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LG Electronic Company
All leading companies in the world have started small but capitalized on their strengths to become world leaders. Let us look t the strengths of LG. Today LG is one of the leading names among the Korean companies in the world. It is known to be a major player in the consumer durables industry, but little of it is known besides that. This is an attempt to view it as a corporate entity.
LG is a relatively recent company having started in 1947 as Korea's first chemical company. This then became the first home appliance company in 1958. Today it is a conglomerate of 49 subsidiaries out of which 20 are listed on the Korea Stock Exchange or KOSDAQ. These 49 units totally have 300 subsidiaries and over 140,000 employees worldwide. The total turnover for the group in 2001 showed a turnover of KRW 700 trillion. The company has four groups called as Chemicals and Energy, Electronics and Telecommunications, Finance and Services. In view of the troubles in the economy in 1998, LG undertook the first phase of restructuring from 1998 to 1999. This achieved a better financial structure and collected $6.5 billion in foreign investment. This is the largest investment collected by any Korean company.
The next phase was in 2000 and was a process of consolidation selling non-core companies and disposing of non-core units in the group companies, which exist today. The third phase is continuing from 2001 and is to reorganize the entire management structure of the LG group. At the end of this period it is expected that LG will become the holding company for the group. All the other companies will be under the control of the holding company, and cross holdings will be eliminated. This is expected to enable the individual business units to maximize their profits without concern for the related companies. The first step was taken in 2001 with the division of LG Chemical into LGCI (the holding company), LG Chem and LG Household and Health Care. The operations were to be controlled by the later two companies, whereas the investments were to be made by LGCI. In April 2002, LG Electronics was similarly broken up into LGEI (the holding company) and LG Electronics, the operating company. Next, LGEI and LGCI will be merged to form the holding company. (www.lg.co.kr/english/about/overview)
These had been the two main operating areas for LG.
Let us now try to look at some of the non-core companies of the LG group and try to find out what they are doing. The first company we have considered is LG Investment and Securities. This has 107 branches with 2565 employees and three overseas branches in Hong Kong, New York and London and two other offices in Tokyo and Shanghai. The objective of this company is fundraising for the group. It is of course supposed to look after the interests of the investors along with the interest for the group. This is a listed company with a capital of $638 million and sales of $759 million. The figures are for 2001. The purpose of the company is clear, but the efficiency of the company is not so clear. It seems that the sales figure refers to the commission earned from the raising of the funds. (www.lg.co.kr/english/company) The second company is called LG Investment Trust Management Company. This was started in 1988 as Lucky Investment Advisory Co. this has 62 employees and a sales $19 million and capital of $23 million. This is supposed to help certain foreign clients meet their investment return goals. It does not seem to have many offices. The figures are again for 2001. One is not very clear what is going to be the future state of this company. (www.lg.co.kr/english/company/chemical/jsp?=A4&coid=181)Then there is the Bumin Mutual savings Bank. This has a turnover of #39 million and capital of $13 million. This seems to have started off in 1969 and has been viewed as LGs efforts to improve the economy of Pusan. This has apparently upgraded to a Unit bank from a local bank. The role of this operation in the future of LG is not clear to one. (www.lg.co.kr/english/company/chemical/index.jsp?code=A4&coid=223)
Now let us look at the profitability of LG. The figures that we have for the company are for the first half of 2000, ending on august 7th, 2000. This is about three years old now. As per the audited accounts, LG Electronics had sales of 6.9 trillion won and sales profits of 572 billion won. (KRW (1,114.80): = U.S.$1.00) One is at liberty to make the conversion directly. Roughly calculated, the sales are about $6 billion and the profits are about $500 million. The increase over one year was 34%, and exports were 69% of the sales and domestic sales were about 31%. The current profits were a little higher at 623 billion won. The profits had increased to five times to what they were in the previous year. The profitability was calculated to be roughly 9%. The reasons for profit were explained as "LGE's profit increase is mainly due to the significant increase in sales of high-value-added products. Its completely flat television (Flatron) sales and DVD-ROM sales increased by 522% and 1,040%, respectively compared to last year, boosting high-value-added product sales by 100%." (www.lge.be/be/nieuws/globaal).The company also claimed that it had got equity gains of 239 billion won from its exports to China and India and due to the tie up with Phillips for LCDs. Due to this; the company was able to payback 80 billion won from a total debt of 3.2 trillion won. This is the return of roughly 2.5%, or it indicates rather long period of requirement of the loan - roughly 20 years on a diminishing balance method. However, the promissory note rating was boosted to AA- with this achievement. The company expected to continue on the same profitable path.
Now let us look at the competitive situation. The biggest unit in Korea is Hyundai, also established in 1947. They have a turnover of $80.6 billion with assets of $63 billion and debts of $51.3 billion. They are into construction, automobiles, shipbuilding, industrial plants, semiconductors, telecommunications, aerospace and shipping. They plan to grow further in capital intensive industries requiring a high technology, like aerospace. They also plan to set up a steel plant. They have increased their financial business. The next on the list is Samsung with turnover of $71 billion and a net profit of $234 million. Their assets are $60 billion and debts are $44 billion. (Plaskitt, 2003) They manufacture mainly electronics parts, display devices, and are into construction, petrochemical products, shipbuilding, automobiles and semiconductors. They are planning to concentrate on the domestic automobile market and the international semiconductor market. They were established in 1938. LG is third on the list with turnover of $55.3billion, profits of $426 million, and assets of $44 billion and debts of $34 billion. They were planning to shed loss making units, expand overseas and concentrate on capital and technology oriented industries. Among comparable Korean companies, they had the lowest debt and the highest profits. (Asiaweek, October 10, 1997)
The drop in value of the won against the dollar in 1998 had proved to be the opportunity for LG. They started exporting to all countries in the world for home appliances like China to Chile and Saudi Arabia to Sweden. As we have seen, the foreign sales account for roughly 70% of LG appliances revenues. During the current year the sales are expected to be $6.2 billion in the current year against a sale of $2.7 billion in 1998. This is the exports we are talking about. The division now contributes 60% of LG Electronics' profits and 35% of sales, compared with 30% and 25% before the meltdown. LG has now become the world's largest, most profitable home air-conditioner maker, and the sixth-largest manufacturer of white goods. The unit was not known outside Korea prior to mid 1990s. The changes had taken place in 1995 at the LG factory for air conditioners and washing machines. They had adopted the "Six Sigma" techniques to tear down existing designs and build fresh designs. This reduced costs by one third in two years and the productivity jumped up by 50%. Quality control was improved to reduce defects by one third in three years. In short it became a good operation. Till now the products are for the middle to the low end of the market. New models of washing machines like the Tromm are ready. This will retail at $1,250 and is quieter and more efficient. The Whisen air conditioners are thin enough to hang on walls. The company wants to become one of the world's top three appliance makers. The Company with the help of its unit in the United States is already into the business of selling South Korean-made LCD TV sets in North America. (Going Global" March/April 2003) In view of the increase in the value of won, they are planning…[continue]
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