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Not So Durable
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If it ain’t broke, don’t fix it. That, in retrospect, may be the idiomatic advice the dynamic Korean duo of LG and Samsung never got. For nearly a decade, their Indian subsidiaries LG Electronics India and Samsung India Electronics looked invincible. They snatched nearly half of the Indian consumer electronics and home appliances market from Indian, Japanese, American and European brands by offering contemporary, technologically advanced products at competitive prices. And they forced closure of regional brands such as Beltek and Weston, and relegated big global brands such as Electrolux, Whirlpool and Sony to munch on the crumbs in the market.
But two years ago, setting aside their time-tested strategies that got them to the top, both decided to alter strategies. That adventurism has left them bruised and vulnerable. However, the economic emaciation now is forcing them to recalibrate their mistaken strategies.
Envy and Pride
Since entering India in the late 1990s, the two Korean firms had chosen their comfort zone in the market, out of each other’s way. Samsung opted for premium positioning and gave priority to margins over market share while LG chased volumes and market leadership. Having captured half of the market in key product categories — televisions, refrigerators, airconditioners and washing machines — the duo began to pursue agendas that were more driven by corporate pride than by market realities.
Come 2007, they tried to usurp each other’s turf in a fit of branding schizophrenia. In January 2007, both companies got new bosses who brought new mandates with them. H.B. Lee succeeded S.H. Oh as the head of Samsung India Electronics operations and proclaimed market leadership as his agenda by simultaneously riding the stallion of premium products, and the mule of the mass products.
chairman, Videocon Group
J.N. Godrej, CMD, Godrej
& Boyce Mfg. Co.
Masaru Tamagawa, MD, Sony India
At LG Electronics India, Moon Bum Shin replaced K.R. Kim (the architect of LG’s market dominance and now the vice-chairman of rival Videocon’s durables business) and brought with him the new global LG agenda of gentrification of the brand’s image and increasing profit margins by pushing premium products, albeit tolerating the company’s staple of mass products.
Experts watched this transmogrification with amusement and curiosity. “In reality, all companies came to India for the belly of the market, which is the mass segment, and have attempted to create a halo around their brands to make those aspirational too,” quips C. Ravi Shankar, manager-strategic and competitive intelligence transactions services at the consulting firm, KPMG India.
The Koreans at Samsung India had never been quite at home with the fact that LG was twice the size of Samsung in India, when the reverse was true back home. In 2007, in India, LG’s Rs 9,500 crore revenues were nearly twice that of Samsung India’s Rs 5,200 crore, while in Korea Samsung had revenues of $105 billion compared to barely $44 billion of LG.
On the other hand, LG tried to turn a new leaf globally in January 2007 with Yong Nam taking charge. Nam desired that LG become an aspirational brand from an affordable, functional one. He declared LG’s new brand identity to be linked to consumers’ self-expression, whereas LG’s traditional positioning was serving consumers’ daily needs with affordable yet smart products.
VIDEOCON has gained market
share in televisions and airconditioners
GODREJ has gained market
share in refrigerators
SONY has emerged stronger in the
premium LCD television market and is
able to hold price even during downturn
“We want to dominate the market through innovation and not through prices,” LG’s M.B. Shin had told BW when he took charge in India, echoing his leader’s new agenda. Shin’s rationale was that the growth of Indian consumer durables market was slowing down to 10-15 per cent a year from the heady 30-40 per cent of the early 2000s and, as a result, the margins were getting eroded at the low end of the market. Besides, he contended, Indian consumers were beginning to seek beauty and individuality in home appliances just as in personal accessories.
Samsung India, which was brought up on the aspirations of becoming a Sony and looking down on LG as a low-brow bargain brand, suddenly had to get off that pedestal and fight LG and local brands such as Videocon, Onida and Godrej on price. The company started offering entry-level products that were competitively priced against LG and other price-aggressive brands. For example, the company sells ‘3-series’ LCD televisions while also selling the upmarket ‘5-series’ and ‘6-series’, which are priced slightly above even Sony’s LCD televisions. The ‘3-series’ is priced about Rs 1,000 below LG’s entry-level LCD televisions.
To generate volumes, Samsung also extended its distribution network beyond its mainstay of big cities to smaller cities and towns. According to R. Zutshi, deputy managing director of Samsung India, the company has expanded its dealer network by 30 per cent in 2008 and its branch offices have been increased from 20 to 50.
Click here to view slide show: In Terms Of Market Share...
Market sources say that Samsung also began to compromise on margins in pursuit of market leadership and gave dealers deep incentives. Samsung’s new approach delivered the intended result, but also some unintended ones.
In 2008, Samsung managed to narrow the gap between itself and LG in India to one-third from about half within a year. In 2008, Samsung India generated revenue of about Rs 8,670 crore compared to LG’s Rs 10,750 crore. Also, it managed to raise its market share, not dramatically yet significantly. Its share went up to 15.5 per cent in 2007-08 in the television market from 14.4 per cent in 2005-06, to 16 per cent in the refrigerator market from 14, and to 15 per cent from 10 in the airconditioner market. It lost 1 per cent market share in the washing machine market though, slipping to 16 per cent from 17 per cent.
The unintended results were that its margins came under strain and its brand image got compromised. Market sources say that Samsung has ended 2008 in the red though the company denies it, albeit without offering any numbers to prove its claim. It has paid the price for getting into a pricing scrap at a time when input prices were shooting up — the cost of materials, wages and freight increased by more than a quarter in 2007-08. Moreover, trying to straddle the two horses at the same time — the premium segment and the mass market — dented the prestige of the brand. Today, many dealers are selling Samsung products at a 10-15 per cent discount to push stocks, just as for LG products, whereas Sony is able to hold its prices.
Where they went wrong:
LG decided to go premium and ignored its
Samsung decided to chase volumes and
compromised the brand
LG failed to hold market share and Samsung
failed to hold prices
What they are doing about it:
LG is paying more attention to developing
Samsung is prioritising technology leadership
LG is increasing focus on the rural markets,
while Samsung is adding smart features
In comparison, LG’s problems are starker. It has lost 3-7 per cent market share in every major product category over the past couple of years. Believing that the mass market was for keeps and focusing on the higher end of the market in its advertising and marketing efforts has allowed others, including Samsung, to nibble at its main market. In 2008, according to M.B. Shin, 70 per cent of the Rs 370-crore advertising budget of LG was spent on premium products such as design-intensive Scarlet LCD televisions, Nimbus refrigerators, and talking washing machines, whereas its mass products — traditional televisions, direct-cooling refrigerators, semi-automatic washing machines — received almost no exposure on television at all. Equally importantly, the company loosened its grip on the durables trade as Shin decreed against pushing products through distribution channel at any cost. Shin insisted that LG rely on its brand prestige rather than its market muscle.
Shin’s predecessor K.R. Kim was a feared man in the consumer durables business. His marketing and sales team rode roughshod over both the trade and the competition by relentlessly running competition-killing dealer incentive schemes, consumer-pulling freebies and loading of ever-increasing stocks on dealers to grab their inventory and display space. “People now think that LG has lost its nerve, though we believe we are creating brand power,” says Amitabh Tiwari, LG’s head of consumer electronics business. While LG’s profitability improved from low single-digit per cent to mid single-digit per cent level in 2008, the inflation and lack of pricing power in a market hit by scarce and expensive consumer finance and the consumers’ propensity to sacrifice on aesthetics and features to save money made its new gamble look like a mistake.
The once-trounced rivals exploited the opportunity the catfight offered them. They had also learnt their lesson along the way and began to offer updated technology and design at competitive prices. Videocon and Godrej, in particular, targeted the value-for-money segment of the market, which LG had begun to ignore somewhat. They also hurt Samsung in the mid-market, albeit Samsung was able to compensate for that in the low segment. Multinationals Sony and Whirlpool also fished in the troubled waters by pushing low-priced flat-panel televisions and semi-automatic washing machines, respectively. As a result, in the television market, Videocon has increased its market share to 22.8 per cent from 19.2 per cent in 2005-06.
Over the same period, refrigerator specialist Godrej has pushed up its share of the market to 18 per cent from 15 per cent. In airconditioners, Videocon’s share has entered double-digit for the first time in this decade. In washing machines, category specialist Whirlpool has regained its lost market share considerably to move back to 16 per cent from 13 per cent in 2005-06. During this period, LG’s market share has shrunk in these categories by 3 per cent to 7 per cent.
K.R. Kim, former CEO of
LG Electronics, now heads
The competition is chuckling. Says Videocon Industries chairman Venugopal Dhoot: “The Koreans are struggling because their perspective has been that the market is transitioning towards the high-end, quality market and that is where the money is. However, the fact is that the segment is beginning to stagnate.”
Tiwari of LG concedes that the traditional cathode ray tube (CRT) television is still 90 per cent of the television market in India in volume terms, and it is expected to grow at least 10 per cent in 2009 despite the economic downturn and a high base of 11.2 million units as of 2008-end. LG itself garnered one-fifth of its total revenue in 2008 from CRT televisions. In comparison, the flat panel televisions’ (LCD and plasma) 100-150 per cent a year growth of the past few years is expected to trip a bit because consumers are expected to postpone upgrading from traditional CRT televisions due to absence of financing or uncertainty of earnings.
The same holds true for high-end frost-free refrigerators, fully automatic washing machines and feature-rich airconditioners. Direct cool refrigerators, semi-automatic washing machines and basic airconditioners are expected to be the flavour for 2009, unless the producers can bring down the prices of the new-technology products dramatically.
At such a time, Sony says it is confident of holding prices and even upgrading its niche market. “Our target audience continues to be the top end of the customer pyramid and their purchases are less likely to be affected by economic downturn or lack of consumer finance,” says Masaru Tamagawa, Sony India’s managing director.
However, even Sony has not been able to resist going after the entry-level segment among premium products, apparently because LG has not defended it well. Though it has exited the CRT televisions market in 2008, it has introduced T-series LCD televisions that are priced below LG and on a par with Samsung’s entry-level LCDs. “I’m happy that Sony is trying to fight us, because it will raise us in the public esteem while bringing them lower,” says Tiwari.
Another challenge that Samsung and LG face, the latter to a lesser degree, is that the indebted urban consumers may not buy much in 2009, and the battle for sales may shift to the small cities and rural areas. According to Videocon’s Dhoot, because of their pursuit of the upgrading consumers, the Koreans will struggle in rural areas where hardy, functional products will rule.
“All bets are on rural markets now where the usage of appliances is still low,” says George Menezes, Godrej Appliances’ chief operating officer. “We’ve observed that surprisingly the tier-II cities have been opening up to products like LCDs,” he adds.
In this scenario, it is back to basics for both LG and Samsung. LG generated one-third of its revenues in 2008 from semi-urban and rural markets, thanks to its willingness to continue with low-end products even as it tried to move up the value chain. It still sells more than 50,000 curved screen televisions every month in rural India where consumers are unable to afford an LCD screen. Moreover, it costs little in marketing expense to LG. “This year, we’ll strengthen our low-end product range with rural consumers in mind, since demand is now coming mainly from rural areas,” says Shin.
In 2009, he expects rural sales to contribute up to 45 per cent of the company’s targeted Rs 12,500-crore turnover. He expects stiff competition from Godrej in direct cooling refrigerators and from Videocon in semi-automatic washing machines.
Samsung, on the other hand, is going to use its increased reach in the smaller cities and towns to take advantage of the shifting market. However, it would rely heavily on its familiar plank of technological innovation and aesthetics to woo its traditional constituency of urban consumers. “Today, the customer is internet savvy and travels abroad. we have to provide him the product for which he is willing to pay. If we do not, we lose our market for that product or sub-category,” says Zutshi.
The new president and managing director at Samsung India, Jung Soo Shin, has come with a mandate that is consistent with his predecessors’ legacy of pursuit of market leadership albeit it is tempered with the familiar proclivity towards brand esteem. “We will be looking at leadership in the Indian market not only in terms of market share but also technology leadership,” he says.
This may develop into an absorbing Shin versus Shin show in the coming months, as the two companies, as well as other rivals, will be unveiling their 2009-10 product lines in late March and early April. Besides recovering from the mistakes of the past couple of years, both the Shins will have to deliver at least double-digit growth and decent profits to the mother companies back home that have been rocked by more than half a billion dollar losses in the December quarter following poor sales around the world.
The competition is revelling in schadenfreude. “India is crucial to LG and Samsung, especially as the Korean market is in the dumps,” says Videocon’s Dhoot. LG’s Shin will be under greater pressure since he inherited a formidable market leading company and his genteel strategy will be slow to deliver results.
But, LG’s Tiwari issues a warning to the rivals: “We’ve put away our guns, but we’ve not forgotten how to shoot.”
With inputs from Noemie Bisserbe
feroz dot ahmed at abp dot in
(Businessworld Issue Dated 10-16 March 2009)