Well known: LG Electronics, Korean corporate power (72,000 employees, $35 billion in revenues, and a major global brand).
Not so well known: The important role IFC’s financing and advice in the 1970s played in building LG into the success it is today.
When IFC’s founding president Robert L. Garner retired in 1961, Korea had a per capita income of $110. It was an impoverished post-conflict country, with weak infrastructure and institutions, a painful past, and an uncertain future.
Today, Korea’s per capita income is $20,000. It is an active OECD member, globally competitive in many industries, and has recently announced plans to become an IFC donor.
Few other countries so powerfully confirm the wisdom of Garner’s original vision for IFC: that the private sector could be “the most dynamic force to bring widespread material progress to more people.” Or as he put it another time: a sense that “the most promising future for the less developed countries was the establishing of good private industry.”
Korea’s success in poverty reduction lies in large part to the power of its private companies. Were he here today, Garner would no doubt be delighted to know of the important role IFC played in building one of them, LG Electronics.
In the early 1970s, LG (or Lucky Gold Star, as it was then known) was a mid-sized provincial company, successfully producing and selling appliances, radios, televisions, and a few other modest products at home, but barely known outside its borders. Hoping for better things, it had a mind to expand production and increase its exports, which then brought in only $12 million a year. But there was a big barrier in the way: access to finance.
Korea’s banks were providing little long-term credit and had tough exposure limitations that kept them from making significant new private sector loans. LG thus wanted to establish relations with foreign lenders and begin accessing the international capital markets. But it didn’t know how. It needed help.
Having few international partners at the time, LG became curious about IFC, which had been growing more pro-active in the early 1970s. IFC also had an investment staff with extensive global knowledge of industries and markets — attractive assets to clients in developing countries at a time when information was much harder to come by than it is today.
A team led by investment officer Carlos Tan and engineer Mak Dehejia came from Washington in 1974. They assessed LG’s ambitious proposal for a new $35 million television tube factory, a project that could make or break the company. The location: Changwon, a planned industrial complex outside Pusan that would eventually also house major Samsung and Daewoo sites.
After running numbers on the growth potential of the Korean TV market and comparing them with similar ventures in Japan, the IFC team saw that the domestic market could never absorb the new factory’s entire output in the early years. No matter how optimistic the sponsors’ projections, Tan and Dehejia sensed serious market risk. So they recommended a major shift in strategy for production of LG’s popular black and white TVs: adding an export component.
This was the ticket to ride. On IFC’s recommendation, a distribution agreement was reached with the leading retailer in the U.S. at the time, Sears, taking advantage of LG’s position as a low-cost producer of a popular consumer product. Branded under the Sears name, the TVs soon found a ready new market in the world’s largest economy.
Before 1974 was out, IFC had provided $14.1 million in long-term financing for the new factory that LG could obtain from local banks, in the process becoming an 11.45 percent shareholder in LG. This single project doubled the company’s total assets. But even more important were the additional introductions IFC provided to its partners in the financial world. These newfound commercial banks would then become the source of much extra funding raised through the syndications program that IFC launched in 1975.
At first, most of the company’s exports came from products it manufactured for others. But IFC spotted an emerging trend. LG, a 1975 appraisal report said, was “in the process of establishing themselves as an independent exporter of their own brand products, thereby raising profit margins on exports to where they now make a significant contribution to the company’s overall profitability.”
The export business soon took off, building new customer loyalty that could then be taken up to the next level.
In the next three years, the Korean company’s sales would grow by an extraordinary 53 percent per annum. By 1978, LG’s annual exports were up to $100 million, making it one of the first emerging market multinationals to succeed on the global stage. In time, the television exports that IFC took a risk on would become core business for LG, which eventually built a major factory in Alabama, then in 1995 bought one of the best known U.S. brands in that business, Zenith.
During the 1970s and 1980s, a long-term partnership with IFC was soon underway, leading to several subsequent transactions that helped build the firm into the success it is today.
As IFC predicted more than 20 years ago, LG has indeed built a high-value brand—one that now generates more than $38 billion in sales each year, and allows it to employ 66,000 people worldwide. An estimated 86 percent of these sales now come in the foreign markets that LG first pioneered with IFC support.
Today, LG is the third largest Korean conglomerate, trailing only Samsung and Hyundai Motor Co. What an increase from the $78 million turnover and 5,000 employees it reported in 1974 when first encountering IFC, its first partner in international finance.
As he looks back at the story today, Dehejia feels the key was IFC’s special combination: knowledge and finance.
“That’s the wonderful part of the work we did,” he recalls. “We succeeded in a number of countries because we were operating around the world in a range of industries and could take this experience and spread it around, like honeybees cross-fertilizing plants. Even though we had never worked in consumer electronics before, we could advise LG on things like sourcing machinery, market risk, and capital costs, and that proved very important to them.”
If you have an idea for a “postcard from the past,” please email Celeste Diaz Ferraro at cdiazferraro@ifc.org.
