March 2005
Insight
Volume II - No. 55
Consumer Durables: strategic choices
and parent support
Analytical Contact : Rajesh Chitre
rchitre@crisil.com
Executive Summary:
The ratings of CRISIL-rated consumer durable companies have benefited
to some extent from the support extended by foreign parent companies.
The two Korean players, LG and Samsung, have demonstrated the
capability to thrive in a challenging industry scenario, and therefore
display standalone credit strength superior to that of other CRISILrated consumer durable companies. The others, propped up by support
from foreign parents, are now taking steps to improve their businesses
to self-sustaining levels. Over the medium term, CRISIL expects LG and
Samsung to maintain their position of strength, with the credit profiles
of all the companies in the sector continuing to be driven by parent
support, till such time as their efforts to improve their businesses bear
fruit.
March 2005
Ratings driven by Parent Support:
companies in this sector goes into advertising expenditure. This
The Indian consumer durable industry has witnessed the growing
expenditure, coupled with the need to service and maintain extensive
dominance of the Korean companies, LG Electronics India Pvt Ltd
distribution networks, results in low operating margins.
(LG) and Samsung India Electronics Ltd (Samsung) over the last two
to three years. While the strengthening business profiles of the Koreans
reflect in the high investment grade ratings assigned to them, the
performance of the other rated entities have been largely driven by the
financial, managerial, product, and operational support provided by
their overseas parents.
Company
Parent’s
S&P
Rating
2003
2002
2001
2000
AA/P1+
AA/P1+
P1+
The following graphs show that the sales of CRISIL-rated consumer
P1+
P1+
P1+
P1+
D/FD
D/FD/
P1+(so)
A-/FA/
P1+(so)*
capacity utilisation have resulted in operating margins remaining low.
Aggressive Koreans have increased sales...
A-/ Stable/ A-2
P1+
BBB+/ Stable/
A-2
AAA(fso)/ AAA(fso)/ AAA(fso)/
Stable/ P1+
P1+
P1+
12
A+/
AA-/
FA+/P1 FAA-/P1+
AAA(fso)/ AAA(fso)/
P1+
P1+
Consumer Electronics
Sony
India
financing of almost their entire working capital requirements with
however price erosions, low operating efficiencies structure and lower
White Goods
Philips India
ratios of most of these companies continue to be low on account of
durable companies have shown an increase over the past 4 years;
BBB-/Stable AA+/Stable/P1+
BPL Ltd
Whirlpool
of India
Ltd
debtor management and reduction in debtor collection days, the current
BBB+/
Stable/ A-2
AA/Stable/
P1+
AA/P1+
AA/P1+
P1+
P1+
A+/ Negative/
A-1
P1+
P1+
P1+
P1+
P1+
10
In Rs. ‘000 crore
Samsung
India
Electronics
rated companies have over the years shown improvement in their
payables and short-term bank borrowings.
September,
2004
Diverse product portfolio
LG Electronics
India
The industry continues to be working capital intensive. Although CRISIL-
8
6
4
2
0
2000-01
Challenging industry scenario :
2001-02
2002-03
2003-04
Net sales
The profitability of the players has been low, mainly on account of the
following characteristics of the industry:
...but profit levels have remained low
800
Overcapacity: The industry has been plagued by overcapacity due
to rapid capacity expansions by the players, expecting high growth
600
penetration levels. However, growth has been slow and volatile
as compared to expectations, due to infrastructure bottlenecks
and seasonality of purchases. Therefore, low capacity utilisation
and low operating efficiencies have resulted in low profitability
margins.
Intense competition: Owing to intense competition, companies need
to spend heavily and consistently on building brands. CRISIL’s
experience demonstrates that 4-6% of the operating income of most
In Rs. crore
rates in the business owing to growing middle class and low
400
200
0
-200
2000-01
2001-02
Op. Profit
2002-03
2003-04
Net Profit
March 2005
The Korean dominance:
Other players – Back to the drawing board
CRISIL’s experience in rating consumer durable companies has shown
Other MNC players have followed the traditional model of “acquiring
that the share of the Koreans in the net sales of the rated portfolio, has
and running” businesses. Foreign consumer durables manufacturers
increased to about 63% in 2003-04, from about 43% in 2000-01. The
have, in the past, taken over businesses in India from domestic
share of the Koreans in the overall operating profits of the portfolio
promoters, and continued operations through their Indian subsidiaries.
has jumped even more sharply, from 45% in 2000-01 to 74% in
The subsidiaries thus were saddled with old manufacturing units,
2003-04. A look at the movements in market shares of the players in
bloated workforces, and high fixed costs. This led to weak business
the CTV and refrigerator segments (see charts below) illustrates the growth
and financial risk profiles, translating into lower standalone credit
in market shares of the Koreans and their dominance over the market.
ratings than their Korean counterparts.
This dominance is underpinned by three strategic choices: volume-led
Let’s get our act right
capacity growth, diverse product portfolios, and close touch with
Having borne the brunt of the price erosion and escalating raw material
movement of stocks on the ground.
prices in the highly competitive consumer durables market, companies
For a more detailed analysis of the strategy, please refer to box , ‘The
have initiated restructuring measures including trade correction,
Korean Game Plan’.
suspension of local production, and merging of subsidiaries.
CTVs - Market shares of major players
Whirlpool has completed its trade correction programme through
Market share %age
40%
which the company aimed to liquidate its pipeline inventories, reduce
its credit period, increase its cash sales and rectify its distribution mix
30%
by increasing its proportion of direct dealers.
Philips has also implemented restructuring measures by consolidating
20%
its core lighting operations, reducing the working capital requirement,
executing VRS schemes, and hiving off non-core factories and
10%
businesses. Recently Philips India has decided to consolidate its
business operations in India by merging two group companies, Philips
0%
LG+Samsung
BPL
2002
Onida
Videocon
Software Centre Private Limited (PSC) and Philips Medical Systems
India (PMSI), with itself. The company is optimistic about the growth
Jan-Mar 2004
potential of its medical systems business and plans to revive its
Refrigerators - Market shares of major players
consumer electronics business as well, by focusing on the flat TV and
DVD segment.
40%
Market share %age
reduction in trade credit periods, voluntary retirement schemes,
Sony has suspended its manufacturing operations in India and
30%
extended a Voluntary Retirement Scheme (VRS) to all its employees at
its Haryana plant. This closure was due to the low economies of scale,
coupled with the additional tax burden levied by the local state
20%
government. The company has decided to import its requirements
from other manufacturing locations of its parent, Sony Corporation’s
10%
subsidiaries.
0%
LG+Samsung
Whirlpool
2002
Godrej
Jan-Mar 2004
Electrolux
Kelvinator
In a nutshell, the above-mentioned initiatives undertaken by the
companies are aimed at improving cost structures and operational
efficiencies, leading to improvements in their business risk profiles.
March 2005
The companies expect that savings on account of such restructuring
one of the leading players in the consumer electronics market. After
measures would result in an improvement in their financial health,
establishing its presence in the Indian market initially, the company
with reduced dependence on parent support.
gradually increased its production capacities to match the demand
Conclusion – no room for failure
Intense competition and price erosion is expected to continue in the
medium term. Therefore improvement in fixed cost structures, and
savings on account of operational efficiencies through restructuring
businesses, will be a decisive factor in matching the reducing prices
and sustaining profitability in the short to medium term.
The Indian subsidiaries will remain of strategic importance to their
parent companies. India is a key growth market, given its large market
size and low penetration levels. Long-term growth prospects for
consumer durable categories in India remain favourable on account
in the market. In December 1998, the company commissioned a
manufacturing facility for 50,000 microwave ovens. Late in 2001,
the company established manufacturing facilities for washing
machines and air-conditioners. In 2003, the company commissioned
its refrigerator facility at Noida. Samsung has also, over the years,
expanded its product range to include DVDs and VCDs, which are
largely sourced from the parent.
The benefits of the strategy volumes led investments in capacities
result in high capacity utilization and thereby high return on capital
employed.
of improving infrastructure, increasing disposable income levels, and
Diversify the product portfolio:
increasing urbanisation. Most parent organisations are expected to
The Koreans have a well-diversified product portfolio. Both LG and
remain committed to their Indian subsidiaries in the short to medium
Samsung merged their IT and Telecom divisions with their consumer
term. However, the parents’ managements expect their subsidiaries to
durable divisions in order to diversify their product base. The benefits
significantly improve their profitability in the medium term and realise
of diversification in the product mix include:
their potential in the long term. Financial support from parents, which
•
Better absorption of overheads, especially advertising costs
•
Lower volatility in performance due to reduced dependence on
has so far continued, should not be taken for granted in the long term,
as companies will eventually seek to limit the erosion of their
a single product category.
shareholders’ wealth.
The Korean Game Plan:
Source, generate volumes, build capacity, and expand:
The Koreans, unlike other players in the domestic market, have aimed
•
Better utilization of their extensive distribution network
•
Greater shelf space at dealers end and consequently higher
bargaining power to negotiate tighter credit terms.
at first generating brand equity and building volumes, and then
A close watch on Secondary Sales:
investing in building capacities and expanding market share. This
The Koreans have always kept a close watch on the inventory built
approach is evident in both LG and Samsung’s business model in
up at the dealer level and are prompt in liquidating inventories
the Indian market.
through promotions and incentives. This strategy has helped the
LG began operations in India as a trading company, importing
products from its Korean parent. Once it had established its brand
dealers in rapid inventory turnover and maintaining high return on
investment.
equity in the Indian markets, the company put up its manufacturing
The benefit of the strategy – Protecting dealer’s interests results in
facilities at Greater Noida to manufacture CTVs, semi-automatic
dealer push at the retail end. This is critical as dealers’
washing machines, and air conditioners. High end products in each
recommendation has considerable weightage in the buyers’ final
of the categories continue to be sourced from the parent.
choice of the brand.
Samsung too followed a similar strategy. The company, which started
operations in India, with a small presence, has emerged today as