Samsung, SK, LG Groups Rethinking Operations in China

Three of Korea’s top conglomerates – the Samsung, SK and LG groups -- are rethinking and enhancing their operations in China.

Samsung Electronics will hold a “Global Innovation Day” tomorrow in Suzhou, China, to increase productivity at its plant there. To be hosted by the company’s Vice Chairman Lee Yoon-woo, the event will have in attendance Samsung Group heir apparent Lee Jae-yong, chief of China operations Lee Keun-hee, the heads of Samsung branches and subsidiaries, and staff from plants from across China.

They will promote cases of innovation at Samsung’s Korean plants to production bases in China, including in Huizhou, Tianjin and Weihai.

A Samsung source said, “The event will discuss ways to innovate manufacturing operations in China rather than simply checking local operations there.”

The move comes as China, dubbed “the world’s factory,” is also emerging as a major global market amid increasing global competition there. The Chinese economy is poised to grow around eight percent this year.

Samsung Electronics said the innovation event seeks to change the recognition of China as a production base with cheap labor into that of a multipurpose production hub with productivity and efficiency as high as in Korea.

In the face of Chinese companies chasing and intensifying competition with Japanese and Taiwanese rivals, Samsung Electronics is moving to upgrade the capacity of its plants in China.

The most notable example is an LCD panel plant Samsung Electronics is building in Suzhou at a cost of 2.6 trillion won (2.2 billion U.S. dollars). The company has operated an LCD module plant in Suzhou to assemble LCD panels shipped from Korea, but plans to produce LCD panels there as well.

Until two to three years ago, Samsung Electronics did not respond to Beijing’s invitation to invest but has had a change of heart in the face of competitors investing in China. Sharp of Japan and LG Display of Korea will invest in LCD panel production lines in China. Taiwanese LCD producers AUO and CMO are raising their presence there amid strengthening ties between Beijing and Taipei.

Chinese companies with sixth-generation LCD production lines are also closing in on Korean competitors with eighth-generation lines.

A Samsung Electronics source said, “China’s central government is moving to increase tariffs on LCD panels, and we could suffer damage unless we build a plant in China,” adding, “If we don’t build an LCD panel plant in China, we’ll lose our market right before us.”

The company has also shifted its market strategy in China from premium products to “masstige (products for the masses).” Accordingly, it will likely expand operations targeting China’s mass market and smaller cities, while maintaining a conventional strategy targeting high income earners and large city dwellers.

The SK Group is also reviewing its China operations. More than 30 of its top executives including Chairman Chey Tae-won, SK Energy Vice Chairman Shin Hun-chul, and SK Telecom President Chung Man-won held a meeting in Beijing Monday last week.

Chey asked his staff at the meeting “to review China operations from scratch,” urging them not to get complacent. He said SK will not necessarily succeed in the Chinese telecom and energy markets just because of its success in Korea, pushing the search for a third growth engine in China aside from telecom and energy.

The SK Group said its achievements in China are rather meager considering its extensive efforts spanning nearly 20 years in the Chinese market. In the 1980s, the late SK Chairman Chey Jong-hyun was a “secret envoy” in normalizing Seoul-Beijing ties, while his son Tae-won made a “Hangzhou Declaration” in calling China “SK’s second domestic market.”

The group, however, has made no significant achievements in the telecom and energy sectors due to Chinese trade and investment barriers. The prevailing mood at the conglomerate is, “SK can no longer afford to wait further. It is time to attain achievements.”

As such, the conglomerate is likely to merge and reshuffle more than 110 subsidiaries and branches in China to increase efficiency, following SK Telecom’s sale of its stake in China Unicom. Instead, the group will raise the status of SK China.

Moreover, the group will probably step up efforts to find a new business with more than 500 billion won (428 million dollars) as seed money funded by proceeds from the sale of the China Unicom stake.

For the LG Group, its top managers including Chairman Koo Bon-moo, LG Electronics Vice Chairman Nam Yong, and LG Display President Kwon Young-soo visited Nanjing, China, Oct. 27.

Nanjing is the site of the group’s largest production base in China. Koo there held a “consensus meeting” with chiefs of LG affiliates Monday last week to finalize the group’s business plan for next year.

Chairman Koo told senior executives in China, “We will expand investment in China,” and stressed that “China is not a production base but a strategic market that must grow in partnership with Korea.”

The LG Group will change its China strategy aimed at expanding the market share into one focusing on profitability.

LG Display will invest 4.7 trillion won (4.02 billion dollars) in Guangzhou to build an LCD plant, while LG Electronics will develop a profitability model integrating products and solutions (software) to counter Chinese rivals that are rapidly catching up.

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