicates the size and model.

Factory and Customer Service Head Sanjay Arora points out that workers at LG are better placed to offer suggestions on product improvements because they're encouraged to experience life outside the factory gates as well. Workers are routinely sent to do sales stints at company showrooms and even to customers' homes to service the products.

"This way workers on the line know what problems the customers face and they also become more involved with innovations on the line," Arora points out.