Many foreign companies have tried—and failed—to make a deep impression on the Indian market in recent years.

LG's first attempt to enter it (in the early 1990s, as Lucky Goldstar) floundered as a result of difficulties the company encountered working with local importers. But since 1997, following the Indian government's green light for a state-of-the-art white-goods factory at Greater Noida, in the state of Uttar Pradesh, the South Korean chaebol has scarcely glanced back.

LG Electronics India, a wholly owned subsidiary of the Seoul-based parent, bet big on India, and the gamble is paying off. LG's share of the Indian market (by volume) is currently 29.4 percent in refrigerators, 26.5 percent in color TVs, 35.8 percent in washing machines, and a crushing 38.0 percent in microwave ovens. A second factory, at Ranjangaon, near Pune—India's first facility for manufacturing GSM¹ handsets—has been turning out white goods and mobile phones since October 2004. LG's Indian market share in GSM handsets is now 6 percent and rising.

The company's ambitions don't stop there. LG Electronics India has set itself a revenue target of $10 billion by 2010—five times the present level—as it positions itself to attack the fast-growing Indian information and communications markets. Within five years, it also plans to make India a hub for exports to other parts of Asia and to Africa and the Middle East.

LG's hectic pace in the subcontinent has left other multinationals and local rivals struggling to figure out the secrets of its success. Skeptics may wonder whether its competitive price strategy will hold, but few doubt its long-term commitment to go on growing in India and to transform its Indian operation from a useful bit player into a significant contributor to the company as a whole.

Kwang-Ro Kim, the managing director of LG Electronics India since 1997 and a much-traveled veteran of LG's expansion around the globe over the past three decades, has played an important role in the company's Indian success story. Kim's earlier experiences have shaped the nature and direction of the group's passage to India. At the subsidiary's Greater Noida headquarters, near Delhi, he talked with Pramath Raj Sinha, a principal in McKinsey's Delhi office, about LG's early commitment, its willingness to empower local employees, its focus on R&D, and its ability to develop a strong and far-flung distribution network.

The Quarterly: Can you explain how LG came to set up operations in India in 1997?

Kwang-Ro Kim: It was a natural decision for us, given India's population and the likelihood that the country would become a priority region in the way China has become. From the outset, LG was determined to commit a lot of money to the Indian venture, but when we came here in the early 1990s local regulations forbade foreigners from making independent investments. We therefore tried to work through exclusive importers or agents. Around the end of 1996, the rules changed, and we were able to go ahead on our own. This has given us the freedom we need. Compare our situation with that of another South Korean company, which established a joint venture three years before we set up shop in the country but does not appear to be able to exercise its full strength, because of the need to work with a local partner.

The Quarterly: Has LG's experience in other markets provided insights that you applied in India?

Kwang-Ro Kim: LG has accumulated experience in a number of overseas markets, stretching back over 30 years. When I joined the group, in 1974, South Korea was still a poor country, a small market with around 45 million consumers. The only way to make the company's income grow was to export, to push aggressively outside our home base. Over the years, LG has made many mistakes in overseas markets, learning through trial and error, and it was that experience we brought to India. We knew it was important, for example, not to downgrade the Indian market and instead to treat it just as seriously as we would any developed market. That meant preparing a full strategy and emphasizing good-quality products, the best technology, the best network, and access to the best people. We have seen many Japanese and Chinese companies arriving in India, but like other foreign-owned businesses they typically put one foot in the water to see if it is warm or cold. They have doubts. They lack determination. One of our competitors, for example, recently shifted its factory to Thailand and is now supplying all its products to India from there. What's been different about us is that we made a full commitment—a very big investment—from the start, including setting up two full-scale manufacturing facilities.

The Quarterly: Having production in India presumably puts you in a strong position to tailor goods to the local consumer. Has that helped?

Kwang-Ro Kim: Yes, and so has the way we invest in and trust our employees. When that competitor left for Thailand, for example, we tried to recruit some of its engineers but decided in the end not to hire them. In the ten years those people had been working for that company, we discovered, they had done little to improve the products it was trying to sell to the local market. It turned out that this company's R&D department back home had been doing most of the work, with only a few modifications carried out here. It's true that LG imports the basic technology from South Korea, but in India we are responsible for 90 percent of the subsequent R&D work; only 10 percent gets done in South Korea. We spend a billion rupees² a year here on research. That commitment is something we've learned in other developing markets.

The Quarterly: So the local management has a lot of autonomy?

Kwang-Ro Kim: Absolutely. Local empowerment is a very important part of our strategy, and I would say that 99 percent of our decisions are made independently. At the moment, we have only 20 Koreans here in India—most of them in R&D—out of a total workforce of 2,700. The expatriates are called in only when there is a problem, and they are generally seen as consultants, or advisers, to the business. No Korean works in the administrative branch offices we have set up around the country. And even at the corporate level, in India every decision is made by Indian employees.

The Quarterly: What kind of things do you have to refer to South Korea? Don't you find that product managers back home tend to dominate and seek to prevent you from taking quick action?

Kwang-Ro Kim: The South Korean parent monitors our sales and profit commitments and makes sure that we are meeting them. And we had to get permission from South Korea for the investment in our new factory near Pune, for example. But a decision to invest in existing operations can be made locally. We do have product managers in South Korea, as you suggest, but in my experience they don't interfere in the way that their counterparts at some US and Japanese companies do. I visited one Japanese factory recently and learned that the designers there have to send their drawings back to Osaka for approval. The process can take six months or more, which means that the company is late bringing products into the market.

The Quarterly: Can you give us an example of how empowerment has worked to your advantage?

Kwang-Ro Kim: Three years ago, we invested in a new refrigerator production line and needed to buy a vacuum-foaming machine, one of the most expensive pieces of equipment for this $20 million project. We could have sourced the equipment in South Korea, but our local employees thought it might be better to buy from Italy. So we agreed. We sent them to Milan several times to check the machinery—no Korean went on any of the trips—and they eventually made the decision to buy there. Apart from being the right one commercially, this had an obvious effect on their attitude. When the machine arrived, they worked night and day to install it—they hardly went home. They felt real ownership and took full responsibility for implementation.

Another example is our policy of making salespeople responsible not just for sales but for profits too. The salespeople therefore need to know the costs of the business—something we readily make available to them. Many companies are reluctant to do this. But when our people know that they are accountable for profits, they understand that they have to control their marketing expenses and other costs.

A final example would be our decision to sponsor the Indian national cricket team. We know that football and baseball are important in other parts of the world, but as Koreans we had no idea what sport was popular in India when we first arrived. Our employees decided that this was the right thing to do and thus we associated ourselves with cricket.

The Quarterly: Is the policy of empowerment a general LG philosophy or your own idea?

Kwang-Ro Kim: Generally, LG has a philosophy of empowerment. But this system of profit responsibility is something we have devised especially for India. I have noticed over the years that empowerment results in more hard work and innovation at the workplace, thus adding to the company's productivity.

The Quarterly: How did you find people you could trust, particularly in the early years?

Kwang-Ro Kim: I strongly believe that if you trust people 100 percent, their dedication will be 100 percent. If they think you trust them only 50 percent of the time, that will be reflected in their performance. That said, we have a very good IT system, and that is important. I trust the human beings, I trust the system, as it acts as a check and balance. And we have good rewards—people can earn bonuses of up to seven times their salary in every six-month period. But what's more important is that human beings like to be free; they want to be allowed to be innovative.

The Quarterly: What if people don't perform? Do you get rid of them?

Kwang-Ro Kim: We always give people at least three opportunities, and we do not move people from one place to another just because they do not perform. We try to treat them like family. What's most important for success is passion. On the whole, the Indian employee is well educated, but to succeed in our business we don't need geniuses—just average brains and big hearts with a lot of passion.

The Quarterly: Many foreign companies are daunted by the sheer size of the country. What have you learned about distribution in India?

Kwang-Ro Kim: India is a heterogeneous nation, and it is important to have planning and resourcing specifically for each region. We therefore identified various strategic locations where we thought it would be viable to set up administrative branch offices to handle local business, to make decisions, and to act as independent profit centers. All the critical departments of the company are represented in these branch offices: accounts, logistics, customer service, marketing, and sales. These branch offices are distinct from the retail outlets where LG products are actually sold. The latter consist of a mix of our own branded shops in some large towns—shops where you can buy only LG items—and independent, multibrand stores for consumer electronics and consumer durables, where LG products compete with products from other companies.

The locations we chose for both the branch offices and the shops were determined by the likely demand for our products and the viability of operating there. To me, for example, it was always obvious that if we could develop a presence in the interior, in rural areas—where 70 percent of the Indian population lives—we would have an advantage. In the beginning, our people used to tell me, "You can't go tour that location; it's not safe." Before we opened our branch office in remote Rourkela, for example, they said that even Indians can't go there because of the security situation. But after three years we finally went ahead and discovered that Rourkela is a big town with lots of buying potential on account of the steel plant located there. The same arguments were used about Guwahati and Jorhat, where we also have branch offices.

LG has been prepared to go up-country. Away from the cities, we are growing at a rate of 50 percent. People tell us we have been one of the quickest, most aggressive companies when it comes to building our network—we now have 2 branch offices in almost every big state in the country, or 49 in all. We are spread more widely across the country than most local companies that have been in business here for 30 years.

The Quarterly: What can you tell us about the Indian consumer?

Kwang-Ro Kim: Indian customers are more complex than those I have encountered elsewhere. In contrast to consumers in Latin America, for instance, they are less easy to satisfy. Indeed, anyone who believes that Indian consumers are only interested in price misunderstands this market. They are very smart and want a quality brand at a reasonable price. Note that I didn't say "lowest price." We have competitors with products that are 10 percent cheaper, and if the lowest price was all that counted they would be number one. Take televisions. In more developed countries, people might want to buy a set and keep it for only three years—but Indians are looking for a model that will last ten. The fact that it is a bit more expensive doesn't matter, provided the quality and service are good.

The Quarterly: What percentage of your products do you export now? Will that figure increase?

Kwang-Ro Kim: At the moment, less than 10 percent, but by 2010 we expect exports to account for 30 percent of our production, mainly to neighboring countries like Bangladesh, plus the Middle East and Africa. We now export a little to Mexico and even to Panama, but because of the geographical distance it is hard to make this profitable.

The Quarterly: Is China a bigger export base than India?

Kwang-Ro Kim: LG's Chinese operations are ten times bigger in terms of volume than our operations in India—we have many factories in China—and exports amount to around 70 percent of what is produced. But too much investment in one country is dangerous, so LG decided that India should also be an export operation. It's a good opportunity for India and one that the country needs to exploit generally, in other sectors as well, if it is to escape poverty. We had a similar situation in South Korea after the Korean War, as did the Japanese. Without exports it will be impossible for India to feed one billion people properly.

The Quarterly: A lot of foreign business executives complain about bureaucracy and government regulation in India. What has your experience been?

Kwang-Ro Kim: For many people, bureaucracy in India means something bad, but I see a positive side to it—namely, the stability that it brings. India's governments have changed many times over the years, but because of the strong bureaucracy the basic policies are stable. The authorities are also responsive. Take, for example, the budget announcement earlier this year by Mr. Palaniappan Chidambaram, India's finance minister, imposing a special additional duty on foreign components for finished products. This move, around the time we were completing our new GSM mobile-phone- manufacturing plant, seemed to discourage investment in the country. It was actually our Indian employees who took the lead by protesting through the newspapers and by meeting officials to explain how the proposed duty could affect jobs, and in the end the government accepted our suggestions.

The Quarterly: Are there any other obstacles?

Kwang-Ro Kim: Indeed. As you know, there are problems with the electricity supply, the roads, and the infrastructure generally. But I believe that the Indian government is doing its best to put this right. And that takes time. I like to say to people that these kinds of obstacles give us an advantage in some ways. Marketing books point out that when you are evaluating a certain area for investment, an obstacle represents an opportunity, since without obstacles it is also easy for your competitors. In India, we at LG enjoy the obstacles. This is a country where expatriates often find it difficult to live, and to survive, which is why many Japanese executives, for example, come here without their families. Koreans, on the other hand, always come with their families. This not only provides encouragement but demonstrates the sort of commitment needed to succeed.

The Quarterly: Where do you see LG Electronics India going over the next five years?

Kwang-Ro Kim: Up till now we have done a good job in consumer electronics and home appliances, and our market share is above 30 percent—in some cases, above 40 percent. That is a solid foundation. We now want to build on it to develop a strong position in communications, which means mobile phones, and in information, which means desktop and notebook PCs. In these two areas, we also want to be number one. PCs and mobile phones are the fastest-growing segments in India at the moment.

In consumer electronics, a 40 to 45 percent market share is probably the limit, so we are now focusing on building a range of premium products that in the future could represent 10 percent of our earnings. We do not yet manufacture these products here, because the volumes are not big enough, but I think that future growth will be strong. We are already assembling LCD monitors here.

The Quarterly: Would you say that your revenue targets are very ambitious?

Kwang-Ro Kim: At the moment, we are a $2 billion company in terms of sales. We want LG Electronics India to be a $10 billion business by 2010. That is our dream. We may end up being only a $7 billion or $8 billion business, but by aiming to climb Mount Everest you will easily scale a smaller mountain.

The Quarterly: A lot of foreign companies start out with the sort of ideas and aspirations you have talked about, but most of these companies find that they cannot achieve such aspirations in practice. Why?

Kwang-Ro Kim: Thinking and implementing are different. Everybody knows that getting up early in the morning and running is good for your health. But how many people actually do this? As I said, many companies hesitate, but LG has been successful because it has been positive and aggressive from the beginning.