New venture outsourcing blog

This week, we will look at why LG has been so successful in India. While a blog is too small a place to discuss the details, I will try to highlight some of the important reasons behind their success. When LG entered India in the middle of 1990s, few people in India had heard of it. Leading Japanese brands like Sony, Sanyo and Panasonic were much better known and respected. Some of them have had a market presence in the television market for some time. However, over the next ten years, LG became the market leader in almost all major appliance categories, ahead of even local brands at the low end of the market.

While there have been major factors at work, the most important one has been PG’s approach towards the Indian market. They restrained from transplanting strategies that had worked well in other markets. They understood the peculiarity of the market-each part of India is a different market and consumers are extremely value conscious meaning they look for not just the cheapest but the best that fits the budget. Also, a lack of established distribution channel means the manufacturers have to rely on third party distribution, especially in tier-2 cities and beyond. LG has done rather well on all counts- it established a local sourcing base, even before the volumes could justify one, to cut down the costs. It used third party distribution to penetrate smaller cities and gain scale. LG also priced the entry level products aggressively to compete with local players. It created new products for the market- like an entry level TV to capture the low end of the market and a more refined, flat screen 21” model used as upgrade bait. The model was priced about 10% higher than the entry level model and has been surprisingly successful. Of course, it had the traditional, premium product retailing at the higher end. The volumes game allowed LG to achieve the manufacturing and distribution scale that enabled it to sell premium products with lower overheads as the costs were spread over a larger base. The company also tied up with aggressive local and foreign finance companies for financing consumer purchases, an area so far overlooked by major players. LG also did something unusual in its market entry strategy- it avoided getting into joint ventures (JV) with local companies. For a long time, management gurus and their ilk have championed the cause of joint ventures for entering new markets. However, the ground realities are quite different- most JVs have been utterly unsuccessful in India (more on this in a later). As an independent entity, LG India was not constrained by the limitations and interests of the local partner. The freedom allowed LG to invest freely and expand the product lines as it saw fit. Many other companies were unable to invest or bring in new products due to their partners limitations.

The result – LG had sales exceeding $2.5 billion in 2005 and expects to increase it to $10 billion by 2010. There is a lesson in this for everyone planning to sell to Indian consumers. However, LG’s situation was unique. It was a fairly large company and could afford to invest before seeing real results. It could also keep prices down due to economies of scale. But what if LG had been a small player? Had this strategy still worked? It’s doubtful. For starters, if you are a small player, you cannot hope to achieve scale, and therefore compete effectively at the low end of the market. But then, you probably don’t need to. Since LG was large, it needed to have a large business for it to make any sense. But for a small company, say $10m in revenue, even a $2m per year market will be attractive. It means that if your product sells for $100, you need to sell about 20,000 in a year to get to $2m. Is that doable without investing lots of money? Absolutely! We will see how in the next post.

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