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These Days, Goldstar Is Burning Bright


International Business

THESE DAYS, GOLDSTAR IS BURNING BRIGHT

It was only five years ago that Goldstar Co. was in deep trouble. The largest South Korean maker of electrical appliances and consumer electronics had seen its market share slip at home and overseas, as product quality plummeted. Losses piled up, margins fell, and costs rose. "If we continue like this, we'll go bankrupt," wrote an impatient worker in the company's bulletin.

Today, the company is healthy and vibrant. With improved operating efficiency, Goldstar is selling more in the rapidly growing Korean market while taking advantage of the strong yen to undercut Japanese competitors internationally. It has regained its No.1 position in Korea for color TVs, refrigerators, and washing machines. Globally, Goldstar has emerged as a powerful challenger in the fields of semiconductors and liquid-crystal displays. And it has new alliances with such companies as Zenith Electronics and GE Appliances that will give it a boost in the U.S. and Europe.

AUTOCRATS. The central figure in this transformation is Lee Hun-Jo, 62, who was appointed chief executive in February, 1989. The turnaround is typical of the metamorphosis many Korean companies are attempting. They are grafting more Western management techniques onto sometimes rigid Confucian-style hierarchies. And above all, they are attempting to move up the ladder from labor-intensive industries to battle the industrialized world's best technology companies. "We want to compete upward toward heaven," jokes Lee. "To compete downward is hell."

To do that, Goldstar was forced to shift its management from founding-family autocrats to professionals such as Lee, a 27-year veteran of the Lucky Goldstar group, the larger chaebol to which Goldstar belongs. Lee won near-complete control in 1991 when Chairman Koo Cha-Kyung, son of the group's founder, made a guarantee of autonomy in writing and handed it to Lee before hundreds of employees. Under the arrangement, Lee reports to Koo only twice a year on the company's performance. "I'm free to run the company the way I want," he says.

Lee has accomplished his transformation of Goldstar--whose annual sales are expected to reach $6 billion this year--in part thanks to recommendations made by McKinsey & Co. But Lee, who speaks both English and Japanese, is also benchmarking his company against the likes of General Electric Co. and Motorola Inc. to learn about greater flexibility and customer orientation. All these changes have helped improve the company's quality record in Japan and the U.S., where a poor image has hurt its sales push in consumer electronics.

To challenge Goldstar's strictly hierarchical culture, Lee sometimes resorts to almost missionary-like zeal. "You have to transform human beings," he says. "If you can't change your people, you can't change your organization. If you can't do that, you can't reach your goal." Lee's desk looks like a school librarian's--piled with books in Japanese and English, including Tom Peters' Liberation Management.

SWITCHING BRANDS. Reflecting his thirst for change, Lee has broken with the tradition of conservative neckties and wears more brightly colored ones. He also refuses to sit in a designated seat of honor at meetings, just to throw managers off balance. Typically, he declines to visit factories or set production goals, forcing others to make the

decisions.

Goldstar under Lee has come a long way since the summer of 1989. Disputes with labor unions were spreading in all four of its Korean plants, inflicting colossal damage. The company lost more than $600 million in production, and quality deteriorated. Longtime customers both at home and overseas switched to other brands. Compounding the company's problems were the appreciation of Korea's currency, the won, and a doubling of wages within three years.

Rather than taking union leaders on as antagonists, Lee sought to close the communication gap by revealing as much financial information about the company as he could. He gave union leaders the unprecedented right to visit him whenever they wished. Even rivals acknowledge how well Lee managed relations with the labor unions. "What is remarkable is that Lee, who rose to the top under the traditional top-down, owner-driven management, was able to wipe out whole layers of management between himself and the factory workers," says one executive at Samsung Electronics Co.

Having won workers' confidence, Lee was able to carry out his restructuring. With McKinsey's help, he reorganized Goldstar in late 1992 into nine strategic business units that include 29 operational groups. Each of these smaller divisions has a multidisciplinary team of designers, engineers, factory workers, and marketing people. The idea is to decentralize management as far down as possible, encouraging line managers, workers, and salespeople to open up the lines of communication among themselves.

At the same time, Lee started to reduce costs by simplifying production. The average assembly-line length in a microwave-oven plant, for example, was reduced from 200 meters to 65. Overall, output per employee nearly doubled in four years. Even bigger savings were made in parts-inventory turnover after the company introduced the just-in-time supply system. Overall, Lee was able to maintain labor peace while cutting the number of factory workers by 30%.

Another challenge was to shake up the product-development process. In the past, in a bid to catch up with the Japanese, Goldstar concentrated on bringing in a foreign product and reverse-engineering it. Although it allowed for some technology gains, it also kept the company permanently behind the cutting edge.

SLATS OF WOOD. So Lee took what was seen as a radical approach: He let the engineers out of the laboratories and into the market to see for themselves what customers wanted. That resulted in a refrigerator that can keep Korea's national dish--kimchi, fermented pickled cabbage or radishes--fresh and odorless for a long time. The fridge became an instant hit--just like a new vacuum cleaner for the wooden floors of Korean houses. Most Western-made cleaners can't get the dirt up from between the slats of wood. These products helped Goldstar regain a No.1 position in the domestic market, which it had lost to Samsung in the late 1980s.

Now that Goldstar has regained its lead at home, it is sharpening its focus overseas. Goldstar will pursue a dual strategy: shifting as much production as possible of low-end and midrange products to countries such as China and Vietnam, while forming strategic alliances with the world's best technology companies.

Goldstar now operates 14 overseas plants, including three new joint ventures in China. The company plans to increase the share of overseas production from the current 10% of sales to about 25% by 1997, a level comparable to that of Japanese companies. Goldstar hopes to invest $200 million in China by 1995 to assemble liquid-crystal display devices, VCRs, and electronic components.

In North America, the company has made strides both in driving down manufacturing costs and in improving quality--by shifting TV assembly from Huntsville, Ala., to Mexicali, Mexico, near San Diego. The combination 13-inch TV and VCR made there, called a TVCR, is one of the company's hottest-selling items in the U.S., where it retails for about $329. Another new product winning good reviews is a VH8 playback deck, which allows fans of 8mm video to edit and transfer their home movies to a VHS format.

Overall, the company's U.S. consumer-electronic sales of about $1 billion in 1993 are growing at a torrid 17% clip this year, says Jeffrey P. Mullarkey, vice-president for marketing at Goldstar U.S. Inc. in Englewood Cliffs, N.J. Lee's reforms back home have had a "cascading effect" by persuading Goldstar factories in Korea and elsewhere in Asia to work more closely with U.S. design and sales units, says Mullarkey.

FINICKY CONSUMERS. In high-technology fields, the company is relying on new alliances to increase market share. In 1991, it took 5% equity in Zenith Electronics Corp., creating a technology-development partnership. Suh Yoon-Won, general manager for Goldstar's alliance coordination team, says the companies are developing high-definition TV and flat tension mask picture tubes, engaging in a two-way flow of parts and technology.

Similarly, Goldstar has invested $10 million in 3DO to work on the next generation of game hardware, and it's working with Oracle Corp. to develop video-on-demand set-top boxes. Goldstar is also tied up with bigger U.S. companies: It's producing and marketing white goods with GE Appliances and developing new operating software with IBM. In all these alliances, Lee says Goldstar is trying to move beyond being merely a source of cheap production to becoming a full-fledged technology partner.

Goldstar is making progress even in Japan, which is especially gratifying. The yen's strength is widening the price advantage that Goldstar's products enjoy over Japanese products, even those assembled at the overseas affiliates of Japanese companies in Southeast Asia. Japanese manufacturers also have been experiencing quality problems at those plants, so Goldstar looks good by comparison, even in the eyes of finicky Japanese consumers. In what appears to be a big breakthrough, Sony Corp. and Hitachi Ltd. have recently decided to purchase color televisions and VCRs from Goldstar for sale in Japan.

Of course, Goldstar still faces big challenges. The biggest single risk is its effort to develop thin-film transistor (TFT) liquid-crystal displays, the next generation of the displays used in laptop computers and many electronic devices. The company plans to spend $620 million to build a plant in Korea for making these 10-inch color LCDs. By 1997, the company says, its output will reach 1 million units a year, making Goldstar a player in a market now 90% dominated by Sharp Corp. and other Japanese makers. Goldstar is entering this high-risk venture for the same reason that Sharp is: to compensate for the sluggish growth in consumer electronics.

Noboru Kubokawa, LCD consultant for Nomura Research Institute, thinks chances are good that Goldstar can succeed in TFT. The obvious concern is whether there will be sufficient demand for all the capacity coming on line. Several Japanese companies, including NEC, are ramping up.

AGAINST HEAVY ODDS. Goldstar has one important advantage: The Korean government is behind its push into thin-film displays. Although a majority of the funding would come from its more lucrative white goods, the company can count on financial support from the government, which considers the new technology a national priority. "They are just as capable of mastering this as anyone else," says Joseph Osha of Baring Securities (Japan) Ltd. "It's a question of whether they can get the yields up."

While its LCD effort hasn't yet paid off, Goldstar has succeeded against heavy odds in semiconductors. Goldstar Electron Co., of which Goldstar owns 62%, is the world's 10th-largest manufacturer of dynamic random-access memory chips. Goldstar joined hands with Japan's Hitachi to develop and market 1- and 4-megabit DRAM chips. Today, the company has a 5% share in the world memory-chip market and supplies $23 million worth of chips to Hitachi every month. Having completed the greater part of its spending for 4-megabyte DRAM chips, the semiconductor company expects net profits to nearly double in the next two years, boosting Goldstar's earnings as well.

It's all a far cry from the dark days of 1989. Although Goldstar hasn't established itself as the equal of Sony or Motorola, the company has made enormous strides. And even if Lee achieves only a fraction of his global aspirations, it's clear that Goldstar will be competing upward toward heaven for years to come.Laxmi Nakarmi in Seoul, with bureau reports


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