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CONFIDENTIALDevelopingaWinningStrategyfortheMicrowaveOvenBusinessinChinaLGElectronicsTianjinAppliancesCo.,LtdFinalprogressreviewApril9,2001Thisreportissolelyfortheuseofclientpersonnel.Nopartofitmaybecirculated,quoted,orreproducedfordistributionoutsidetheclientorganizationwithoutpriorwrittenapprovalfromMcKinsey&Company.ThismaterialwasusedbyMcKinsey&Companyduringanoralpresentation;itisnotacompleterecordofthediscussion.THEJOINTLG/McKINSEYTEAMHASCOMPLETEDTHEPROJECTWITHIN5WEEKSModulesKeyactivitiesMarketDemand/ForecastForecastpotentialmarketbysegmentthroughrefiningmarketsegmentation,understandingkeygrowthdrivers,andmodelingmarketgrowthLGEperformanceassessmentConductinternaldatacollectionwithinLGEDevelopsoundunderstandingofvaluepropositionbasedonavailablemarketresearchincludingbrandingandconsumersurveyStrategicdevelopmentopportunitiesAnalyzedifferentproductmixoptionsGatherinformationonbrandingandmarketingConductchanneldiagnosisAnalyzevaluechaincostsCompetitorDevelopcompetitiveassessmentformicrowaveovencompetitorsConductinterviewswithdistributors,retailers,governmentagencies,competitorstocollectcompetitorinformationConsumerConductconsumersurveyviaexternalresearchhousein6specifiedcitiesand1ruralareatounderstandconsumerpurchasingbehaviorEndproductsMarketdemandforecastbyareasandproducttypeCurrentorganization’sstrengthsandweaknessesCurrentprocessesandincentivesystemsstrengthsandweaknessesLGEaspirationsforfuturegrowthHighlevelrecommendationonproductmixBrandpositioningstatusandrecommendationsChannelmixdiagnosisandhighlevelchannelprioritizationDetailedbreakdowncomparisononcosts,COGSinparticularAnalysisonoverallcompetitiveenvironmentDetailedinformationoncompetitorperformanceincludingsales,branding,pricing,channelmixandincentivesKeycompetitors’COGSanalysisStrengthsandweaknessesofeachcompetitorgroupandtheimplicationsDetailedanalysisonconsumerpurchasingpattern1TODAY'sDISCUSSIONTheMicrowaveovenmarketinChinawillcontinueitsstronggrowthandshouldreach7.5millionunitsin2003.PrimaryregionswillbeCentralChina,followedbySouthandSouthwestChina.Otherregionsshoulddevelopasincomegrows.Computergrillandmechanicalgrillshouldfurtherincreasetheirshareaspricesdecline.

Fourcustomersegmentsarefoundfrommarketresearch:Premiumbuyers,basicbrandbuyers,rationaltechnophile,andgenericbuyers.Allsegments,exceptpremiumbuyers,arehighlyprice-sensitive,thusskewingmarketdemandtowardslow-endproducts.Atthesametime,reliableperformance,easeofuse,andgoodafter-serviceareimportantacrosssegments.ThecompetitioninChinaisalreadyintenseandwillcontinuetoincrease,asGalanzandMideahavehugeambitionsinthemarket.Inaddition,thesevereovercapacity(about45%)willcontinuetoforcepricesdownwardsthusthreateningprofitabilityforallbutthelowestcostplayers.LGhasbuiltasuccessfulplatformforgrowth,becoming#2inChina,althoughfarbehindGalanz,byfocusingonpremiumproductsandintheBeijingarea.Facedwiththeissueoffurthergrowthandimprovingprofitability,LGnowneedstochoosebetweenahighgrowthstrategy,withtheobjectiveofbecomingtheleadingplayerandtoreachbreakevenin2005,ortoremainapremiumnicheplayerfortheforeseeablefuture.Toachievetheaspirationofbecomingaprofitable#1PlayerinChina,LGneedstolaunch5strategicinitiatives:(1)launchathreestepregionalexpansion,firstfromBeijingtoWuhan,(2)introduceentryproductstocoverallpricepointswhilecontinuingtointroducehighendproductstocreatemargins,(3)improvechannelcoveragebyincreasingthedistributornetworkandthesalesforceresources,(4)increasesignificantlyadvertisingspendingwhileoptimizingmediamix,(5)reduceaggressivelycostbyleveragingeconomiesofscale.2TODAY'sDISCUSSIONTheMicrowaveovenmarketinChinawillcontinueitsstronggrowthandshouldreach7.5millionunitsin2003.PrimaryregionswillbecentralChina,followedbySouthandSouthwestChina.Otherregionsshoulddevelopasincomegrows.Computergrillandmechanicalgrillshouldfurtherincreasetheirshareaspricesdecline.

Fourcustomersegmentsarefoundfrommarketresearch:Premiumbuyers,basicbrandbuyers,rationaltechnophile,andgenericbuyers.Allsegments,exceptpremiumbuyers,arehighlyprice-sensitive,thusskewingmarketdemandtowardslow-endproducts.Atthesametime,reliableperformance,easeofuse,andgoodafter-serviceareimportantacrosssegments.ThecompetitioninChinaisalreadyintenseandwillcontinuetoincrease,asGalanzandMideahavehugeambitionsinthemarket.Inaddition,thesevereovercapacity(about45%)willcontinuetoforcepricesdownwardsthusthreateningprofitabilityforallbutthelowestcostplayers.LGhasbuiltasuccessfulplatformforgrowth,becoming#2inChina,althoughfarbehindGalanz,byfocusingonpremiumproductsandintheBeijingarea.Facedwiththeissueoffurthergrowthandimprovingprofitability,LGnowneedstochoosebetweenahighgrowthstrategy,withtheobjectiveofbecomingtheleadingplayerandtoreachbreakevenin2005,ortoremainapremiumnicheplayerfortheforeseeablefuture.Toachievetheaspirationofbecomingaprofitable#1PlayerinChina,LGneedstolaunch5strategicinitiatives:(1)launchathreestepregionalexpansion,firstfromBeijingtoWuhan,(2)introduceentryproductstocoverallpricepointswhilecontinuingtointroducehighendproductstocreatemargins,(3)improvechannelcoveragebyincreasingthedistributornetworkandthesalesforceresources,(4)increasesignificantlyadvertisingspendingwhileoptimizingmediamix,(5)reduceaggressivelycostbyleveragingeconomiesofscale.3THEMWOMARKETINCHINAHASGROWNTO4.4MILLIONSETS1997-2000ChinaMWOretailsalesvolumeThousandsets1997199819992000CAGR=32%source: LightIndustryInformationCenter,componentmanufacturers,Galanz,LG,teamanalysis,SICTeamestimationbasedoncomponentpurchasesminusinventoryandexportvolumeforGalanzMWOmanagementestimationbasedonsalesvolumeofGalanz’20largestdistributors3,8004PENETRATIONISDRIVENBYINCOMEINCREASE2000penetrationratebyregionRMB,percentPenetrationratePercent

AnnualdisposableincomeRMB

1991-1999SHpenetrationrateRMB,percentPenetrationratePercent

AnnualdisposableincomeRMB

ShanghaiBeijingGuangdongChongqing

Source: ChinaStatisticYearbook5BASEDONTHEEXPECTEDINCOMEGROWTH,18%ANNUAL

GROWTHRATEISEXPECTEDFORTOTALCHINA

MICROWAVEOVENMARKETINTHENEXT5YEARSKeyassumptionsIncreaseofpenetrationrateinurbanareasfrom14%in2000to30%in2005Increaseofurbanhouseholdnumbersfrom99millionin2000to114millionin2005TotalChinamicrowaveovenmarketforecastThousandunitsSource: Teamanalysis20002001E2002E2003E2004E2005ECAGR=

18%Lowestimate=3,800Lowestimate=8,4646HUABEI(NORTHERNCHINA)REGIONHASBEENTHE

LARGESTMARKETFORMWOINCHINA * EstimatedbyLGsalesbranchesSource: SICTotalChinasalesvolume–YYSC

Thousandsets,percentHuaBeiandHuaDongstillaccountformorethan60%ofthewholemarketHowever,salesinXi-Nan,DongBei,andHuaChunghasgrownevenmorerapidly100%=6528477601,032BeijingShanghaiGuangzhouShenyang19971998199920002000totalChinasalesrevenue–YYSCRMBthousands,percent762,591779,450667,818753,6791997199819992000ChengduWuhan3.05.22.37.247.734.6%29.542.16.77.88.35.67.813.09.54.035.430.534.127.54.711.212.310.23.67.0BeijingShanghaiShenyangWuhanChengduGuangzhou3.0100%=9.09.012.011.028.031.01,5842000plusselectedhypermarkets*7BASEDONTHEINCOMEDEVELOPMENT,DEMANDFORECASTANALYSISSHOWEDTHATCENTRALANDSOUTHERN

REGIONWILLHAVETHEHIGHESTGROWTHChinatotalurbanhouseholdnumberincreaseby30%perannumfrom

2001-2005DisposableincomepercapitaintotalChinaurbanareasincreaseby6%perannumfrom

2001-2005MarketsizeforecastbyregionThousandsets;percent100%=19972005E2000CAGR

PercentKeyassumptions

Source: Teamanalysis,ChinaStatisticYearbookBeijingShanghaiGuangzhouShenyangWuhanChengdu1,9309,8004,40018171223193420HIGHESTIMATE8MarketsizeofeachregionThousandsetsBEIJING,SHANGHAIANDWUHANWILLBETHELARGEST

MARKETSIN20054651,02820002005Chengduregion4531,98320002005Wuhanregion23656120002005Shenyangregion1,0552,23320002005Beijingregion7541,85320002005Guangzhouregion1,3992hanghairegionHIGHESTIMATE9ALTHOUGHREGIONSOTHERTHANBEIJINGONLYACCOUNT

FORSMALLSHARECURRENTLY,TREMENDOUSGROWTH

ANDHEALTHIERMARGINAREEXPECTEDTHERE2001-2005growthpotential

CAGRProfitabilityLG2000grossmarginpercentMarketsizetodayShanghaiBeijingGuang-zhouChengduShenyangWuhanHIGHESTIMATE

Source: LG,teamanalysis10SALESFROMSINGLEFUNCTIONPRODUCTSHASSHIFTEDTOWARDSMECHANICALGRILLPRODUCTS * EstimatedbyLGsalesbranches Source: SICTotalChinasales–YYSC

Thousandsets,percent100%=6338477751,032SensorComputergrillMechanicalgrillSingle1997199819992000Salesrevenue–YYSCRMBthousands,percent100%=629,680728,891592,880707,582SensorComputergrillMechanicalgrillSinglefunction199719981999200022.01,58431.047.02000plusselectedhypermarkets*11RECENTBUYERSTENDTOBUYMOREMECHANICALGRILL

PRODUCTSTHANBEFORETypeofMWOboughtPercentSinglefunctionMechanicalgrillComputergrillTemperature**controlDon'tknowAllownersRecentbuyers* * Thosewhopurchasedinpast12months ** PartissubsetofcomputergrillSource: AMIcustomersurvey12PRODUCTTYPEMIGRATIONRELATESMORETOTHE

PRICEDROP1997-2000productevolutionRMBPercentSalesofmechanicalgrillproductshasincreasedalotduetothepricedrop.ComputergrillproductsareexpectedtogrowquicklyforthesamereasoninnearfuturePriceofmechanicalgrillproductinYYSCPriceofsinglefunctionproducts

inYYSCPercentofmechanicalgrilltosinglefunctionproductsinYYSC

Source: SIC13DEMANDFORECASTANALYSISSHOWEDTHATCOMPUTER

GRILLPRODUCTSWILLHAVETHEHIGHESTGROWTHRATE

FORTHENEXTFIVEYEARSPriceofcomputergrillproductswillgodowntoRMB540-560in2005PriceofmechanicalgrillwillgodowntoRMB470-490in2005PriceofsinglefunctionwillgodowntoRMB360-380in2005MarketsizeforecastbyproducttypeThousandsets100%=199720002005E2004E2003E2002E2001EKeyassumptionsCAGRPercentComputergrillMechani-calgrillSinglefunction1,9004,4009,8008,6007,5006,4005,40018201914

Source: Teamanalysis,ChinaStatisticYearbookHIGHESTIMATE14WITHTHEOVERALLPRICESDROP,MECHANICALGRILL

PRODUCTSAREGOINGTOGAINMOREIMPORTANCE

OVERTIME2001-2005growthpotentialCAGRProfitabilityLGmarginalprofitin

percentofsalesMarketsizetodaySinglefunctionMechanicalgrillComputergrillHIGHESTIMATEMarketsizein2005Singlefunctionproductshavelittleroomforfurtherpricereduction,withmaterialcostreducedby5%p.a.,thushavingimprovingprofitability15TODAY'sDISCUSSIONTheMicrowaveovenmarketinChinawillcontinueitsstronggrowthandshouldreach7.5millionunitsin2003.PrimaryregionswillbeCentralChina,followedbySouthandSouthwestChina.Otherregionsshoulddevelopasincomegrows.Computergrillandmechanicalgrillshouldfurtherincreasetheirshareaspricesdecline.

Fourcustomersegmentsarefoundfrommarketresearch:Premiumbuyers,basicbrandbuyers,rationaltechnophile,andgenericbuyers.Allsegments,exceptpremiumbuyers,

arehighlyprice-sensitive,thusskewingmarketdemandtowardslow-endproducts.Atthesametime,reliableperformance,easeofuse,andgoodafter-serviceareimportantacrosssegments.ThecompetitioninChinaisalreadyintenseandwillcontinuetoincrease,asGalanzandMideahavehugeambitionsinthemarket.Inaddition,thesevereovercapacity(about45%)willcontinuetoforcepricesdownwardsthusthreateningprofitabilityforallbutthelowestcostplayers.LGhasbuiltasuccessfulplatformforgrowth,becoming#2inChina,althoughfarbehindGalanz,byfocusingonpremiumproductsandintheBeijingarea.Facedwiththeissueoffurthergrowthandimprovingprofitability,LGnowneedstochoosebetweenahighgrowthstrategy,withtheobjectiveofbecomingtheleadingplayerandtoreachbreakevenin2005,ortoremainapremiumnicheplayerfortheforeseeablefuture.Toachievetheaspirationofbecomingaprofitable#1PlayerinChina,LGneedstolaunch5strategicinitiatives:(1)launchathreestepregionalexpansion,firstfromBeijingtoWuhan,(2)introduceentryproductstocoverallpricepointswhilecontinuingtointroducehighendproductstocreatemargins,(3)improvechannelcoveragebyincreasingthedistributornetworkandthesalesforceresources,(4)increasesignificantlyadvertisingspendingwhileoptimizingmediamix,(5)reduceaggressivelycostbyleveragingeconomiesofscale.16MICROWAVECONSUMERSURVEYDESIGNGeographycoverageUrbanareaofBeijing,Shanghai,Guangzhou,Tianjin,Shenyang,Chengdu,WuhanSamplesizeTotal875samplesinurbanareawhoaredecisionmakersinmicrowaveIneachlocationInBeijing,Shanghai,Tianjin:100MWOowners,50MWOpotentialbuyers(innext12months)eachInGuangzhou,Shenyang,Chengdu,Wuhan:60MWOowners,40MWOpotentialbuyers(innext12months)eachMethodologyDoor-to-doorrandomsamplingFace-to-faceinterviewFieldperiodMarch9-16,2001Detailedexplanation17FOURDISTINCTIVECUSTOMERSEGMENTSAREDERIVEDFROM

THEIRRESPECTIVEKEYBUYINGFACTORS100%=875microwaveovenownerspluspotentialbuyersPricesensitiveconsumerstakeupmorethanhalfofthemarketPremiumbuyersMostcareofperformance,designandqualityLeastpricesensitiveandhashighestincidenceofusingpremiumbrands,e.g.,Nationalandsophisticatedmodels,e.g.,computergrill1BasicbrandbuyersLookingforreliablebrandforqualityassurance2RationaltechnophilesKnowledgeablebuyerswhounderstandwhattheyneedfromamicrowaveovenCarelessaboutbrand,morepricesensitive,requiringalotofproductinformationtomakethepurchasedecision3GenericbuyersBuyerswhoarenervoustohandlethemicrowaveovenLookforsimplemachineandneedgoodafter-salessupport4

Source: AMIcustomersurvey18WHILEPRICESENSITIVITYDIFFERSACROSSSEGMENTS,

RELIABLEPERORMACE,EASEOFUSE,ANDGOOD

AFTER-SALESSERVICEAREKEYFOREACHSEGMENTRankingofKBFsReliableperformanceLowpriceEaseofuseGoodafter-salesserviceFamousbrandLotsoffeaturesNiceappearanceAdvancedtechnologyWordofmouthProductpromotionPremiumbuyersBasicbrandbuyersRationaltechnophilesGenericbuyersTop5KBFs

Source: AMIcustomersurveyTotalurban19CUSTOMERDEMANDISSKEWEDTOWARDSLOW-ENDPRODUCTSEXCEPTFORPREMIUMBUYERSMWOboughtbycurrentownersProducttypeSinglefunctionTotalurbanPremium

buyerBasicbrandRational

technophilesGeneric

buyerMechanicalgrillComputergrillTemperaturecontrol*Don'tknow * PartissubsetofcomputergrillSource: AMIcustomersurvey20TODAY'sDISCUSSIONTheMicrowaveovenmarketinChinawillcontinueitsstronggrowthandshouldreach7.5millionunitsin2003.PrimaryregionswillbeCentralChina,followedbySouthandSouthwestChina.Otherregionsshoulddevelopasincomegrows.Computergrillandmechanicalgrillshouldfurtherincreasetheirshareaspricesdecline.

Fourcustomersegmentsarefoundfrommarketresearch:Premiumbuyers,basicbrandbuyers,rationaltechnophile,andgenericbuyers.Allsegments,exceptpremiumbuyers,arehighlyprice-sensitive,thusskewingmarketdemandtowardslow-endproducts.Atthesametime,reliableperformance,easeofuse,andgoodafter-serviceareimportantacrosssegments.ThecompetitioninChinaisalreadyintenseandwillcontinuetoincrease,asGalanzandMideahavehugeambitionsinthemarket.Inaddition,thesevereovercapacity(about45%)willcontinuetoforcepricesdownwardsthusthreateningprofitabilityforallbutthelowestcostplayers.LGhasbuiltasuccessfulplatformforgrowth,becoming#2inChina,althoughfarbehindGalanz,byfocusingonpremiumproductsandintheBeijingarea.Facedwiththeissueoffurthergrowthandimprovingprofitability,LGnowneedstochoosebetweenahighgrowthstrategy,withtheobjectiveofbecomingtheleadingplayerandtoreachbreakevenin2005,ortoremainapremiumnicheplayerfortheforeseeablefuture.Toachievetheaspirationofbecomingaprofitable#1PlayerinChina,LGneedstolaunch5strategicinitiatives:(1)launchathreestepregionalexpansion,firstfromBeijingtoWuhan,(2)introduceentryproductstocoverallpricepointswhilecontinuingtointroducehighendproductstocreatemargins,(3)improvechannelcoveragebyincreasingthedistributornetworkandthesalesforceresources,(4)increasesignificantlyadvertisingspendingwhileoptimizingmediamix,(5)reduceaggressivelycostbyleveragingeconomiesofscale.21GALANZISTHELEADINGCOMPETITORCompanyname:GuangdongGalanzEnterprise(Group)Co.Mainproducts:microwaveovens,electronicricecookers,airconditionersYearofestablishment:Galanzwasestablishedin1978underthename“GuizhouFeathers&DownProductsFactory”andwasengagedintheproductionandmarketingofdownproductsinChina.Yearofenteringmicrowaveovenmarket:Thecompanychangesitsname

to"GuangdongGalanzEnterprise(Group)Co.inJune1992andstartedtoproductmicrowaveovensinJuly1992.Paid-incapital:US$42.56millionNetassets:US$48.11millionTurnover:US$673.76millionProfitaftertax:US$55.59millionCapacity:12millionsetsformicrowaveovenin2000Numberofemployees:11,000

Source: Literaturesearch,2000Galanzunauditedfinancialstatements22GALANZHASALWAYSBEENTHEMARKETLEADER,WITH

ASTOUNDINGGROWTH1997-2000GalanzsalesvolumeestimationThousandsets1997199819992000CAGR=50%

Source: LightIndustryInformationCenter,componentmanufacturers,LG,Galanz,SIC,teamanalysis,HighestimateLowestimate2,40023GIVENEXPANSIONISFINANCEDBYSHORTTERMLIABILITIES,GALANZGROUPISPROBABLYDROPPINGPRICESANDLOADINGCHANNELS,WHICHMAYCONTINUEINTHEFUTURECurrentassets199819992000Balancesheet

RMBmillionsSales199819992000Incomestatement

RMBmillionsTotalliabilitiesandowners'equityLong-terminvestmentFixedassetsIntangibleanddeferredassetsTotalassetsCurrentliabilitiesLong-termliabilitiesOwners'equityEarningsbeforetaxGOGSGrossmarginGrossmargin/salesS&MG&MAExchangelossOperatingprofitOtherexpense(income)Earningsbeforetax/salesCollectionproblem

duetoloadingchannelsHasbeenfinancingfixedassetacquisitionbyshort-

termloansD/Aratioalmost80%in2000ProfitabilityimpactedbyfiercecompetitionDoesnot

fullyreflectthefinancingcostofshort-termloans9219971,2272626471351844508261021,0901,2331,8268238381,4288002583953981,0901,2331,8261,8402,9055,5821,4942,3994,71634650686619%17%16%791522424672904922531722604817(2)211652624609%9%8%

Source: 2000Galanzunauditedfinancialstatements24MIDEAHASGROWNRAPIDLYSINCEESTABLISHMENT

Source: SICMideasalesvolumeinYYSC

Sets20002001AprMayJunJulAugSepOctNovDecJan20002001AprMayJunJulAugSepOctNovDecJanMideamarketshareinYYSC

Sets25THEHIGHOVERCAPACITYWILLCONTINUETOINCREASE

PRICEPRESSURE * Alreadyexcludingdowntime;takingintoconsiderationoneshiftonly Source: LG,Literaturesearch,ChinaLightIndustryInformationCenter,ChinaHomeApplianceAssociation,Galanz,teamanalysis,componentmanufacturerPlayersGalanzLGMideaWhirlpoolSamsungDaewooPanasonic/NationalHaierSharpMitsubishiTotalThousandsets2000capacity*2000domesticsales2000overcapacity12,0002,400-3,0003,0007001,0001002,0001,0001,0001,00060055050022,6505,700-6,3001,0769003,800-4,4002000export3,3001,224N/AN/AN/A1591,6005008501997,83210,418-11,0186002,74226ASARESULT,THEPRICEHASBEENDECLINING,

TRIGGEREDBYMARKETLEADER,GALANZSinglefunctionIndustryCAGR=-18%MechanicalgrillIndustryCAGR=-17%ComputergrillIndustryCAGR=-18%SinglefunctionproductpricehasreachedthevariablecostofGalanzplus10%channelmark-upMechanicalgrillandcomputergrillproductpriceareexpectedtofollowsuitandthusincreaseshareandreduceprofitabilityatthesametimeAverageretailpriceinYYSCRMBIndustryGalanzLGGalanz2000variablecostplus10%channelmark-up

Source: SIC,LG,teamanalysis27WEEXPECTTHEPRICEDROPTOCONTINUEINTHEFUTURE * 2001JanpriceinYYSC,2000LGcoststructure ** Includingmaterialcost,utilities,gifts,logistics,rebate,and10%ofG&A *** IncludingsensorforLG’scoststructure ***** RMB449onSINO-MRSource: SIC,LG,teamanalysisProduct

typeGalanzretailPriceRMBLG'sretailPriceRMB

LG'spricetochannels(excludingVAT)RMBLG'svariablecost**RMBLG'smarginalprofitPercentToday*Singlefunction419429****3753623.5Mechanicalgrill59764654446913.8Computergrill***7361,00784861727.2Product

typeGalanzfullcostRMB

GalanzvariableCostRMBLG'spricetochannels(excludingVAT)RMBLG'svariablecost**RMB

LG'smarginalprofitPercent5yearsfromnowSinglefunction335288288-335Mechanicalgrill438379379-438Computergrill***496433433-4962863514191-157-203-1628TODAY'sDISCUSSIONTheMicrowaveovenmarketinChinawillcontinueitsstronggrowthandshouldreach7.5millionunitsin2003.PrimaryregionswillbeCentralChina,followedbySouthandSouthwestChina.Otherregionsshoulddevelopasincomegrows.Computergrillandmechanicalgrillshouldfurtherincreasetheirshareaspricesdecline.

Fourcustomersegmentsarefoundfrommarketresearch:Premiumbuyers,basicbrandbuyers,rationaltechnophile,andgenericbuyers.Allsegments,exceptpremiumbuyers,arehighlyprice-sensitive,thusskewingmarketdemandtowardslow-endproducts.Atthesametime,reliableperformance,easeofuse,andgoodafter-serviceareimportantacrosssegments.ThecompetitioninChinaisalreadyintenseandwillcontinuetoincrease,asGalanzandMidea

havehugeambitionsinthemarket.Inaddition,thesevereovercapacity(about45%)willcontinue

toforcepricesdownwardsthusthreateningprofitabilityforallbutthelowestcostplayers.LGhasbuiltasuccessfulplatformforgrowth,becoming#2inChina,althoughfarbehindGalanz,byfocusingonpremiumproductsandintheBeijingarea.Facedwiththeissueoffurthergrowthandimprovingprofitability,LGnowneedstochoosebetweenahighgrowthstrategy,withtheobjectiveofbecomingtheleadingplayerandtoreachbreakevenin2005,ortoremainapremiumnicheplayerfortheforeseeablefuture.

Toachievetheaspirationofbecomingaprofitable#1PlayerinChina,LGneedstolaunch5strategicinitiatives:(1)launchathreestepregionalexpansion,firstfromBeijingtoWuhan,(2)introduceentryproductstocoverallpricepointswhilecontinuingtointroducehighendproductstocreatemargins,(3)improvechannelcoveragebyincreasingthedistributornetworkandthesalesforceresources,(4)increasesignificantlyadvertisingspendingwhileoptimizingmediamix,(5)reduceaggressivelycostbyleveragingeconomiesofscale.29LGHASBEENEXPANDINGRAPIDLYSINCEESTABLISHMENT...SalesrevenueRMBmillions1997199819992000source: LG1997199819992000Salesvolume

ThousandsetsCAGR=21%CAGR=39%30LGISCATCHINGUPONTHEMARKETSHARE,ANDHAS

BECOMESECONDLARGESTPLAYERINCHINAOverallmarketsharebysalesvolume–YYSCPercent;set100%=633,191LG1997199819992000GalanzOthers847,008774,7601,032,198Sensor/computergrillmarketsharebysalesvolume–YYSCPercent;set100%=79,505LG1997199819992000GalanzOthers204,976208,410318,576Mechanicalgrillmarketsharesales

volume–YYSCPercent;set100%=55,551LG1997199819992000GalanzOthers103,335236,302361,983Singlefunctionmarketsharebysales

volume–YYSCPercent;set100%=498,134LG1997199819992000GalanzOthers538,697330,048351,67931HOWEVER,LGSTILLLAGSBEHINDTHEMARKETLEADERGALANZ

BYASIGNIFICANTMARGIN,ANDMIDEAISATTACKINGAGGRESSIVELY *Assumingtotalmarketsize3,800K~4,400K:Galanz2,400K~3,000K,LG700K,Midea100K,Others600KSource: SIC,teamanalysisGalanzLGMidea2000ChinaMWOsalesSalesvolumeThousandsetsMarketshareby

salesvolume*PercentMideaGalanzOthersMidea'smarketshare

hasgrownto8.7%inYYSCinJan2001,mainlytakingsharesfrom2nd-tierplayersLG63-6816-182-314-162,400-3,00032...ANDLGSTILLNEEDSTOIMPROVEITSPROFITABILITYEarningsbeforetax

RMBthousands1997199819992000

Source: LGEarningsbeforetax/salesPercent-1,581-17,698-17,137-0.68-7.4-5.5-1.5LGfinancialstatementIncorporatingallS&Mspending-44,152-43,798-6,266-28,0461997199819992000N/AN/A-18.6-13.9-6.933LGHASFOCUSEDONMULTIFUNCTIONPRODUCTS100%=LGGalanzMidea230,175613,26427,5181,032,198IndustryaverageSensor/

computergrillMechanicalgrillSinglefunction2000productmixforsalesvolume–YYSC

Percentoftotalsalesvolume;set

Source: SIC34LG'sPROFITABILITYINPREMIUMPRODUCTISMUCH

HIGHERTHANTHATONOTHERPRODUCTSOverall

Source: LGSimple

functionMechanical

grillComputer

grillSensorGrossmarginEarningsbeforetaxwithall

S&Mspending2000grossmargin,earningsbeforetax,andmarginalprofitinpercentofsales34.7-6.915.1-20.430.6-12.140.4-1.87.052.5Marginalprofit17.93.413.822.731.635LGHASDEVELOPEDASTRONGPRESENCEINBEIJING100%=352284