Business Today

The Chaebol challenge

Sunny Sen        Print Edition: May 15, 2011

In 1997, two years after shedding its quaint Lucky Goldstar name, when Korean consumer electronics giant LG entered India, local competitors that dominated the industry discounted them. At their peril, as it turned out. Within a few years, LG had powered ahead, leaving a trail of broken domestic companies - BPL and Onida, the most prominent of them.

Samsung's Jung Soo Shin
Samsung's Jung Soo Shin
But what gave the managers at LG even more satisfaction is that they had left their Korean rival Samsung biting the dust. By 2007, LG was clocking $2 billion, Rs 8,000 crore then, in revenues in India. This despite the fact that globally, Samsung had become the Sony of the 21st century, the largest consumer electronics firm. Doubly hurtful was that Samsung was the largest chaebol, or conglomerate, in Korea and LG No. 2. It is time for that lead to be rewritten. Bolstered by rapidly climbing consumer electronic sales, particularly of flat panel displays and mobile phones, and better realisations through a small pricing premium, Samsung has equalled LG in sales - around Rs 16,000 crore - and expects to end 2011 ahead of its rival by a substantial margin.

Some executives at Samsung boast LG is already behind. "We are bigger in size and in portfolio. Category to category we are much larger," says Ravinder Zutshi, Deputy Managing Director at Samsung India, the man responsible for its consumer electronics business. Data on market shares do not back that up but with the benefit of stronger pricing - Samsung prices itself at a two to five per cent premium - the bigger chaebol is powering ahead.

Samsung's sales projections for 2011 show revenues of Rs 22,400 crore, a growth of 40 per cent. LG on the other hand expects sales of Rs 20,000 crore. In a market of around Rs 1,10,000 crore for consumer electronics and mobile phones put together, as estimated by Technopak, a Gurgaon retail advisory firm, Samsung's is a powerful one-fifth share. Both companies expect to double sales shortly. By 2013, Samsung hopes to touch around Rs 46,000 crore; LG Rs 40,000 crore by 2014.

How did Samsung get ahead and, as importantly, how did LG cede its ground? There is no doubt that mobile phones have powered Samsung's recent sales success - half of its India revenues come from mobile and information technology, or MIT, products. Various surveys give Samsung market shares in mobile phones between 14 and 23 per cent in India. It is acknowledged to be a strong No. 2 to market leader Nokia, thanks to early success with touch-screen phones and popular devices Galaxy S, Wave 2 and the Guru range. This is something that LG India accepts.

Y.V. Verma, Chief Operating Officer of LG India, concedes: "They are good at mobiles and we are not good at it." He is quick to point out that LG will come out with better products and without the mobile business, Samsung still lags. "If you take out mobiles, they are 65 per cent of us," says Verma.

Kwang-Ro Kim, LG's erstwhile India chief who left his employer in 2007 after building the company up from scratch in the country, says as much. "The management of LG in Korea underestimated the appetite India has shown for mobile phones. Hence, LG faltered a bit on that count," says Kim, who now heads a new credit rating agency, which is part of the Onida Group.

Analysts also credit Samsung's success at premium pricing, though LG rubbishes this. "(Samsung) has not gone to the masses, so has created a premium positioning, compared to LG," says Purnendu Kumar, Vice President, Technopak. This, he believes, has helped Samsung in the replacement market, which accounts for 30 per cent of urban sales. Such buyers tend to pay more for what is perceived as a premium product.

Still, that cities-focus is set to change at an ambitious Samsung. All that it has to look at is Sony, which is renowned for its price premiums but is going for scale in India. Globally, we are a premium market product, but at the same time we want to capture the mass market," says Tadato Kimura, General Manager of Marketing at Sony India. "Focusing only on premium products is not enough in India," he adds, referring to Sony's recent introduction of lower-cost sets in its Bravia flat panel TV range.

Jung Soo Shin, Samsung South West Asia CEO, actually wants to emulate a part of LG's strategy from the early part of the last decade. Around 2003, Kim took LG deep into the Indian market, going into towns with a population base of 100,000 people. "If one villager buys an LG product and is happy, the entire village buys LG. There is greater stickiness," says LG's Verma.

Jung (he is called Shin by his colleagues in India), who regularly shoots hoops at a basketball court near his Gurgaon home, believes the Indian market has a lot of headroom to grow. Samsung wants to expand its reach, from around the 17,000 outlets that sell its products currently to exceed the 20,000 outlets that retail LG products. This would also entail an increase in its single-brand Samsung Plaza outlets, 400 of which dot India (compared to 270 Sony Centres and over 1,600 LG Shoppes) and make for 14 per cent of its India sales (12 to 13 per cent for LG).

Ranjit Yadav and Ravinder Zutshi
Ranjit Yadav and Ravinder Zutshi
Ranjit Yadav, Director for MIT at Samsung India, relates Jung's aggressive push with an instance when it was suggested last December that Samsung open a line of exclusive shops for high-end mobiles after a successful experiment at New Delhi's Nehru Place commercial area. Jung not only bought into the idea but mandated Yadav open 600 'Samsung Smartphone Café' outlets by the end of 2012. "Once he (Jung) is convinced on the business case, he wants quick action. Speed is very important to him and so is the big picture," says Yadav. "Customer comes first for him."

This will be coupled with an increase in local manufacturing so that the company can customise products faster for local needs. For example in 1997, Samsung barely made 10 to 15 refrigerators a day. Today the company makes 5,500 at a new Chennai plant - around 1.4 million a year. Its plant in Gurgaon rolls out a cathode ray tube TV every 4.5 seconds. Its investments of $225 million in factories in India also cover mobile phones, washing machines and air conditioners.

Yet not every bet Samsung has made has been that successful. Despite playing a starring role on the Koffee with Karan talk show, sales of its flagship Galaxy Tab have been weak, despite price drops. Globally, Samsung's bet on 3D TVs has fallen flat as the technology itself has stalled. Samsung's late entry into the notebook market - despite being a global supplier of almost every computer component - in India might actually cost it the opportunity to grab top spot in the laptop market.

And then there is the re-emergence of local brands that were hammered when LG and Samsung entered the Indian market. Thanks to cheap Chinese manufacturing and the emergence of organised retail with chains such as Big Bazaar, brands such as Tokyo-based Akai and home brand Onida are making a comeback. Jung shrugs off this competition: "Eventually, these brands will die."

Yet, while Jung has managed to out-dribble his competitors in this battle, the war between Samsung and LG is far from over. Kim, the ex-LG India chief, says Shin will find tough competition in LG's new man on the ground in India, Soon Kwon, who took over in December, "is very serious about his ambition for growth here," says Kim. "It will now not be unusual to have situations when two equally good giants compete in the market. Sometimes Samsung will lead; there will be times when LG will race ahead."

It may have taken 14 years in the making but the battle of the chaebols in India may have just begun

Additional reporting by Shamni Pande

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