Lg Marketing Strategy of Airconditioners by nwm56417

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									Competition




     Running away with
      the Indian market




30
 Within a decade of setting up business in India, the Korean majors
    have outflanked the competition in many consumer product
 categories. Established American, European and Japanese brands
have been unable to stop the juggernaut. What is the secret of their
     success? Is it sustainable? N Chandra Mohan finds out.




                       S
                                     outh Korea is popularly           setting up shop in India. They splurged on
                                     referred to as the Land of the    marketing and sponsored high-profile
                                     Morning Calm but its chaebols     sporting events like cricket. They estab-
                                     could hardly be subscribing to    lished outposts all over the country, espe-
                                     that calmness going by their      cially in small town and rural India — which
                       success in emerging as market leaders in        accounts for 35 to 40 per cent of LG's
                       India. After they took a strategic decision     sales. The Koreans thus became household
                       to invest in the country in the 1990s, busi-    names in the domestic market. Looking
                       ness groups like Daewoo, LG, Samsung            ahead, Hyundai has made its small car pro-
                       and Hyundai stepped up their exposure           duction the hub for its global operations.
                       with a surefootedness and speed that            Samsung and LG are also the export hubs
                       upstaged rival Japanese, European and US        for their parents' south-west Asian opera-
                       consumer companies.                             tions.
                           Daewoo got enmeshed in serious prob-            All of this forcefully underscores an
                       lems back home in Korea just when it            important element in the Korean success
                       revved up to participate in the Great Indian    story — that all the chaebols in question,
                       Auto Race in the late 1990s. The biggest        Hyundai, Samsung and LG, have a long-
                       chaebol in cars, Hyundai, put up a state-of-    term commitment to India. Unlike neigh-
                       the-art manufacturing facility in the state     bouring Japan, South Korea made up its
                       of Tamil Nadu with a capacity of 150,000        mind faster to come here. While LG and
                       cars. It rolled out the first major challenge   Samsung were busy ramping up their
                       to the dominance of Maruti Udyog in the         capacities, their Japanese rivals were fixat-
                       compact segment with its Santro, barely         ed on China.
                       17 months after ground breaking in end-             Hyundai has so far invested $1 billion
                       1998. Today, it is India's second largest       in its Indian manufacturing facility. After
                       carmaker.                                       Santro's runaway success, the company
                           However, the segment which the              introduced other models and volumes
                       Koreans have really dominated is the so-        picked up. The company decided to
                       called white goods comprising colour TVs,       expand its capacity to 250,000 units in
                       washing        machines,       refrigerators,   2004. With car sales touching 215,630
                       microwaves etc. The spearhead of the            units that year, Hyundai decided to set up
                       assault on the Indian market originally was     a second facility to make an additional
                       Samsung Electronics India that got going in     150,000 units and is targeting 20 per
                       December 1995. LG commenced opera-              cent of the Indian car market by 2007.
                       tions later in May 1997 and within just         LG's facilities can assemble 2 million
                       four and a half months, it had a nationwide     colour TVs annually, while Samsung's
                       launch of its products. LG now occupies         capacity is 1.5 million.
                       the numero uno slot and, together with              With such capacities, the Koreans
                       Samsung, accounts for one in three of           clearly intended to push volumes in a
                       colour TVs, half of the washing machines,       price-sensitive market like India. They
                       microwaves ovens and frost-free fridges         realised that Indian consumers wanted
                       sold in India.                                  world-class goods at reasonable prices.
                           The upshot is that the Koreans have run     An indicator of their success is the speed
                       away with the market barely a decade after      with which they registered milestones,


                                                                                                                31
COMPETITION




                                                                                                 The Korean
                                                                                              chaebols can be
                                                                                             aggressive in their
                                                                                             pricing as LG and
                                                                                                Samsung can
                                                                                               cross-subsidise
                                                                                                their losses in
                                                                                              appliances with
                                                                                             profits from colour
                                                                                             TVs, DVDs, music
                                                                                                systems, etc.
TECHNOLOGY AT LOW PRICES: Consumers viewing a Samsung plasma tv at a showroom



such as Hyundai rolling out 700,000 cars
in 70 months after commencing manufac-          LG SPEAK
turing in the late 1990s. Or LG selling
100,000 airconditioners in a calendar                                                     markets and therefore LG's strategies are
year. Or Samsung, cumulatively selling                                                    quite aggressive to ensure huge growth.
one million colour TVs three years after                                                  LG India has done a creditable job of
starting operations in 2000. LG followed                                                  making it big in the consumer durables
suit in 2002.                                                                             market.
    Pushing volumes at affordable prices                                                  LG India will also become the export hub
requires control over costs. In this brutal                                               for LG worldwide catering to the Middle
consumer-driven market, even wafer-thin                                                   East and African markets. The company
margins have so far eluded the major play-                                                aims to touch an export turnover of $3
ers. Unlike most of their rivals, however,                                                billion by 2010, which will contribute to
the Koreans succeeded in their drive as                                                   30 per cent of LGEIL's turnover. LG is
they indigenised their operations quickly.                                                also looking at introducing LG Shoppes
Hyundai's Santro rolled out with localisa-                                                and exclusive stores in key cities all over
tion levels of 85 per cent. LG and                                                        the country and gradually taking them to
Samsung too localised rapidly in home                                                     the B&C class cities.
appliances and consumer electronics,
with the former's levels being 70 per                                                     How has LG fared better than older
cent, going as high as 95 per cent in                                                     European and Japanese brands?
fridges. Samsung's, on the other hand,                                                    Through latest global technology, new
ranges between 50 to 60 per cent overall.                                                 breakthroughs, continuous research and
    With huge capacities and cost control,                                                development work, LG has set new
the Koreans sallied forth into battle as                                                  industry standards in customer service
'price warriors' in their quest for domi-     K R Kim, MD, LG Electronics India Ltd,      and product innovation.
nance in white goods. A lot, however,         spoke to N Chandra Mohan about his          Another distinguishing factor is that it
was also happening in India during those      group’s operations in India. Excerpts       has one of the widest coverage of serv-
                                              from the interview:                         ice centres. LG is also the first Indian
                                                                                          consumer durable brand to cater to the
 On the Web
 Samsung India: www.samsung.com/in            What has been LG's strategy in              rural and semi-urban population, con-
 LG Electronics India: www.lgezbuy.com        India?                                      tributing almost 40 per cent of LGEIL's
 Hyundai Motor India: www.hyundai.co.in       This country is one of its biggest global   total sales turnover presently.




 32
                                                                                                                          COMPETITION




years when the Korean majors were               sion, even the low margins in this busi-       million units.
sharpening their marketing thrust. During       ness vanished, triggering a shakeout in            The Koreans can take all these daunting
the go-go years of the 1990s, the market        the industry. Rivals like Electrolux-          trends in their stride as they are present in
for white goods, two-wheelers and cars          Kelvinator India, Whirlpool were pushed        all the segments of consumer electronics
boomed with the sharp drop in bank inter-       into the red and into the waiting arms of      and appliances. LG and Samsung can thus
est rates from 18 per cent to 8 per cent.       Videocon.                                      cross-subsidise their losses in appliances
But from 2000 onwards, however, too                 Colour TVs, bucked this trend as boom-     with profits from colour TVs, DVDs, music
much supply started chasing too little          ing volume growth of 17 per cent compen-       systems, mobile phones etc. With margins
demand. The Koreans are volume players          sated for the 12 per cent erosion in prices    in colour TVs remaining healthy at 8 to
but whether they have made any money            in 2004-05. For flat-screen colour TVs in      9 per cent, the scope for making up for the
so far is a matter of conjecture, as the        particular, volume growth exploded by 108      carnage in appliances is considerable. If
chaebols do not release profit statistics.      per cent.                                      this is the current reality of the Indian mar-
    What is beyond doubt, however, is                                                          ketplace, questions naturally are bound to
that their aggressive pricing knocked out
the competition. LG's fridges were 5 to
16 per cent cheaper than its rivals. So too
                                                H    owever, demand has stagnated in
                                                     some categories. Thanks to the easy
                                                availability of housemaids, demand for
                                                                                               arise whether the Korean leaders' strategy
                                                                                               to grab market share at all costs is sustain-
                                                                                               able.
were its colour TVs. And prices have            washing machines has virtually plateaued           To be sure, the chaebols are reassess-
been dropping. A 5 kg capacity automat-         at 1.1 million units six years ago, nudging    ing their strategies in India and are seeking
ic washing machine currently sells for          up to 1.4 million last year. Similarly, the    to differentiate themselves from their repu-
$140 compared to $186 two years earli-          demand for fridges is also not taking off.     tation for 'spoiling' the market with their
er. A 1.5 tonne air conditioner is available    Overall demand last year amounted to 3.3       aggressive pricing. LG thus may have
these days for $350 as against $580             million sets last year while the capacities    pushed sales volumes as fast as 76 per
three to four years ago. With price ero-        built up in the industry are a massive five    cent on a compound annual basis from $28
                                                                                               million in 1997 to $1.45 billion in 2004.
                                                                                               But there is only that much additional pick-
    A QUESTION OF NUMBERS                                                                      ings left for an economy brand. The com-
  THE KOREAN chaebols dominate India’s                                                         pany has, accordingly, decided to move
  white goods market with LG occupying                                                         into the premium segment in a much bigger
  the leadership slot with a share of 25.5                                                     way.
  per cent in colour TVs, followed by
  Samsung's 17 per cent, according to data
  compiled by the premier market research
  agency ORG-GFK for 2004-05. LG's dom-
                                                                                               S    amsung, for its part, to differentiate
                                                                                                    itself from LG's aggressive pricing
                                                                                               while pushing volumes to challenge the
  inance is also seen in its commanding 41                                                     latter's dominance in flat-screen colour
  per cent market share in microwave                                                           TVs. Samsung also seeks to consolidate
  ovens and 34 per cent in washing                                                             its position in the number two slot in air-
  machines. What is interesting is the huge                                                    conditioners while expecting a leadership
  gap between the leader and the number 2                                                      position in frost-free fridges by 2006.
  player in this business, which happens to                                                    Although Samsung began operations in
  be Samsung in the case of colour TVs and                                                     India earlier, LG forged ahead in sales and
  microwave ovens and Whirlpool in fridges                                                     dominance much to its chagrin.
  and washing machines.                                                                        Samsung's turnover of $1 billion thus has
  Videocon Ltd doesn't accept the veracity                                                     a lot of ground to cover to catch up with
  of ORG's numbers. Since the late 1990s,                                                      LG.
  ORG's estimates have come under its crit-                                                        Samsung's major advantage, however,
  ical scanner for not reflecting Videocon's                                                   is that it can piggyback on the reputation
  true market share, which it says can be                                                      of its $55.2 billion parent as a global
  arrived at by aggregating sales of the var-                                                  brand for innovation and technology. The
  ious Japanese and European brands that                                                       company, therefore, emphasises that it is
  it acquired such as Akai, Sansui, Kenstar,    Samsung is now updating its website            a technology leader which is more value-
  Electrolux-Kelvinator,      Toshiba    and    with more up-to-date estimates for 2001        driven than price-driven. One example of
  Hyundai.                                      and 2002. For 2003, it remains                 all this is its shift from traditional TVs to
  Besides market shares, the industry's         unchanged at $824 million while for 2004       flat-screen ones which now account for
  estimates of sales is also dated and high-    its turnover is $1 billion — which misses      90 per cent of its TV sales. Another is its
  ly provisional. LG's website, for instance,   the target of $1.17 billion. No other finan-   edge in mobile telephony space with the
  only provides sales numbers from 1997         cials are available to assess the domi-        first TFT phone. Korea's chaebols thus
  to 2002 when sales crossed $666 million!      nance of these chaebols.                       are reinventing themselves to destroy the
                                                                                               morning calm of their rivals.


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