LG: Defying Gravity

For hours on that day in December, Dermot Boden and his fellow managers at South Korea's LG Electronics fretted about the future. The same exercise had been taking place in companies around the world. It was 2008, and it was becoming grimly clear just how severe the coming global downturn would be. Boden, LG's chief marketing officer, and the rest of the senior-executive team gathered at the firm's Seoul headquarters to plan how to respond. The outlook for the company's TV and mobile-phone businesses was frightening. They talked of the need to cut costs; one executive recommended using less toilet paper.

But then, says Boden, the atmosphere began to change. The conversation turned to gaining share and building the LG brand around the world. "The rest of the time, we only focused on one thing," he says. "How do we take advantage of the opportunities now being presented?"

That gutsy, counterintuitive strategy paid off. While many of its competitors reeled, LG expanded in key sectors and markets. In mobile phones, LG jumped from fifth in the global market in 2007 to No. 3 by 2009, with a more than 10% share, according to consulting firm IDC, bypassing old-guard Motorola and Sony Ericsson. In LCD TVs it extended its lead over stalwarts like Sony and Panasonic. In fact, the LCD-TV market is becoming increasingly dominated not by Japanese firms but by the fierce rivalry between Korea's LG and Samsung. "It's really fighting each other that is the key driver right now," says Paul Semenza, a senior vice president at research outfit DisplaySearch in Santa Clara, Calif.

The gains propelled LG to surprisingly strong results. It posted record sales of $43.4 billion in 2009, up 12.5% from 2008, while net profits surged 325%, to $1.6 billion, also an all-time best. In the first quarter of 2010, profit swung to $590 million, from a loss of $142 million during the same period a year earlier. "The only difference between the company that is doing well and not doing well [in the recession] is how they view the situation," says Nam Yong, LG's CEO. "I personally feel a downturn is a blessing. If we do the right thing, I think the return is going to be much, much higher than the average time."

The emergence of LG on the world stage is part of an important trend reshaping global business: the rise of the non-Japanese Asian brand. For the past 60 years, Asian manufacturers proved highly adept at producing consumer products with great efficiency but were not nearly as good at designing and marketing them under their own brand names. Aside from Japanese powerhouses such as Sony and Honda, most Asian firms toiled in anonymity as contract manufacturers for companies in the U.S. and Europe, which then slapped their brand names onto the goods and captured a greater share of the profits.

Asian companies are now ascending the value chain, developing expertise in innovation, marketing and design. They are building brands in addition to products. In automobiles, Korea's Hyundai, once an industry laughingstock, is elbowing into the ranks of the world's best-known nameplates, while Samsung, not Nokia, is the top mobile-phone brand in the U.S. In computers, Taiwan's Acer has become the world's No. 2 PC brand, ahead of Dell, according to research firm Gartner.

For much of its history, LG was a bottom feeder, known to Americans as a purveyor of cheapie TV sets and microwave ovens under the Goldstar label, after its former corporate name, Lucky Goldstar. The firm rebranded as LG in 1995 with the goal of upgrading its image and repositioning itself on par with Sony and Nokia. The new brand met with some success in emerging markets like China and India, but the company moved cautiously in the highly competitive U.S. The LG brand arrived on American shores in 2001 via its mobile phones, with distribution all but guaranteed by wireless-phone-service retailers. LG didn't launch a major marketing campaign in the U.S. until 2003. Since then, LG's presence has grown with remarkable speed. The company grabbed consumers' attention with nifty innovations to stodgy products, like the addition of a steaming function in its washing machines, and neat designs, like the sleek Chocolate mobile phones.

LG's blunt-talking CEO has since made the company even more competitive. Nam, 62, has spent his entire career within the giant LG empire — an almost traditional Korean chaebol controlled by the Koo family, with interests in telecommunications, chemicals and other industries. Nam first signed on as a young recruit in the planning department of LG Electronics in 1976. After stints as an aide to the founding-family managers and top executive at the group's mobile-phone-service provider, among other posts, he returned to the electronics company as CEO in 2007.

Nam is anything but traditional. He's shaken up the top management team, pressed LG employees to generate new ideas and streamlined operations. "We've got a CEO who believes in taking aggressive action and living with it," says Bradley Gambill, LG's chief strategy officer. "Once he decides that it makes sense to move down a path, he doesn't look back."
That fortitude proved especially important during the Great Recession. Even as the global economy shrank, Nam continued to shovel money into crucial aspects of the business, such as R&D and marketing. Instead of laying off workers, Nam reassigned 4,000 employees — about 20% of the headquarters staff — to new tasks such as devising strategies to penetrate underperforming markets. Some 100 people were given the assignment to find ways to reduce travel costs and other expenses, an effort that saved $350 million over a year. While its competitors often slashed ad budgets, LG boosted marketing in key countries. Its ad spending in Russia, for example, doubled in 2009. In fact, according to data from Nielsen, LG was the only major electronics or mobile-phone brand to increase ad spending last year.

To better monitor these initiatives, Nam set up a war room at LG headquarters, where each department was required to post its promised targets for sales, product releases or cost savings. Teams that met their goals got a green sticker; those that failed were publicly humbled with a red one. "We didn't think about profit too much," Nam says. "To show some profit [in a recession] is important, but not as important as long-term sustainable profit. This is a time to really come up with long-term competitiveness rather than short-term profits."
To that end, Nam hired Thomas Linton in 2008 as chief procurement officer and gave him a mandate to beat savings out of the purchasing operation. The IBM veteran found LG's buying was wasteful and convoluted. Each product division maintained its own purchasing staff and bought similar components independently. There had been so little effort made to coordinate that when Linton first called a meeting of circuit-board-procurement officers, he found to his surprise that they exchanged business cards. Even though they all bought the same thing, they had never communicated with one another.

Linton smashed the bureaucratic barriers within LG by coordinating procurement from HQ and standardizing components across product lines. That enabled LG to buy parts in bulk and extract better deals from suppliers. In 2009, Linton saved $6 billion.

Linton isn't the only outsider Nam brought in. Nam has pursued a recruitment strategy that has made LG's senior-executive team highly unusual in Asia for its diversity. Asian firms typically select top managers from within their own ranks and rarely include anyone from outside their home nations. Nam has ditched those habits, believing such practices would deprive LG of the skills and experience it needs to compete. His multicultural executive team, Nam says, "is a real demonstration to the entire world that LG is serious about globalization, so we can create an environment to attract the best people to our company."

Nam will need all the help he can get to hold onto the gains he made during the recession. In mobile phones, for example, LG is launching its first full line of smart phones later this year, called Optimus, repairing a glaring weakness in its portfolio that led to slimmer margins in its handset business. That deficiency may result in lower profits for the company in 2010.

But having caught up in the arts of designing and marketing gadgetry, LG has set its sights on a new goal: transforming itself "from a device-only to a device-plus" company, in Gambill's words. That means not just adding features and applying updated technologies to its mobile phones and TVs but also meshing its products with content and services that keep bringing in dollars after a sale has been made. To get there, Nam has more than tripled the share of R&D spending on "disruptive" research — areas that may not show results for years. "Going forth, we really have to come up with breakthrough solutions," Nam says. "We're going in Apple's direction — coming up with the solution rather than just the device." That task won't be easy, but don't expect Nam to flinch.