Reversal of Premium Strategy?

There is controversy brewing that the high-price premium strategy of South Korea’s electronics industry is not effective anymore.

Up until now, on their strengths of better design and quality, Samsung Electronics and LG Electronics have sold products such as cell phones and digital televisions at higher prices than foreign rivals. This premium strategy was successful to some extent and contributed to enhancing the status of South Korea.

However, foreign competitors are increasingly entering premium markets and raising their market share in low-priced goods markets by continuous price cutting, which is posing a serious threat to South Korea’s companies.

Nevertheless, Samsung and LG Electronics said, “We will maintain the premium strategy considering future growth potential and profitability.”

Samsung, and LG Electronics’ Performance Down-

In the second quarter (from April to June), amid the performances of global cell phone manufacturers, Motorola, the second largest American cell phone manufacturing company in the world, stands out. Motorola sold 33.9 million cell phones, outpacing Samsung by 9.5 million. With sales of $4.9 billion (about 4.9 trillion won), Motorola outstripped Samsung (4.19 trillion won).

Motorola’s operating profit rate (operating profits divided by sales), an indicator of profitability, was 10.2 percent, similar to that of its first quarter (from January to March).

In contrast, even though Samsung sold an increased number of cell phones, sales dropped by eight percent compared with the first quarter, and its market share and operating profits decreased.

LG Electronics sales dropped by 2.8 percent compared to the first quarter to 1.8216 trillion won. The company sent shock waves through the market by posting its first operating deficit.

Controversy over South Korea’s “Premium Strategy”-

On the weak second quarter performance of Samsung and LG Electronics, the Financial Times of Britain said, “They lost ground in the low price market in fast growing emerging markets such as Asia and Latin America.”

Cell phones from South Korea are selling at high prices in the U.S. and Europe. However, as the market matures, the demand for replacements is higher than the demand for new subscriptions there.

In contrast, in Latin America, Eastern Europe, and Asia, consumers tend to prefer low-priced goods to high-priced goods due to the income level. But Samsung and LG neglected these markets, according to the Financial Times.

Unlike Samsung and LG, Nokia and Motorola put great emphasis on market share, since they believe in “economies of scale,” which means even with a low profit rate, their overall profit will become bigger if their market share is big.

Lee Ki-tae, president of Samsung Electronics Telecommunications Network Division, said, “We will not be occupied with the desire to expand market share. We will be committed to high-quality, premium cell phone markets.”

Digital TV Confronted by Lowest-Priced Goods-

Other South Korean premium products are LCD (Liquid Crystal Digital) and PDP (Plasma Display Panel) TVs.

Thirty-two inch LCD TVs from Samsung and LG Electronics sell for $2,300 to $2,500 (about 2.3 to 2.5 million won) in the U.S. Meanwhile, 30-inch LCD TVs manufactured by Dell and HP of the U.S. and Hier of China sell for $1,300 to $1,400, cheaper than those made by South Korean manufacturers by $1,000 (about one million won).

The success of premium goods requires not only differentiated quality and service that sets them apart from late starters but also high brand value of manufacturing companies.

Much attention is being paid to whether the long-time experience of Samsung and LG Electronics can defeat the low-price strategy and brand value of Dell and HP.

LG Electronics said, “It is true that the low-price strategy of the U.S. and Chinese companies is putting pressure on us, but we have no plan to counter them with price-cutting. The premium strategy of digital TV is still valid.”

Do-Young Kim Sang-Hoon Kim nirvana1@donga.com sanhkim@donga.com