LG’s going places in Indian market

And, luck has nothing to do with the way the Korean giant is striking gold, says RAHUL NEEL MANI

LG is the only company to successfully introduce and run a regional distribution model in India, claims Manikandan

It hasn’t been very long since this Korean electronics and home appliance giant came to India to sell colour TVs and other white goods. No sooner did the company enter India than it found this to be a large market for its IT products as well. LG’s experiments may have resulted in some initial snarls, but the company is now successful in terms of both market penetration and presence. Year-on-year LG is registering tremendous growth in its PC components business. How has this been possible? Not that the company didn’t face any competition when it came here, but LG has fought well to get where it has today.

LG has grown by about 73 percent in monitors this year, compared to 2001-02. The company has also recorded nearly 30 percent growth in the optical storage devices (OSD) segment in 2002-03 as compared to the last fiscal. The high growth for the company in the latter segment came from the CD-Writer sub-segment. If we take this sub-segment in isolation, we see that it grew by about 200 percent this year as compared to the corresponding period last year. Sales revenues went up by 44 percent, and the company achieved 43 percent growth in volume terms. The total sales turnover for the IT division touched Rs 199 crore, against 138 crore a year ago. The company as a whole posted a 45 percent jump in sales revenue for the same period. In the IT division OSD posted a growth of 30 percent in sales revenues, while the monitor division registered a growth of 60 percent in revenue and 73 percent in volumes.

Channels are the lifeline

This growth, according to company officials, has been possible due to a focused channel strategy. By and large, the channel too seems to have found LG business to be profitable. "Channel sales is the underlined parameter for LG to beat competition," says R Manikandan, LG’s deputy general manager for Sales & Marketing of IT products.

The company believes in stock rotation; it doesn’t believe in dumping stocks on its channel partners. "We provide stocks of LG products and simultaneously create the pull factor. Thus, the stock that the company sends to its channel partners is sold in three to four days. When we get information about a shortage of stock we feed them fresh stock. What we have observed is that at any given point of time stock held by the channel doesn’t remain there for more than a week," reveals Manikandan. Channels therefore are kept happy because their cash flow is rotated fast. As a result, there is no price undercutting. In the whole chain, the channel fraternity feels that prices are stable and do not fluctuate because of overstocking and understocking. This simply translates into a scenario where everybody involved in the channel makes money. There is no excess inventory, which means no flab on the channel’s belly.

How is it done? It’s a cyclic parameter. "You start with an increased pull. That pull is generated by launching various attractive schemes and promotional activities," explains Manikandan. All the programmes that the company carries out for sales promotion are interlinked.

The IT distribution process involves multiple tiers, unlike any other industry. In other segments like electronics and home appliances, there is a maximum of two tiers in the channel—from the vendor it goes to a dealer and finally to a customer. But in IT the product goes from the vendor to the distributor to a master reseller to a smaller reseller or a system assembler/consumer. Thus, the company feels it is essential to energise all the tiers involved in selling an LG product. "The entire hierarchy of this channel has to be incentivised," says Manikandan. For end-user pull the company suggests many bundling propositions. When all these schemes are put together, the company gets the pull factor activated for its products. This results in greater push for LG products as compared to others. To top it all, supplies are very consistent in the market because the company operates on a cash-and-carry basis, unlike other players.

To enhance the pull factor, LG has been announcing a lot of schemes from time to time. "We have a unique point-based incentive scheme for the channels on a very large scale. The way it is administered is unique to LG," says Manikandan of the scheme the company has implemented for the past one year. It has virtually forced other market players to consider similar deals.

Timely settlement is another key factor that helps LG sell more in the areas it operates in. Company officials boast of a settlement period of two months, and this actual period cannot be reduced by any means. "Data from across the country is collated and invoices are taken into account. The data entry and validation process takes this much time," says Manikandan. Based on these calculations, the dealer or channel partner is informed about the points they have scored by selling LG products. That leads to the final stage of sending them their incentives/gifts.

Manikandan claims that LG is the only company to successfully introduce and run a regional distribution model in India. "We are proud to say that this model is 100 percent successful," he beams. Regional distribution means there is no national distributor and thus no monopolistic attitude. The model, which was adopted last year, has worked to the advantage of the company. There is quicker rotation of stocks, and better penetration into B-, C-, and D-class markets. "Today we have distributors representing geographies like Dibrugarh in Assam. These distributors work directly with the company," says Manikandan. The products have also become very competitive since the company has cut many tiers and introduced value additions to fill the gap. Now LG feels the time has come to consolidate its success.

Compare this to the practices of many other IT firms in India. A credit line is established by the national distributor. People get credit for a certain period, which drives them to overstock. This results in overtrading, which gives birth to price undercutting. Ultimately there is a sharp decline in profits for the entire channel fraternity. Manikandan says that LG is proud to get out of this vicious circle—there is no overstocking, no price undercutting and no overtrading. He claims that due to this successful strategy, more and more channel partners are joining hands with LG. "We have also been reciprocating by providing them better schemes and incentives."

New products will bring new markets

LG’s new initiative is to provide value-added products around the PC to its customers. The company launched an optical mouse some time back, which has since achieved tremendous success. "LG will soon announce the launch of multimedia keyboards as part of its ongoing strategy to penetrate all spheres of the PC market," informs Manikandan. This product will be available from mid-September 2003.

LG has also launched a ‘My PC’ initiative. Though not as talked about as Samsung’s high-profile and well-known ‘Build your own PC’ scheme, the company feels that the launch was quite successful and claims the response is encouraging. B- and C-class cities were key targets for the scheme. The peripherals are being offered to the channels that cater to the assembled PC market. When it comes to the branded PC market, LG has all the strengths/core competencies to manufacture a PC. "We wanted to go a little further and add value to the product, and that’s how the PC initiative came into being," says Manikandan. But he candidly accepts that the company has still to achieve the magic numbers as far as ‘My PC’ is concerned. Last month LG launched AMD-powered PCs catering to the value segment. The company says that though the acceptance of Linux is increasing day by day, sales of PCs with Linux have not picked up very strongly; however, Manikandan refuses to share any numbers. "We ship our PCs with the Linux OS, but if the consumer wants to use any other OS, it’s his choice," he states. LG’s strategic relationship with Maxtor has also got it the desired momentum; it offers Maxtor hard disks in its PCs.

Won’t retailing kill the channels?

On one side LG says that the company is proud to be associated with the channel fraternity, which has made it a strong player in India. But on the other hand LG is planning to launch its own exclusive retail outlets. Isn’t this move contradictory? Manikandan denies this; according to him the two polices are not in any conflict with each other. "I don’t think they will ever clash. Also, it will be a long time before the retail outlets actually take off." According to him, all their retail initiatives will involve channels in one way or the other. For example, in the case of components, channels have a role to play in terms of value-addition, like assembling a PC. The channel thus stands to get more benefits, and once the strategy is in place, people will understand how it works. As of now, the three retail LG outlets in Delhi belong to its channel partners.

What’s next?

The company is believed to be toying with the idea of introducing two new products for the Indian market—the LG laptop and LG home-based PC server for the small office, home office environment. But when asked Manikandan is evasive: "It’s too early to give any information," is all he’ll say. Well, watch this space.