How LG surpassed Samsung in India
By Choe Soon-kyoo
Samsung Electronics has led LG Electronics in most foreign markets, but India is a notable exception. These two Korean electronics giants entered the Indian market in mid-1990s. Since then, LG has continuously recorded higher sales and profits than Samsung. For example, in 2002, the sales volume of LG Electronics India totaled to $630 million ― more than twice that of Samsung’s $300 million in the same year. In 2007, LG Electronics India reported $2.3 billion in annual sales, as Samsung’s barely reached $1.3 billion.
This situation led Samsung to hold for the first time an annual strategic meeting of top executives in India in April 2007. One important issue at the executive meeting was how to overtake LG in the Indian market. LG’s success lies in the fact that it has more aggressively localized its products, strategies, and organizations to adapt to the different business environment there.
The Indian market
India, as one of the BRIC (Brazil, Russia, India and China) countries, has achieved high economic growth over the past two decades. It is, however, still a poor country with a total population of 1.1 billion people.
The Indian market has a three-tiered pyramid structure. The top tier of the pyramid consists of a small group of wealthy consumers who earn sufficient income to purchase pricey foreign products. Next is the second tier, a relatively large group of middle-class consumers who are considerably wealthy but still lack the purchasing power to buy expensive foreign products. Lastly, the third tier is at the bottom of the pyramid, the largest group of consumers who can barely afford even cheap local products.
India’s undeveloped infrastructure and distribution channels are significant barriers to doing business in the country. For example, India’s railway system is not well developed, and the distribution of goods has to be done using local roads. However, most roads including highways suffer serious traffic congestion due to too many vehicles, carts and even cattle, as well as the problem of roads being too narrow in the first place.
India has 627,000 villages across 3,200,999 square kilometers of land with 13,113 villages having less than 5,000 people. Among the total population of 1.1 billion people, 200 million people live in deserted, rural areas. In addition, nationwide distribution networks are not available, and there are not many large department stores or supermarkets even in big cities. Consequently, companies have to rely on small local retail shops to distribute and sell their products.
English is an official language in India. There are 15 more official languages because individual states have their own along with their unique cultural traditions. Illiteracy rate is high.
Moreover, the penetration rate of television throughout the country is only 40 percent, and the rate is even lower in rural areas. This situation makes it difficult for companies to advertise their products through TV screens, especially in rural areas.
Samsung’s and LG’s Strategies in India
Samsung chose to focus on India’s premium market for two reasons. Firstly, targeting wealthy customers would increase the chances to succeed in emerging markets such as India, where the income gap between the rich and poor is wide. Secondly, in the long run, it is better for the company to position itself as a global premium brand. Therefore, Samsung targeted the 3 percent upper stratum of the society to sell its high-quality appliances and mobile phones, gradually increasing the portion of high-end products within its entire product portfolio. High-end products sold in India were mostly imported, leaving its local factories to produce low and middle priced products.
On the other hand, LG thoroughly localized its products, allowing access to its products not only to consumers with high income but also to those with lower income. Similarly to Samsung, it imported high-end products from Korea, but more actively promoted the idea to produce locally and to customize its products to further suit the country.
As a good example, LG, focusing on the fact that India had 16 official languages, produced television sets with on-screen-display (OSD) and manuals in 16 different languages. In addition, having discovered that cricket was one of the most popular sports in India, LG produced television sets with built-in cricket games.
Samsung’s main marketing strategy was to advertise on TV to attract wealthy consumers in urban areas, consistently stressing that their products are technologically the best as a global brand. In contrast, while advertising on television as well, LG actively promoted “van marketing” to effectively reach consumers who had no access to TVs _ LG loaded trucks with their own products and visited cities, towns and villages located in the middle of nowhere to advertise.
Samsung focused mainly on nine big cities of India, including New Delhi, Mumbai, Chennai and Calcutta, to establish their distribution system. The reason for the distribution strategy is that the social infrastructure such as roads is the most developed in these cities. The majority of wealthy consumers who can actually purchase its high-end goods also lived in big cities.
Unlike Samsung, LG made more efforts to build its distribution system in rural areas. In order to sell products in the countryside, LG built specialized offices called Remote Area Offices (RAOs), and for places where either the population is too small or which are too remotely located to set up a RAO, LG authorized local dealers to act as distributors. Based on the discovery that the final sale of a product is mostly determined by local dealers, LG put a lot of effort in building a good relationship with them.
For organizational administration, Samsung dispatched more expatriate managers than LG did, and had them fill the key management positions within the Indian subsidiary. Thus most authority to make important decisions lies with Korean managers sent from the parent company.
On the other hand, in LG’s Indian subsidiary, expatriate Korean managers acted only as mentors or advisors without the authority to make decisions. In other words, local Indian managers and executives were practically granted authority to run the business on their own.
Samsung and LG took different strategic approaches to enter the Indian market. Normally, the global premium product strategy chosen by Samsung is considered superior in that it can establish entry barriers and increase consumer loyalty, leading to high profitability. However, in emerging economies like India where the social infrastructure is underdeveloped and consumers have limited purchasing power, Samsung’s strategy can be less successful than LG’s localization strategy.
The reason is that the key to success in emerging markets lies in how to penetrate the growing middle-class market, not just the focus on the top premium market. In this regard, it can be said that LG’s aggressive localization strategy has been more effective than Samsung’s global integration strategy in serving the large number of customers in the middle- and low-income classes.
Furthermore, since LG granted the local Indian executives and managers’ practical authority, unlike Samsung where the expatriate Korean managers ruled, LG was able to provide more suitable products and services to the local.
However, as the Indian economy is growing fast nowadays, Indian customers’ purchasing power is rising. This trend, if continued, may make Samsung’s premium product strategy more effective in the long-run. To succeed in emerging countries, therefore, companies should constantly monitor dynamic changes taking place in the local market, reexamine the effectiveness of their current business strategies and modify them, if necessary, continuously adjusting their business to the changing local business environment.
Choe Soon-kyoo is a professor at the school of business, Yonsei University.