LG's White-Hot White Goods

The South Korean home-appliance maker is ringing up huge overseas sales

Most Koreans remember the Asian financial crisis as the toughest period since the Korean War. For Kim Ssang Soo, president of LG Electronics Inc.'s white goods business, it was a godsend. After the Korean won tumbled by a third in 1998, he seized the chance to boost exports of his washers, refrigerators, and air conditioners. "The crisis certainly was a huge stepping stone for us," Kim says.

Now, Kim is stepping all over competitors in the home-appliance industry. Overseas sales--in countries ranging from China to Chile and Saudi Arabia to Sweden--today account for 70% of LG's appliance revenues, up from 30% before the crisis. The unit expects revenues of $6.2 billion this year, more than double its 1998 sales of $2.7 billion. The division now contributes 60% of LG Electronics' profits and 35% of sales, compared with 30% and 25% before the meltdown. LG has become the world's largest and most profitable home air-conditioner maker and the sixth-largest manufacturer of white goods. That's far from its stature in the mid-1990s, when the unit was unfamiliar outside Korea and barely breaking even. LG's success is "proof that misfortune comes with an opportunity for the prepared," Kim says.

When the storm hit, Kim was indeed prepared. In 1995, as the chief of LG's main factory for air conditioners and washing machines, Kim adopted the program of improving productivity known as "Six Sigma." A key part of Kim's plan: "tear-down-and-redesign teams," which helped trim costs by one-third in just two years. Productivity jumped 50% after he shortened assembly lines and streamlined product development. By beefing up quality control, he cut defects by a third in three years. All of this helped Kim compete with the world's best appliance makers when the currency devaluation made LG's products more attractive abroad.

Kim, an LG lifer who has led its global white goods operations since 1996, now faces his toughest test. To continue his winning streak, the 57-year-old manager must intensify LG's presence in the U.S. and Europe. While LG is dominant in emerging markets, it trails local rivals in Europe. And it's little known in the U.S. despite the fact that it builds air conditioners, fridges, and microwaves for the likes of Whirlpool Corp. and General Electric Co. "There's no question that LG has become one of the most competitive appliance makers, but building products and brand images are two different animals," reckons James Kim, an electronics analyst at Salomon Smith Barney in Seoul. LG started selling air conditioners and washing machines under its own brand name this year in the U.S. To raise its profile, LG plans to boost its U.S. ad budget to $20 million in 2003, up from virtually nothing this year.

Kim's other challenge is to keep his company innovating. So far, LG has built mostly midmarket and low-end products; it needs to strengthen its presence at the high end. One hot prospect: the $1,250 Tromm washing machine, which is quieter and more efficient than traditional models. The company is also rolling out better-designed products, such as Whisen air conditioners that are thin enough to hang on a wall. "We can no longer take cues from others. We should be the one introducing products with new features," says Kang Tae Kil, LG's vice-president for strategic planning.

Kim's ultimate goal: Making LG one of the world's top three appliance makers. By 2005, he expects sales to top $8 billion, which would put LG ahead of GE, Bosch und Siemens Hausgerate, and Matsushita, and on the heels of leaders Whirlpool and Electrolux. But since 1998, the Korean won has regained 16% of its value against the dollar, meaning Kim is losing one of his primary advantages. His answer: Like everyone else, he's moving production to China--and to India, Mexico, and Vietnam. By next year, some 60% of the 11 million microwave ovens LG makes every year, and half of its 7 million air conditioners, will be manufactured in China.

The strength of the white goods unit may be giving LG a new lease on life. Although it's Korea's No. 2 consumer-electronics maker, LG had long been relegated to a supporting role while rival Samsung Electronics Co. took its star turn. For the past three years, LG has spun its wheels with a $3 billion investment in telecom gear that has gone nowhere. Today, though, LG has overtaken Samsung in white goods. The unit's profits are a cushion for the company, throwing off the cash it needs to expand sales of mobile phones, digital TVs, and plasma-display panels. The appliance business, it seems, might be the stepping stone LG needs to become a global player in consumer electronics.

By Moon Ihlwan in Seoul

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