International Business Strategy Of Lg Chemical Management Essay

‘I-Phone, FTA, Manchester United, Hanryu, Sub-prime Mortgage etc…’ all these are the international words that we easily experience from our daily life. The physical border of Korea exists but the border of culture, economics and people do not exist any longer. We are living in so called a global world. Especially the economic aspect is one of the most important issue. The IMF financial support for Greek is giving us bad influence on our economy, the Chinese product are already covering more than 50% of the products we use and the Cheonan’s sinking can have bad influence on the world economies. We are not free from internal business environment. In order to survive in this situation it is necessary to analyze international business environment and develop our strategies to enter a target market and expand further.

From this report we will learn about LG Chem who is a local Korean firm having 60 years of history, ranked in the 4th among the Korean chem. firms in terms of sales revenue and has been making continuous success from its international business. The international business strategies in the overseas markets from LGChem will be analyzed and evaluated according to what we have learned from our internal business class.

â…¡. Main issue

(1) LG Chem outline

1) History

LGchem has been established in 1947 named as “Lucky Chemical” and changed its name to “Lucky Company” in 1974. LG chem has started business in cosmetic industry and evolved to chemical industry. There have been a wide range of chronological milestones to become No 1 chemical company in domestic market and major players in global wide. In this report it is being recognized major global business activities as follows. 1

date

Activities

country

function

Nov.1996

Acquired Hindustan Polymers Ltd. (LG Polymers India)

India

Manufacturing

May1998

Commissioned Tianjin PVC and PVC flooring plants

China

Manufacturing

Jul.1998

Commissioned Ningbo ABS plant

China

Manufacturing

Mar. 2001

Co-founded battery developer Compact Power, Inc

USA

R&D

Oct.2001

Completed 90,000 mtpa expansion of Tianjin PVC plant

China

Manufacturing

Aug.2002

Commissioned Guangzhou EP compound plant

China

Manufacturing

Aug.2002

Established LG Chem China Trading Co., Ltd. in Shanghai

China

Sales

Dec.2002

Completed 150,000 mtpa expansion of Ningbo ABS plant

China

Manufacturing

Mar.2003

Commissioned Tianjin window profile and door plant

China

Manufacturing

Jul.2003

Completed 100,000 mtpa expansion of Tianjin PVC plant

China

Manufacturing

Aug.2003

Established Nanjing battery and polarizer

back-end processing plants

China

Manufacturing

Nov.2003

Established LG Chem Industrial Materials, Inc.

USA

Manufacturing

Jun.2004

Established Ningbo SBL joint venture

China

Manufacturing

Jul.2004

Established marketing subsidiary

LG Chem (Taiwan), Ltd.

Taiwan

Sales

Nov.2004

Commissioned Guangzhou ABS plant

China

Manufacturing

Dec.2004

Established LG Chem (China) Investment Co., Ltd. in Beijing

China

RE

Jun.2005

Established joint R&D lab with Moscow State University

Russia

R&D

Jul.2005

Established sales subsidiary LG Chem Europe GmbH in Frankfurt

Europe

Sales

Oct.2005

Commissioned HI-MACS®solid acrylic surface plant in the USA

America

Manufacturing

Nov.2005

Established LG Chem Poland Sp. z o.o. polarizer back-end subsidiary

Poland

Manufacturing

Dec.2008

LG Chem Industrial Material Russia, establishment of LLC

Russia

Manufacturing

(Source: 2009 LG chem brochure from LG Chem’s homepage)

2) Financial status

LGchem has becomes number 1 domestic company in chemical industry with 13.7 billion dollars sales revenue and 26th company among the domestic corporations. LG chem has continued its sustainable business growth with 42%(’08) and 8% (’09 year) in total sales volume (Refer to Appendix 1) In terms of business portfolio, LG chem business are composed of two major area; petrochemicals (75%) and IT&E Materials (25%) (Refer to Appendix 2)

 

3) Vision and value

â‘  Vision

LG chem’s vision is to be global leader-Growing with customers by providing innovative materials and solutions.

â‘¡ Core values

The core values of LG chems are customer value creation, execution and mutual repect.

â-¡ Customer Value Creation

Value that substantially improves customer performance and competitiveness.

â-¡ Execution

Execution is essential to bringing corporate objectives and aspirations to fruition

â-¡ Mutual Respect

Mutual respect plays a key role in building effective teams and the capacity to make breakthroughs.

4) Main Products by Business Areas

The major product groups of LG chem. are petrochemicals and IT and E materials. The details are explained in the table below. 1

Petrochemicals

IT&E Materials

NCC/PO

Basic distillates

(ethylene, propylene, etc.),

polyolefin, BPA, ABS, PVC, octanol, AA, synthetic

rubber, SM, EG and other petrochemical products

Batteries

Lithium-ion batteries, lithium-ion

polymer rechargeable batteries

Rubbers

/Specialty Polymers

Synthetic rubbers

(SBR, BR),

SBS as an asphalt modifier

Medium-and

Large-sized Batteries

High-output and high-capacity

batteries for robots, electric and hybrid

vehicles

PVC

Plastics widely used as materials for

pipes, flexible and rigid sheets, chassis,

floor-coverings

Optical Materials

Polarizers, PDP filters

ABS/EP

Plastic materials used for electrical and electronic, automotive, industrial,

residential application

Electronic Materials

Photoresists, strippers for LCD, toners,OLED materials, electrolytes, cathode materials, printed circuit materials

Acrylates/Plasticizers

Acrylate and plasticizers used as feedstock to make super-absorbent polymers, paints and adhesives

Film

Light shaping films (LSF), DAF for semiconductor packaging application

(Source: 2009 LG Chemicals Sustainability Report)

(2) Global Strategy

1) International Business by Regions

<table – LGchem international business>

LG chem operates total 25 global business subsidiaries; 1 global holding company, 11 global manufacturing subsidiaries, 5 global sales & marketing subsidiaries, 7 global representative offices and 1 oversea R&D center. (Source: 2009 LG Chemicals Sustainability Report)

Total sales volume of LGchem has been reached 13.7 billion dollars and 65% of them are driven by oversea business. In business portfolio, global business account for 65% in Petrochemicals and 19% in IT&E business. In the perspective of international business China has taken up 64.4% of total global market so that China has emerged as second markets following by domestic market. In addition, LGchem has penetrated rigorously global business opportunities such as BRICs, US and Europe etc.

LGchem has started international business by exporting products produced in Korea then expanding global business gradually in forms of establishing global manufacturing subsidiaries, sales & marketing organization and eventually global R&D centers;

After 20 years of international business, LGchem has accelerated global business by dividing global market as 8 regions such as China, US, Europe, India, South East Asia, Russia, South America and Middle East including Africa.

â‘  China

LGchem has chosen China as the first global business point where they can appreciate cheap labor costs in order to enhance cost competitiveness in global markets. As a member of WTO in millennium, China has opened up its markets to global players. China has been emerging as the most attractive markets in terms of the market size and future growth potential. LG chem has paid attention to the China market and made decisions to have second move establishing the Sales & Marketing focused subsidiaries in order to penetrate the potential markets.

As LG chem has experienced business success in China market and LG chem has decided to bring up their coordination level by establishing LG chem China Holdings company.

To improve local responsiveness LG chem China holdings developed the local business strategy, sales strategy integrating local produced products and exported products from the HQ, local marketing strategies and whole array of support functions such as finance, human resource and legal services.

â‘¡ India Market

LG chem has opened regional manufacturing subsidiary in India in 1998. It is being analyzed that LG chem has leveraged cheap labor costs to acquire cost competitiveness of their products in that market. LG chem has penetrated potential markets around India such as Southwest Asia, Middle East and Africa continent by utilizing cost competitiveness and regional benefit to access the markets

â‘¢ Russia

With giant of natural resources such as oil and gas, Russia has been growing rapidly and defined one of the four most attractive markets (BRICs). Not only Russia but also around nations such as Uzbekistan and Kazakhstan are growing rapidly which makes Russia market more attractive. LG chem has penetrated Russia market by opening sales and marketing oriented subsidiaries.

In addition, LG hem has established R&D center to enhance global R&D capabilities for the preparation of future business. What LG chem R&D center in Russia focus is Smartpolymer products which major global players have also poured out investment strategically. Russia has exclusive technologies on this Smartpolymer products. LG chem is expected to leverage Russian talents to develop new technologies and products by collaborating.

â‘£ Europe

LG chem has penetrated Europe market by establishing sales & marketing oriented subsidiaries. They have started conducting Europe businesses by exporting products from HQ . LG chem has expanded business by establishing manufacturing facilities when they have reached the strategic points of sales volume in order to cut down the logistics costs and enhance customer interaction with speeds

2) Functional Strategy

â‘  Global Manufacturing

Global manufacturing strategy of LGchem is to enter the relatively cheap labor cost countries such as China, India and Vietnam. When LGchem made a decision where they would manufacturing facilities for Europe market, the same strategy was applied. Poland was selected as the manufacturing site to appreciate not only cost competitiveness from relatively cheap labor cost but also close accessibility to the European markets.

â‘¡ Global Sales & Marketing

LG chem operates region based sales & marketing subsidiaries because LG chem wants to tap into regional market in order to enhance local responsiveness.

Dynamics between global sales & marketing functions and global manufacturing are being defined as “first acquire market accessibilities then build up manufacturing facilities”. LG chem penetrates a new market with sales function first, and then when the sales volumes within the market reach certain level, it establishes manufacturing facilities later on in the market

â‘¢ R&D

LG chem has its own strategies for global R&D functions. It has invested lots of money for R&D in HQ and it enjoys the fruits of its investment. However it needs to evolve R&D strategy beyond HQ which it can not really acquire enough R&D capabilities meeting customers needs, developing new products and even preparing for the future business. LG chem has looked up the global perspective and built up global R&D center in US, Germany and Russia where advanced technologies, highly qualified talents could be found in chemistry industry. LG chem transfers what global R&D center purely developed into HQ and make products adopting those technologies. In between HQ R&D center and global R&D subsidiaries there are high level of collaboration in forms of projects based to accelerate R&D capabilities and create synergy1

3) Product Analysis

â‘  Petrochemicals

Last year demand for petrochemicals picked up for chemical products from construction and home appliance industries, the main beneficiaries of pump-priming policies at major economies including China. LG Chem. achieved quite strong results through portfolio diversification of profitable products, ranging from basic raw materials such as ethylene and propylene to ABS4), PVC, acryl, synthetic rubber, oxo-alcohol and specialty products. The NCC/PO business is moving to secure competitiveness in cost, mainly attributable to its cost saving drive and stronger bargaining power gained from bulk purchasing of raw materials. The oxoalcohol business continues to generate profit against a supply shortage in the market, and the synthetic rubber business enjoys higher earnings from a rising demand in the car market such as China and India, and strong prices in natural rubbers.

â‘¡ IT&E Materials

Profitability grew for mobile energy business as it continued to develop its key global customer base and implemented a number of manufacturing innovation initiatives including feedstock internalization and stabilization. It is expected that performance is steadily improved as well, through increased supply volume to key clients (HP, Nokia), productivity enhancement and cost saving drive. Based on advanced technical know-how, LG Chem is bracing for a hybrid vehicle mobile energy business, which will serve as a future growth driver for the firm. In addition, the optical material business, represented by polarizers and photo-resist materials, achieved remarkable growth and profit, backed by a full-fledged growth in demand for the LCDs and internal cost reduction efforts. A downward pressure on price is expected to come continuously from upstream players.

4) Strategic Alternatives for International Business

Based on global business practices of LGchem, global functional strategies is being analyzed as follows

(3) International Business Strategy

1) Human Resource Management

LGchem has 5517 overseas employees and 96.9% of them are local people. LGchem operates global business with key expatriates sent from the HQ1). Expatriate from HQ occupies major CxOs such as CFO, CMO, CPO in major global sales and manufacturing operations. LGhem has applied HQ based HR Policy to global operations. Those HR practices could be translated that LGchem is in the pursuit of Ethnocentric HR.

However, LG chem has been moving its HQ based HR strategies into local HR environment based HR practices.

2009 LG Chemicals annual report

Time frame

To accelerate applying of local environment familiar HR practices, LG chem has focused to acquire highly qualified local talents and develop them. China is especially the core country where Polycentric HR paradigm has been practiced. One of major polycentric HR practices is to position local qualified employees in manager positions. LG chem has increased the number of local managers rapidly in order to tap into local HR environments; developing, motivating and managing local people with effectiveness and efficiency. As a result of local based HR practices, local employee occupies more than 76% of all the manager position which is 6% higher than previous year. 1

Not only recruiting local people and promoting them in manager position, but also LG chem operates leadership development programs which is called HPI (High Potential Individual) for Chinese in order to build up potential business leader in early stage of China local business success.

To enhance collaboration between HQ and China regional office, LGchem has been operating a wide range of activities such as Global wide value training, workshop for functional officers across the nations and competency development programs for global job experts from any countries. 1

It is believed that those activities are not only transferring HQ core practices and capabilities but also respecting ways of local people and culture which might leverage and maximize local capabilities. This phenomenon are interpreted that LG chem has been reached the certain level of polycentric HR in global operation and even in the pursuit of Geocentric HR.

2) Internal Marketing management

As mentioned briefly above, since the early of 1990 LG Chem. has been very actively involved in foreign investment. Due to the reasons of geographic accessibility, cost reduction, labor market flexibility and first-mover-advantage, LG chose China. For the analysis of the aspect of internal marketing management, the case of introduction of the floor heating pipe to China will be marketing analyzed as an example. The articles, “LG introduces floor heating system in China” and “LG provides Ondol to senior citizen center in China” shown in the April 22, 2010 issue of the Herald news were caught by our attention.

â‘  SWOT Analysis

Categories

Contents

Strength

High market share thanks to early market entry for floor material

Recognized as world top products groups in Korea

Weakness

Competition in China from Korean competitors

Competition against current air heating system

Opportunity

House construction boom in China

Increase of customer demand on floor heating system

Material cost increase and shortage of electricity in China

Threat

Excessive supplies by new competitors

(yr 2000 : 4 new firms, yr 2005 : 194 new firms)

Changes of Chinese government policies

â‘¡ STP Strategy analysis

– Segmentation

In China there were many monopolistic firms who had small scale of distribution channel, which was caused by big territorial size of China. LG Chem. has put its foothold in Tianjin which has stable market but great growth potential from the geographic and demographic aspects.

– Targeting

For synthetic resin material, China has been contacting Japanese and American firms, but it is not easy to find the firm who can meet their various specifications. LG chem. has simplified the target market by selling high quality product with competitive price instead of making single specification pipe lines. Knowing that Chinese government control very tightly heating system and the heating type and the heating material are defined by construction firms, LG has focused on building local network with the Chinese government and the construction firms.

– Positioning

LG chem. took a differentiated strategy that it takes care of customer’s need through close customer contact.

First of all, it made its customer a silo as part of Door-to-Door delivery service, which made it possible to reduce packing and loading cost from their side and unloading cost from the customer’s side, and effort from income inspection. Even for the multi-purpose pipe line, it has operated tech-centers according to its customer’s wish to provide customer oriented products.

â‘¢ 4P Analysis

– Product

Back in 1990s, the products LG chem. could produce were toothpaste, synthetic resins, decoration materials, petrochemical PVC and ABS. But it is petrochemicals which are the least sensitive and demand increasing. Due to high economic growth of China, house construction was in a boom. And there was a need for replacement of air heating system according the low energy policy in China. In this situation, LG chem. introduced the On-dol, floor heating system in China.

– Price

Generally the LG’s product is more expensive than that of the competitors. But LG has been operating pipe lines in a way according to a differentiated cost-reduction strategy and standardization of product fitting to government’s requirement.

– Place

LG has been expanding the distribution network including 10 production and sales entities in Beijing, Tianjin, Yantai, Nanjing, Shanghai, Ningbo, Shenzhen, Guangzhou, Taipei, Hong kong.

– Promotion

LG chem. has a core slogan of ‘solution partner’ and a principle of ‘speedy handling of customer wish’.

LG chem. has been promoting the On-dol pipe line though holding a conference for construction firms and Chinese government, refining the specification of floor heating together with Chinese government, making strategic approach to Chinese construction firms by having local alliance and donation of On-dol floor to Senior citizen center.

3) International manufacturing and Purchasing Management

â‘  Manufacturing configuration

Since the early 2000, the Korean chemical market has been saturated. In this situation, LG chose China in order to grow stably and independently from Korean situation, it had to find a proper market. That was China.

The Tianjin PVC plant has been expanded to increase its production capacity to 100,000 M/T in 2003 since it was built in 1998. And the capacity of the ABS plant in Ningbo was increased to 150,000 M/T in 2002 since it was built in 1998. On top of this addition, LG chem. built one more ABS plant in Guangzhou in 2004. Currently it has 15 production subsidiaries 11 in China, 1 in Poland, 2 in India and 1 in Vietnam. It seems that LG took centralized manufacturing configuration for America and regional manufacturing configuration for China by operating many plants.

The detailed locations are shown in the map below.(source: 2009 LG Chemicals Sustainability Report)

â‘¡ Implementation of ERP

In order to standardize the work process between the head quarter in Korea and the overseas subsidiaries in the world, LG chem. has introduced the ERP system to the Chinese subsidiaries which it had implemented to the head quarter in Jul.2002. 1

The ERP LG chem. introduced at the overseas subsidiaries has five big modules, Sales & Distribution, Product planning, Material management, Financial Accounting and Controlling. The ERP had the following target to achieve. 1

1 Global management of LG Chem by JooSeok Park, Dec.2004

Introduction of advanced work process

Decision making support by providing detailed profit analysis

Integration of logistics system

Provision of management info. on time and transparently between HQ and overseas subsidiaries

Global process standardization between HQ and overseas subsidiaries

Same master data for HQ an overseas subsidiaries

â…¢. Conclusion

LG has been successfully operating global business with its major industrial commodities. By having vertical product array which is one of LG’s strong points, LG could create synergy effect from making the products in a specific supply chain. The vertical product grouping of LG chem. shows one of the examples of architectural capability of LG

In addition it has focused on global integration like cost reduction abilities from advanced technologies, manufacturing localization and economies of scale as well as local responsiveness like building relationship with Chinese government and related local firms and thorough customization via cultural marketing analysis. These are evaluated as the success key of LG.

But LG chem. needs to understand that it is still in early stage in global market, therefore it is necessary to have a strong integration and effective motivation. Based on what LG has learned from global petrochemical business, we hope that it grows and become one of the leading Korean company in basic industries by focusing on the future grow engine of IT and E.