Korean Conquest: How LG and Samsung Won Over the Indian MarketPublished: December 11, 2008 in India Knowledge@Wharton
The world is still reeling under the biggest financial crisis since the Great Depression, but it seems that someone forgot to tell LG and Samsung. Sales of the two South Korea-based conglomerates were 35% to 50% higher in India in September and October 2008, compared to the same period last year. And both are confident of meeting their targets by this year's end, which include revenue growth of around 30%.
Granted, the September-October sales figures may be higher this year for specific reasons. About 3.5 million government employees received the first installments of their delayed salary raises around that time, resulting in a sudden surge in disposable income. And the festive season in India typically sees a spike in sales of all products, especially consumer electronics and household appliances.
What is not so easily dismissed, however, is the level of success LG and Samsung have achieved in India. In just over 10 years, the Korean duo has established dominance over the Indian white goods market, edging out traditional multinational companies and Indian competitors. Between them, they account for the largest share of the $6 billion consumer durables, electronics and appliances market, with LG claiming the preferred brand position for virtually everything from televisions to microwave ovens and washing machines, while Samsung is a steady number-two or number-three player. Over the past decade, both have consistently seen double-digit growth rates and are convinced they will maintain, if not surpass, those levels in coming years as well -- an optimism that is shared by industry watchers. How did these two chaebols -- a South Korean term for family-owned conglomerates with government ties -- entrench themselves in India?
LG and Samsung's success is a function not just of what these two companies did, but also of what their competitors didn't do. The super-premium price and positioning of technologically superior Japanese brands like Sony and Panasonic made them inaccessible to most of the Indian market. On the other hand, lower-priced Indian brands offered old-generation products; they did not invest sufficiently in R&D because they were not able to launch new products quickly enough to amortize those costs.
"The other players in the consumer electronics space consider India a market for transactions, which is a short-term, unsustainable strategy," says Abraham Koshy, professor of marketing at the Indian Institute of Management, Ahmedabad. "On the other hand, LG and Samsung believe this is a market in which to do [long-term] business. Both have made a full commitment to India."
Adds Pankaj Gupta, practice head (consumer and retail) at consultancy firm Tata Strategic Management Group (TSMG): "In any customer-facing business, your product, brand and distribution decide your success. Moreover, in the durables industry, after-sales service and product innovation are also key factors. These two companies leveraged their global R&D facilities to speedily bring in new products and offered more variety at attractive prices. LG followed this approach better than Samsung, which is why it is bigger than Samsung in India."
In for the Long Haul
LG may be the leading electronics brand now, but its initial attempts to crack the Indian market were disappointments. In the late 1980s and early 1990s, when government regulations prohibited foreign companies from starting independent ventures, Lucky Goldstar (as the company was then known) twice entered the Indian market with local partners; both ventures failed. In 1997, LG finally got permission to set up its own manufacturing facilities. The company has come a long way since: Revenues in 1997 were US$33.97 million; last year, LG India earned US$2.37 billion. Samsung India has maintained a steady growth since it launched in India in 1995-96, with 2007 revenues reaching US$1.3 billion.
Early on, the two companies had very different approaches in India. LG's entry strategy was to establish its presence across the country, offering a range of affordable but feature-rich products. Margins in the consumer electronics industry are traditionally very low, and the company didn't try to push them up. Instead, it clung to the "value-plus" platform, counting on volume to bring in revenues.
Samsung, on the other hand, focused on creating a premium brand image by emphasizing the design and technology aspects of its higher-priced products and building a more affluent customer base. "Customers would buy an LG [product] for their bedrooms but pick a Sony or Samsung for their living rooms," says Gupta.
Over the past couple of years, though, there has been a reversal of roles. Now, Samsung is reaching out to the price-sensitive masses, offering affordable, customized products. Samsung India deputy managing director Ravinder Zutshi explains the new strategy: "We want market leadership not only in the premium end, but also in the large-volume categories." LG, meanwhile, is seeking to upgrade its image and product portfolio, thus moving from being a functional to an aspirational brand. "All our efforts are directed towards offering aspirational products that new-age customers can be proud of," says Moon B. Shin, managing director, LG Electronics India Ltd.
When Samsung and LG's existing approaches to the market were obviously successful, why are they changing them now? "Your initial route is based on your company's heritage. But whether you choose a product-led or brand-led strategy, you have to complete the circle," says IIMA's Koshy. Adds TSMG's Gupta, "When you want to expand the market, it is easier to reach out to a segment where you don't have a presence than to eke out more value from an existing category."
Product Innovation Is Key
Regardless of which segment of the population they target, the key to LG and Samsung's success lies in their product innovation. While the basic design of the products originates in South Korea, both companies have invested heavily in local R&D to tweak product design to suit local tastes. This year, Samsung spent US$13 million to set up a 75-member hardware R&D center at Noida (Uttar Pradesh), while LG has budgeted US$50 million for R&D and manpower in the coming 12 months. "When LG and Samsung entered the Indian market, domestic companies were investing in advertising and marketing, rather than product development. The Koreans' promise of cutting-edge technology and their hunger for R&D worked to their advantage," says Harish Bijoor, visiting professor of strategic management at Hyderabad's Indian School of Business (ISB) and founder of Harish Bijoor Consults.
Executives at the two companies agree. According to LG's Shin, "One reason LG is successful in India is that we listen carefully to our customers. We have realized that not just localization, but micro-localization, is required." Recently, LG conducted a nationwide lifestyle study "to know more about our consumers and their preferences," Shin says. "Products are designed based on those findings." He offers an example. In many Indian households, the washing machine is operated by domestic helpers who can't read instructions in English. LG's solution was to add speech technology that gives instructions in local languages. "Innovations like this help us connect with our customers and offer products that fit into their lifestyles," Shin notes.
Customization of this kind has been part of LG's India strategy for some time now. It developed Ballad, a flat-screen television with 2,000-watt speakers sold only in the subcontinent, following research that said Indians in the southwestern part of the country preferred loud, bass sounds. The company's refrigerators have smaller freezers and large vegetable compartments than models sold in other countries, based on the fact that many Indians are vegetarians and use the freezer mainly for making ice.
While the pace may only just be picking up at Samsung, product localization is nothing new for that company, either: In 2002, the company introduced a "sari" cycle in its washing machines, designed to prevent the traditional six-yard garment from getting tangled with other clothes. The focus of the current round of innovation, though, is on making mass, volume-driven products more appealing. That means including voltage stabilizers in direct-cool refrigerators (a feature otherwise found only in frost-free refrigerators) and launching semi-automatic washing machines with Samsung's proprietary anti-bacterial wash technology (earlier restricted to fully-automatic machines).
Not surprisingly, the bulk of the improvements are in televisions, the mother category in the consumer electronics market. Accordingly, Samsung has developed customer insight-based features such as channel grouping and lowering volume with a single touch. "[Our] product innovations cater to the needs of diverse consumers. We will move towards customizing even mass and volume-driven products," says Samsung's Zutshi.
Customization is just half the battle, according to electronics industry watchers. Those investments will pay off only when the sales volumes pour in -- and that won't happen unless customers are offered a complete range of products as well as easy accessibility to them.
LG realized that early on and adopted a top-down approach: The smallest villages have remote area offices (RAOs) with individual budgets and separate servicing and marketing teams. The RAOs report to central area offices in larger towns that, in turn, report to branch offices. Just over a third of the company's revenues comes from urban markets; the rest is accounted for by semi-urban towns and rural markets. More than half of all the television sets sold in India are in rural areas, while the same markets account for close to a quarter of the total demand for other white goods. LG kept that in mind when it launched Sampoorna, a made-for-rural-India range of low-priced color TVs that were priced just above black-and-white TVs of the same size. "Both these companies chose their product ranges for the growth potential they offered, even if these required huge initial market development effort," points out Koshy.
Now, Samsung is aiming to similarly broaden its presence across non-metro and semi-urban towns. Says Zutshi: "This year marked a new phase in our operations.... We are making a strong effort to reach a much wider base of consumers in tier-two and tier-three cities." Apart from increasing the number of branch sales offices and expanding its retail presence, the company is also reaching out to its customers directly. It regularly conducts road shows and live demos of its products and has begun distributing pamphlets and promotional literature in regional languages.
Aggressive advertising by both companies has helped them build brand recall and increase not just share of mind, but also share of market. Marketing experts also point out that LG and Samsung's cricket sponsorships and use of film stars as brand ambassadors are smart moves. "Cinema is always a well-hedged bet, while no marketer can afford to ignore cricket, regardless of whether the product has synergy with the sport or not," says ISB's Bijoor. Samsung has sponsored the Indian cricket team as well as individual players, and recently signed on popular actor Aamir Khan as its brand ambassador.
Having gained a foothold in the Indian electronics market, LG and Samsung are now working on firmly securing their positions through customer retention. That requires a two-pronged approach -- promoting replacements for electronics and appliances and focusing on customer satisfaction and after-sales service. Industry observers point out that the product lifecycle in consumer electronics has already plunged from two years to under one year, on average, which creates huge potential for replacement purchases. Suresh Khanna, secretary general of the Consumer Electronics and Appliances Manufacturers Association of India (CEAMA), agrees. "Earlier, all purchases were for a lifetime. Now, the lifecycle is getting shorter and companies are seizing this opportunity."
Customer service is another way of keeping existing customers engaged with the brand. "Across the industry, customer service has improved, from installation to follow-up. Of course, technology has also improved, so breakdowns are fewer. But the accent on customer satisfaction builds brand loyalty and contributes to word-of-mouth publicity for the brand," Khanna says. Both LG and Samsung have focused on providing reliable and quick customer service right from the start. Even in the mid-1990s, when Samsung had just begun its India operations, vans painted in the company's colors toured the major cities with engineers on call for service visits.
Now, apart from a website, Samsung has two captive call centers where operators field calls in six languages and route calls to any one of 900 service centers and 7,000 engineers across the country. The emphasis is on quality and speed of service, so turnaround time is under 24 hours in most cases.
LG, too, has increased its attention to customer service. Earlier this year, the company launched its "211" initiative, where it promises to call back the consumer within two hours, fix an appointment within one day of registering the call, and allocate a one-hour slot to fix the problem. The idea is to provide service at the customer's convenience, says a company spokesman. Like Samsung, LG has a call center, 8,000 engineers and 1,200 service centers across India. "After-sales service is critical in the durables industry," says Shin.
IIMA's Koshy believes customer service is vital, even if product quality is impeccable. "It is a way of establishing confidence in the brand. With customer service, you can connect with the customer not at the functional level, but at a higher, emotional level."
What is the way forward for LG and Samsung? For starters, there is the very real threat of a global recession. Koshy and CEAMA's Gupta are surprisingly optimistic. While Koshy believes India is the "growth market of the future", Gupta is positive about the prospects of consumer electronics in India. "Penetration levels are far from a saturation point and there are 55,000-70,000 villages still waiting for electrification. As infrastructure improves, I see huge potential here," he says.
New technology is also a critical issue. In an increasingly digital world, LG and Samsung's pedigree can be a huge advantage: Korean households are among the world's most demanding when it comes to high-tech, Internet-friendly gadgets; more than 94% of households have access to the Internet, compared to 82% in the U.S. That keeps Korean companies on their toes when designing new products and upgrading existing ones. Of course, much will depend on how these companies respond to new technology. TSMG's Gupta points out that both LG and Samsung were slow to pick up on the potential of new-generation mobile phones. "They woke up only after Nokia had established itself and are now playing catch-up. That's much tougher than making an entry in the initial, evolving phase."
Modern trade -- including hypermarkets, supermarkets and discount stores -- is another mixed blessing. As an opportunity for reaching out to new customer groups, modern trade is unparalleled. At the same time, modern trade tends to threaten established brands when stores launch private labels; already, says Gupta, private-label consumer electronics are gaining a significant presence in international markets. It is just a matter of time before the trend reaches India as well. The solution? "Invest in innovation so your products always offer customers something extra," says Gupta.
Others agree. "It is important to maintain the high ground. These companies should stick to the cutting edge of technology and design, offering new products and variants every six months," says Bijoor. He recommends that LG and Samsung expand their offerings, moving "from the drawing room to the kitchen and, ultimately, the bathroom" of Indian households.