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JANUARY 13, 2005
Korea's LG: The Next Samsung? [Page 2 of 3]
ENOUGH CASH? Meanwhile, the group's chemical unit, Lucky, was expanding into plastics, cosmetics, batteries, and more, and in 1995 the chaebol changed the group's official name to LG. Until perhaps two years ago, if consumers in the U.S. or Europe had ever even heard of LG, they would typically associate it with low-quality goods. 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. 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.
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