LG Will Clean Up, With or Without GE

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In contrast, GE's appliances division is the biggest provider of refrigerators, ovens, and dishwashers for newly built U.S. homes.

Price Considerations

Nevertheless, many analysts are skeptical LG executives will be getting their hands on GE's appliances business. "GE's unit would be a great asset for LG only at a right price, but the price tags widely talked about now are too high for LG," says electronics analyst Kim Ik Sang at brokerage CJ Investment & Securities. Several U.S. analysts have estimated the GE business at between $4 billion to $8 billion. "I think LG will probably be interested at a price of at around or below $3 billion," figures Kim.

LG would be prepared to walk away from a deal, according to Kim and other Korea-based industry watchers, because it has already laid the basis for organic growth. They point out that the bulk of future growth in sales will likely come in emerging markets where LG produces some 70% of its appliances. Consider, for instance, India. There LG hopes to hit revenues of $3.8 billion in 2010 (the figure includes sales from TVs and handsets as well as appliances). The Korean company already enjoys No. 1 market share in India for refrigerators, washing machines and air conditioners—each accounting for a quarter of the country's sales.

Success in the more mature U.S. market would, of course, be harder to achieve on its own. Still, in the U.S., LG has made remarkable progress in the past four years with its strategic focus on premium segments. The Korean maker has targeted consumers willing to pay a few hundred dollars extra for snazzy designs and high performance (BusinessWeek, 10/30/06). LG's sleek washing machines, for instance, last year commanded a 22.8% share of the market for more expensive front-loading washers priced at up to $2,500. That's up from only 6% three years earlier, according to the Stevenson Co., a researcher specializing in consumer durables.

One top LG seller is the Tromm, an energy- and water-saving washer equipped with a "refresh" function that uses steam to remove odors and wrinkles from clothes. To appeal to design-conscious consumers, the machine comes in such colors as titanium, blue, and what LG calls "wild cherry red." LG's Whisen air conditioners, meanwhile, are thin enough to hang on the wall and double as picture frames. LG's overall U.S. appliances sales reached $2.88 billion last year, almost tripling 2004's total.

Seeking More Sales to Businesses

A weakness of LG's appliances unit is its poor presence in the lucrative sector of air conditioning systems for business users. LG's Nam has admitted that his company must find a way to reduce its reliance on consumers for the air conditioner business. "GE can certainly improve LG's air conditioning systems business but a better and cheaper deal would be a purchase of a smaller company specializing in that segment," says Jason Kang at Daewoo Securities in Seoul.

One area of strength for LG is its relatively high margin in the cut-throat appliances industry. Its operating profit margin of 6.1% last year was slightly higher than that of Whirlpool (just below 6%) and Electrolux (below 5%). Both Kang and CJ Investment's Kim expect for this year a similar profit margin and a sales increase of around 10% from LG's appliances business, which along with the handset unit are the company's main money spinners. "Even if LG decides not to buy the GE unit, it will be a major force in the industry in the foreseeable future," says fund manager Min at Tempis.

Moon is BusinessWeek's Seoul bureau chief.