Korea's LG: The Next Samsung?

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JANUARY 13, 2005 ? Editions: N. America | Europe | Asia | Edition Preference







NEWS ANALYSIS

Korea's LG: The Next Samsung?
Bested by its giant rival after the Asian economic crisis, LG is fighting a fierce battle to become a respected global electronics brand


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It was hard to miss the ambitions of LG Electronics at the giant Consumer Electronics Show in Las Vegas in early January. LG's happy-face logo and pictures of its phones were plastered on banners running almost half a kilometer in any direction from the convention center just off the Strip. Inside the hall, 42-inch LG plasma TVs displayed maps of the sprawling exhibit area. Advertisement

At its 1,700-square-meter booth, the company showed off a plethora of new products, ranging from a $180 MP3 player the size of a matchbook to a 71-inch plasma TV (price: $77,000) meant to outshine anything offered by Sony (SNE ), Samsung, or Panasonic (MC ). "You shouldn't be second-tier forever," says LG Chief Executive Kim Ssang Su. "We've got to be a top-notch player."

CLIMBING MT. GUMSU. Sound familiar? It should. That's the kind of talk the industry has been hearing for years from LG's crosstown rival, Samsung Electronics. Under Kim, who took over in October, 2003, LG is aiming for the major leagues. A 60-year-old LG lifer, Kim is determined to turn the company into a digital trendsetter -- and by 2010, into one of the world's top three home electronics players. "We must be a great company with great people," he declares.

Kim's given name, Ssang Su, translates literally as "doubly outstanding." And that's what this tough Korean boss expects all his lieutenants to be. He has ordered each of LG's three divisions -- mobile phones, digital displays, and appliances -- to improve productivity by 30%. And each unit is required to draw up both annual and three-year battle plans for attacking the world of digital electronics.

To drive home the message, a year ago he summoned LG's top managers from around the world -- 256 in all -- to a golf and tennis resort near the central Korean city of Jaechon for a two-day "bonding workshop." There, they all raised their right hands and pledged dedication to the cause of making LG a global brand. Then the execs gulped down shots of soju, the potent Korean spirit, and shouted "Global Top Three" in unison. The next day the entire contingent set off to climb the 1,016-meter Mt. Gumsu.

OBSESSED WITH SAMSUNG. It's like Korea in the old days, when the chaebol laid siege to one global industry after another. Except many of those forays were exercises in profitless expansion, while LG is making money -- at least at this stage of the game. Sales grew an estimated 21%, to $23.6 billion, in 2004, with net profits expected to more than double, to $1.5 billion. The company is the world's top maker of household air conditioners and the No.3 plasma-TV maker, while its joint venture LG.Philips LCD is the world's largest maker of liquid-crystal displays for TVs.

A latecomer to mobile phones, LG boosted it sales of handsets from 6.9 million in 2000 to 44 million last year, and it's the top supplier to American carrier Verizon Wireless. In September, LG overtook Japanese-Swedish venture Sony Ericsson Mobile Communications, claiming 7% of the global handset market, according to researcher Strategy Analytics. It's now at No.5, after Nokia (NOK ), Motorola (MOT ), Samsung, and Siemens (SI ). Consumers love its whimsical designs, such as the LG-350, with its seven-color blinking lights to signal incoming calls. Investors like LG's shares, which have jumped 37% in the past five months.

Despite all the success, LG remains obsessed with Samsung. Until the mid-1990s the two companies were neck-and-neck in the race to become Korea's top electronics producer. Both were hit hard by the Asian economic crisis in 1997, but Samsung began a painful restructuring and expensive brand-building push that catapulted it into the ranks of global leaders.

LG, on the other hand, spun its wheels, making an ill-timed bet on telecommunications -- everything from wired and wireless services to switching systems -- just when those businesses hit the skids. LG's botched strategy touched off an investor panic in 2000. Its shares plunged by 75%.

THE SPEED FACTOR. Today that over-the-top telecom strategy is history -- and LG execs admit that they have a lot to learn from Samsung. CEO Kim speaks highly of the way Samsung pushed its employees "to the brink of the cliff" by creating a sense of crisis to speed the pace of change. Chief Financial Officer Kwon Young Soo marvels at Samsung's handset design skills: "Our quality is almost the same, but design-wise, Samsung is better," he says. And Park Mun Hwa, who heads LG's handset business, says he uses Samsung's strategy as a template for his own. "Samsung is our teacher," he says.

LG isn't a pure copycat of Samsung, though. For starters, Samsung has a dynamic chip unit, which at the high end of the business cycle can provide a huge boost to its profits. LG spun off its chip division five years ago. Still, Kim sees a way to outmaneuver Samsung in two ways. One is speed: LG beat Samsung in rolling out camera phones and MP3 phones in the U.S.

The other tactic is product differentiation. The company sells its high-end goods under the LG name, and lower-priced electronics as Zenith, a U.S. brand it bought in 1996. (A third brand, GoldStar, is being phased out.) This strategy allows LG to expand market share fast without tainting the LG brand.

SHEDDING LUCKY-GOLDSTAR. Although LG isn't anywhere as well-known as Samsung, it's being taken far more seriously than it used to be by carriers and consumers alike. Last year it sold 3 million pricey third-generation cell phones to Hutchison Whampoa (HUWHY ), making it the largest supplier of 3G phones to the Hong Kong-based company, which has networks in eight Asian and European countries.

LG, which doubled its U.S. handset shipments to 20 million in 2004, expects its American phone sales to rise 70% more this year. Last year it sold 11 million handsets to Verizon Wireless and 6 million to Cingular Wireless and its merger partner, AT&T Wireless. And this year, Cingular selected LG as the featured vendor for a phone it's promoting on the American Idol TV show. LG "has developed an attractive portfolio of handsets with respectable quality," says Mike Cost, who oversees Cingular's handset purchases.

LG has come a long way from the days when it was known as Lucky-GoldStar -- a name LG would just as soon forget. Ask executives what LG stands for and they'll tell you "Life's Good," the slogan marketers dreamed up a year ago to retrofit the company's name. Founded in 1958 as a maker of fans, GoldStar Co. became Korea's first electronics company a year later when it started manufacturing radios. The outfit eventually made everything from refrigerators to elevators and semiconductors


Today, LG is aiming high: It wants to seize the No.3 spot in handsets in two years. That's a tall order, given Samsung's strength and the rebound Motorola is enjoying. Besides, the 44 million handsets LG sold in 2004 was about half of No.3 Samsung's output. Yet the company expects its phone sales to grow 50% this year and overtake No.4 Siemens as it seals more deals with big carriers and starts exporting more phones using the GSM standard -- a technology it embraced in earnest just last year. Within five years, LG wants half of its sales to come from handsets, up from 28% in 2004.

Is all of this the kind of misguided dream that has been the downfall of so many Korean chaebol? It's true that life isn't entirely good in the land of LG. Price erosion is so rapid in displays and televisions that the LCD business, which earned half of LG's profits last year, may contribute a much smaller share of this year's income.

While some analysts expect profits in handsets and appliances to grow fast enough to make up for the shortfall, the flat-panel business is highly cyclical. Unless prices recover in the second half of this year, LG may not have enough cash to match the investment needed to stay ahead of rivals.

WHITE-GOODS WARRIOR. In handsets, LG is counting on its early strength in 3G phones to help it capture a growing share of sales, but Japanese manufacturers are targeting the same market and will be formidable competitors. And China's electronics makers are nipping at everyone's heels. "Unless LG keeps investing in new technologies, it could be caught by the Chinese," says Park Kyung Min, chief executive at Hangaram Investment Management.

[sunystory@hotmail.com]

But most in the industry are taking LG seriously, and its success with the likes of Verizon, Cingular, and Hutchison has underscored its potential. "LG has done a credible job in establishing itself on the global market in the past couple of years," says Chang Il Hyung, senior vice-president at Samsung Electronics. "I think it is more than plausible" that LG can make its way into the top ranks of global brands, says Daniel Kim, Merrill Lynch & Co.'s Seoul-based electronics analyst.

The respect LG is getting these days is largely due to CEO Kim. The son of a poor farmer, he started out as an LG engineer in a factory making refrigerators. He spent 27 years climbing the corporate ladder at the appliance division before being appointed the unit's chief in 1996. Under his leadership, the white-goods group turned out double-digit profits, confounding skeptics who thought LG could never compete with low-cost Chinese producers.

MAKING LG TOUGH. Key to his strategy has been the shift of about 35% of production to China while focusing on higher-end appliances at Korean factories. The division overtook Samsung's appliance unit in 2000 and in 2004 jumped into the No.3 position globally (after Whirlpool and Electrolux), while churning out the cash LG needed to invest in mobile phones, digital TVs, and flat-panel screens.

Kim is a tough leader who demands that his employees share his overarching ambition. The first thing he did when he was appointed CEO was put an end to LG's easygoing culture, which did little to encourage managers to exceed targets. "I hate to hear people say LG is a comfortable place to work," Kim says. "I want it to be a tough place."

Kim moved his executive staff meetings up an hour, to 7 a.m. from 8 a.m., and set extremely high targets for execs and lower-level employees alike. And he put the screws to suppliers to lower costs and streamlined supply chains to cut inventories by an average of 30%. TV inventories, for example, have dropped to three days, from five days in the past year.

HANDSET ASSAULT. Then Kim launched so-called TDR (tear-down-and-redesign) teams. These groups are mandated to ferret out ways to boost productivity across LG's divisions. Kim borrowed the TDR concept from his former appliance unit, where in the mid-1990s he used the teams to slash costs by a third in just two years. Productivity soared 50% after he shortened assembly lines and streamlined product development, and defects fell by a third in three years as a result of tighter quality control. This year, Kim wants at least 40% of all white-collar employees to work on TDR teams, up from under 30% in 2004.

He's also boosting research and development and marketing. Although LG's production quality is comparable to better-known Japanese rivals and Samsung, it hasn't really broken into the big time in the minds of most consumers. To raise its profile, LG needs to strengthen its presence at the high end through increased R&D and improved marketing, analysts say.

LG earmarked $1.73 billion for R&D in 2005, or 6% of sales. That's up 40% from last year, but Samsung spends a full 7.5% of sales on R&D. The bulk of LG's spending will go to next-generation handsets, digital TVs, flat panels, and network products. "You need good bullets and weapons on the battlefield," Kim says.
CRITICAL RAPPORT. The vanguard of Kim's assault will be the handset division. Like Samsung, LG believes it can prosper by making mobile phones the anchor of its global brand-building campaign. Since 1999, Samsung has churned out a constant stream of well-designed, feature-packed handsets that have bolstered its image as a top-tier gizmo maker. At LG, the theory is that once consumers have an LG phone in hand, they're more likely to turn to the brand when buying a TV, video recorder, or refrigerator. "LG's brand image is significantly better among those who have used LG products," says Lee Hye Woong, vice-president for global brand management. Advertisement

But unlike Samsung, which has spent hundreds of millions of dollars annually on ads to promote its brand alone, LG is concentrating its efforts on selling phones. This year the company plans to spend $200 million to market handsets in the U.S. -- double its spending last year -- largely in conjunction with carriers that are LG customers.

LG knows the importance of working closely with phone companies. Two years ago, Verizon Wireless was looking for a partner in its launch of a multimedia messaging service. LG jumped at the chance and set up an office near Verizon's headquarters. "The most critical task was creating a good rapport with our client," says Warren Yun, senior manager in charge of LG's North American business.

SPEEDY ROLL-OUT. Those ties paid off when Verizon chose LG's $149 VX6000 camera phone to roll out the service in July, 2003. Then in January, Verizon selected LG's $200 VX8000 as the featured handset for the announcement of its new vcast service, which sends video clips to cell phones.

In the cutthroat mobile-phone business, speed is essential. And that's where LG execs believe they have an edge. To make sure Verizon's new multimedia service was a success, LG flew 50 elite engineers, marketers, and product-development specialists to five sites across the U.S. to iron out glitches that inevitably pop up when synchronizing phones with new servers and networks.

"We had noise and call cutoff problems at a Dallas test in March, and all of our hardware engineers in Korea worked day and night for four days to resolve the problem," recalls Lim Joo Eung, the chief research engineer who led a 48-person-team for the VX6000. By applying that kind of manpower, LG was able to cut the time it normally takes to roll out a new service by 25%, to nine months.

EYECATCHERS. To promote LG's image as an innovator, Kim also wants the company to offer more attention-getting products. In Las Vegas it rolled out a $15,000, 60-inch plasma TV with a built-in digital video recorder. And it showed a stand-alone digital video recorder with a 160-gigabyte hard drive that offers an electronic program guide and can connect to a PC. Last year it was the first company to introduce a mobile phone that can receive digital TV broadcasts, and it launched a refrigerator with a built-in LCD TV. And, of course, there's the gold-plated 71-incher LG pitched as the "world's biggest production plasma TV."

Unfortunately for LG, it had to add the word "production" to the description at the last minute after Samsung showed up with a working prototype of a 102-inch plasma model. Still, LG fared well: It got 16 innovation awards at the show -- more than any other company.

LG's technical prowess is supplemented by a growing team of world-class designers. In the past year, LG has increased its design team by 40%, to 500. At the design center in Kangnam, a Seoul neighborhood of galleries, nightclubs, and cafes, designers clad in jeans, turtleneck shirts, and sneakers are in the forefront of LG's pursuit of must-have products for hip young consumers. LG's L20 LCD monitor, with a sleek black frame atop a chrome-coated base, has won prestigious design awards, and the company has sold more than 20,000 of them in North America since the product's launch last April.

KOREA'S MATSUSHITA? "Increasingly, designers are seen as creators of value," says Yang Jung Min, a 28-year-old color artist who helped design a ruby-red air conditioner LG introduced in 2003. The machine, which sports a glass front panel, has been a hit, selling 40,000 units in the first year.

Can LG repeat the success of Samsung? Skeptics note that the company's projected 2004 profit of $1.5 billion pales beside Samsung's $10 billion -- though about half of Samsung's earnings came from its chip division. And LG's margins for handsets, at 7%, are less than half Samsung's -- a shortfall LG attributes to smaller production volumes and high spending on R&D. Some say LG may end up being a strong No.2 in Korea, the role Japan's Matsushita Electric Industrial -- maker of Panasonic products -- plays to Sony.

"Being Korea's Matsushita isn't such a bad place to be," says Choi Dong June, vice-president at SK Teletech, Korea's fourth-biggest handset maker. No.2? That's not the kind of talk Kim wants to hear. But whether LG ends up higher or lower in the rankings, global rivals have another fast-moving Korean player to contend with.

[Cheese Specialist]

Well, I personally think that both LG and Samsung make crap phones from what I have tried. At least with Samsung they look good. I have an LG television which is fine though.

JMO