SEOUL -- To convince people to buy $6,000 refrigerators and similarly expensive washing machines, South Korea's LG Electronics broke with its earlier thinking in both sales and production.
No discount retailers for its top-of-the-line Signature appliances. Instead, they got their own department store showrooms.
The proof of the success in this strategy is in operating profit margins about twice as high as those of rivals.
The company's margin stood at 9.3% in fiscal 2019, eclipsing the 4% at China's Haier Group, the world's largest appliance manufacturer. LG also topped domestic arch-rival Samsung, which earned 5.8%. Whirlpool, a U.S.-based player regarded for its profitability focus, trailed at 5.5%.
The company's operating margin increased even amid the pandemic-induced global economic slowdown, climbing past 12% in the April-June quarter of this year.
"Offering top-of-the-line premium products had the effect of lifting LG's overall brand value," says Song Dae-hyun, head of LG's appliances business.
LG plans to bring its Signature collection of appliances to more markets, according to Song, a challenge likely to determine the company's growth prospects.
At this month's IFA consumer electronics show in Berlin, LG put its Styler steam cleaner for clothing on display along with other new products, even as regulars like Samsung Electronics and Sony passed on exhibiting at Europe's biggest appliance event. Europe is one market where LG has established itself as a premium appliance brand.
LG may be known for televisions and smartphones, but refrigerators, washing machines and other appliances are the biggest driver of the company's sales, generating 40.6% of the total compared with 31.4% from TVs and 12.2% for phones.
LG's sales of new-model appliances and sanitizing products such as air purifiers will continue to grow, South Korean brokerage Kyobo Securities predicts. Major brokerages project the manufacturer will enjoy a record margin of 9.5% to 10.5% for 2020 -- including the second half, when marketing costs tend to rise.
The pivot toward higher profitability for LG came in 2016, when former CEO Jo Seong-jin created the Signature brand, a collection featuring a stylish designs and matching colors. Jo, the head of the appliance division at the time, believed that building a high-end brand was the only way to contend with the rise of Chinese rivals.
LG avoided brand-damaging discounts by skipping volume retailers, partnering instead with upmarket department stores such as Bloomingdale's in the U.S. and John Lewis in the U.K. The company gained sales floor space dedicated to its Signature collection, as well as access to shoppers willing to pay higher prices.
The company also improved the durability and energy efficiency of the appliances. It started making motors, compressors and other core parts in-house and offered a 10-year warranty on almost all products, which few if any other competitors provided at the time.
South Korea's second-largest electronics maker assembles appliances at its own plants in China, Southeast Asia and the U.S. using components made at its Changwon factory back home. This division of labor among the company's facilities helped maintain quality and slash costs.
Producing core components also enhanced innovation. LG now owns over 1,000 patents on steam technologies used in dryers and dish washers. This accumulation of technology has led to development of the new Styler clothing care system.
Meanwhile, smartphones have become a dead weight on earnings. The segment incurred an operating loss of 206.5 billion won ($174 million) in the April-June term, extending the losing streak to 21 quarters.
Red ink in the smartphone business deepened to 1.01 trillion won for 2019, wiping out half of the appliance division's 2 trillion won operating profit. LG has been unable to develop devices that can compete with Samsung's Galaxy line and Apple's iPhones. This lackluster lineup keeps sales weak, which in turn prevents LG from spending more on development.
LG has quit smartphone production in South Korea and moved output to Vietnam and elsewhere. But with the global smartphone market facing stalled growth and commoditization, more drastic changes may be needed to break the streak of losses.
The Link LonkSeptember 12, 2020 at 11:24AM
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LG cleans up by going upmarket in US and European kitchens - Nikkei Asian Review
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