VIDEOCON - The True Multinational Company

The late Nandlal Madhavlal Dhoot, a wealthy farmer in Maharashtra initiated his sons,
Venugopal, Pradeep Kumar, and Rajkumar in the family business, Videocon Electronics. His eldest
son, Venugopal N. Dhoot, acquired one of India's first licenses in 1984 to make colour television
(CTVs). In 1985, through a technical tie-up with Toshiba Corporation of Japan, Venugopal formed
Videocon International Limited and launched India's first colour television. Videocon, the US$2.5
billion group controlled by the Dhoots, now makes everything from washing machines to VCR to MP3
players. Recently, Videocon bought a colour picture tube business from France's Thomson and a
refrigerator unit from Sweden's Electrolux. The group has lucrative interests in oil exploration too.

Videocon's units in India have a capacity to chum out 4.5 million CTVs, 2.5 million
refrigerators, 1 million washing machines, and 300,000 ACs. Its overseas plant in Oman manufactures
100,000 ACs per annum. In terms of components, in India, it manufactures 5 million compressors per
annum, 24 million glass panels, and 6 million glass funnels. It is interesting to note that glass shell
command margins as high as 30 per cent.

Till 2005, Videocon's individual businesses had clear identities. It started life in 1984 as a
branded manufacturer of consumer durables. In 1995, it ventured into contract manufacturing and oil
exploration. The consumer electronics and oil businesses were separate entities with separate balance
sheets. Things changed in 2005 when Videocon merged its oil subsidiary, Petrocon into the flagship
Videocon Industries Limited (VIL). Now, it has a balance sheet that has the combined numbers of both
consumer electronics as well as oil. It is clear that this was primarily done to use oil revenues to shore
up the sagging consumer electronics business. Nevertheless, it is unusual. This move has raised
questions about whether Videocon is trying out too many things. An indication of market sentiment can
be got from the fact that the company's market capitalization of Rs 96.55 million is less than even its
estimated sales (put out by domestic brokerages) of Rs 114.44 million in FYO6 (it has an October
September financial calendar).

Videocon argues that while the oil business is highly profitable, it does not have the
wherewithal to ramp up it significantly. According to Videocon, 'Consumer durables is definitely not as
profitable as oil and gas, but if we were to expand our oil business, how would we do so?' Bidding for
oil fields is becoming increasingly difficult because of the entrance of new players in the market and
the government's permission to national oil companies to bid for the blocks. The bids are heading
skywards due to expectations that the oil prices would soar higher in the near future. In other words, oil
will probably never become the group's core business. Oil exploration is expensive and large players
invest billions of dollars without the certainty of success. The supply is limited, pricing is controlled,
and the industry is sensitive to political developments. Still the dependence of the group's future on oil
cannotbe ignored. A fall in oil prices will impact the bottom hugely, especially as the sector has fixed
costs.

There is a stated intent to buy companies that have traditionally been engaged in research;
that is why Videocon is interested in acquiring Daewoo Electronics. However, the brands acquired by
the company are at the manufacturing end of a business. For example, though Videocon bought
Thomson's factories, the erstwhile French behemoth sold its brand to China's TCL. That means
Videocon will be able to use the Thomson label, even though may be making TVs in Thomson's
factories. This drategy is not entirely ill-conceived. After all there is a huge opportunity in contract
manufacturing, reckoned at US $220 billion and it includes original design manufacturing too.

Videocon's entry into original equipment manufacturing (OEM) was different from that
of global leaders such as Samsung and LG. The global companies first build strength in contract
manufacturing and then graduated to being brand leaders. After the Videocon brand suffered a serious
setback in India to LG and Samsung in the mid 1990s, the Dhoots focused on manufacturing. They
Started by manufacturing for licensed brands such as Toshiba, Hyundai Electronics, York, and Akai,
and then for domestic brands such as Onida, Salora, and Down. The group now has 26 OEM customers.

Industry observers feel that even India holds enough opportunity in OEM. According to
iSuppli, contract manufacturers' supplies to consumer electronics companies in India touched US $236
on in 2004. This figure is expected to double to US $530 million in 2009. Expectedly, Videocon has
plans to expand OEM manufacturing in India. As branded players such as Philips move out of the
manufacturing space in the sub-continent, Videocon Could have a larger share of the Indian contract
manufacturing pie.

Global contract manufacturing for CTVS is dominated by Turkish players such as the US
$2.9 billion Vestel. The US $1.4 billion Beko Elektronik and the US $550 million Profilo Telra
together have a 90 per cent market share of the European market. Chinese players such as Changhong
and Skyworth are also in the fray.
 While domestic players such as BPL and Onida saw their market share falling, the Dhoots
followed a strategy of joining hands with the enemy. They entered into alliances with Akai, Sansui,
Kenstar, Hyundai, Toshiba, York, and Kenwood to either manufacture or market their brands. In
addition, the multiple branding strategy with the success of their Sansui brand paid off as Videocon
managed to hold on to a combined market share of around 29 per cent, with LG at 26 per cent and
Samsung at around 24 per cent, according to company sources. However, industry sources put
Videocon's combined market share around 24 to 25 per cent, with the two Korean companies sharing
more than 50 per cent.

Credit must be given to the Dhoots. They not only set up a strong distribution and dealer
network but, by entering into alliances, ensured that their manufacturing capacities were kept busy. In
addition, Videocon followed the strategy of backward integration by getting into manufacturing of
components such as electron guns and metal parts; deflection yoke for CTVs and compressors; and
electric motors and plastic components for household appliances such as washing machines,
refrigerators, and ACs. The group integrated further to get into the manufacture of glass panels and
funnels, the key components for the manufacture of colour picture tubes. Videocon enjoys a unique
synergy in the global CTV business from glass to cathode ray tubes (CRT) to CTVs. Together with
other components for household appliances, this high degree of backward integration bestows upon the
company a unique benefit over competition.

Venugopal Dhoot seems to have perfected the art of acquiring companies without paying
much money. He bought 92 per cent of the Indian operations of Swedish major Electrolux for Rs 500
crore. In a back-to-back deal, Electrolux picked up a 5 per cent stake in VIL for Rs 4.15 billion. A year
later, France-based Thomson sold its colour picture tubes facilities to Videocon for €240 million
(around Rs 12 billion at that time). In turn, it picked up a 14 per cent stake in VIL. As of September
2006, the promoter holding in VIL stood at 73 per cent.

What is it that these foreign majors have seen that they chose to sell their holdings in their
businesses yet pick up a stake in the acquirer's flagship? The answers are not easy to come by. This is
the reason why corporate watchers are looking at the Daewoo deal closely. If, after Electrolux and
Thomson, VIL pulls off another financing coup, there is bound to be much discussion in the boardroom
and B-schools.
 Venugopal seems to hold the key to this puzzle. According to him, to have long-term
success in this business, one has to be integrated end-to-end on a low-cost base. Videocon has acquired
only low-cost assets in Mexico, China, and Poland. Thomson invested in Videocon because the
business was seen as lucrative, based on a global scale integration of critical components on a low-cost
base, with support of the steady cash flows from oil and gas businesses. Moreover, Thomson
strategically wanted to remain in this business; hence, they acquired the stake in Videocon. The
company believed in Videocon's strategy and felt that Dhoots were the right players to integrate and
turnaround the business.

Industry sources do not buy the Dhoots' strategy of lapping up 'distressed' CRT capacities
in the international arena at a time when there is no growth in demand for CRTs and the customers are
demonstrating a qualitative shift in consumer preference towards flat, slim, LCD, and plasma
televisions. Large multinationals generally exit a market segment once the prevalent technology gets
mature and dies. Such companies do not mind exiting at any price. Thomson began to bleed as CRT
prices come down to Chinese levels, but the costs remained European. In any case, Thomson wanted to
exit the television and tube business and its deal with Videocon was a good strategy for the company.

There are some divergent views though. According to some industry observers, They (the
Dhoots) have taken a cue from "think big, think global". They are aspiring to be the Ambanis of 
electronics. With the acquisition of Thomson's facilities and Daewoo expected to come into its fold
Videocon would have brands that will help it to tan European and American markets. The company
will not have to spend time and money to establish its own brand from scratch. Due to the huge price
difference between LCD and plasma models and the conventional models, the CRT market will
continue to hold its own. Since multinational companies in the LCD and plasma segment have invested
huge sums of money in R&D, the prices are unlikely to come down drastically.

Analysts point out that the immediate worry for Videocon would be to find enough
customers for the huge installed capacity of cathode ray picture tubes. While growth in the developed
markets is driven by new technology products, the Indian market already has a sizeable installed
capacity of picture tubes with well-entrenched players such as Samtel and Hotline. Thereby, supplying
picture tubes to the Indian market from overseas units may not be an easy task. In addition, it would be
some time before Videocon is able to produce new products such as slim tubes. Dhoot, however, says
that though the market for conventional picture tube may be on the decline, it still accounts for over 85
per cent of picture tubes sales. He expects the growth to come in from developing regions such as the
Commonwealth of Independent States (CIS), Eastern Europe, and Latin America.

There is a significant price difference between a conventional CTV and a premium

product such as LCD or plasma TVs. The narrowing of this gap is still a few years away. Till that time
there will be takers for the conventional television in developing countries in Asia, Europe, and Africa.
Videocon should be able to set up lines for new products by that time and cater to the needs of diverse
markets. The eventual success of the acquisition would depend on how quickly Videocon is able to
adapt to technological changes.

Dhoot aims at deriving optimal value out of CRI assets. In case of televisions, he intends
to be present in the global brand space through the Daewoo acquisition. He plans to build on Videocon
strong domestic position, especially in the emerging markets of this world, where the demand is being
led by the increasing propensity of the erstwhile non consumers to consumers. He also intends to build
further on on the OEM route. Videocon already has a presence in European markets through its
operations based at Anagni in Italy. The company plans to sell 15 million TV sets with plasma, LCD,
and CRT technologies. To complete its TV vertical, it will be present in the LCD space, by setting up a
plasma panel line in Italy. This is already underway and won, it will be one of the only six companies in
the world producing plasma panels. A large project of LCD panel production facility is underway and
the details with the Italian government are being worked out.

What were the strategies deployed to turn around the Thomson plants? One of the first
areas Videocon looked into was the procurement side. Glass is the key component in the making CRTs
and it has the largest facility in the world at a single location (at Bharuch, in India). Videocon is the
lowest cost producer of glass globally due to a combination of low energy, manpower, and raw material
costs. This was leveraged against the existing suppliers of glass lo the erstwhile Thomson plants. The
benefits were quite significant. In the first year, Videocon was able lo save more than €25 million.
Consolidation of CRT capacities in America and Europe has also helps its plants in Mexico and Poland.
Inventory and working capital management also played a part in the process.

The newly-acquired Thomson units are supplying picture tubes to global consumer
electronics majors with key customers being TCL and the Turkey-based Vestel. Globally, margins in
the picture tube business have been under immense pressure with prices of picture tubes declining,
while raw material prices have not come down proportionately. Videocon's strategy for integrating its
glass shells unit may do well to lower cost of production. In addition, geographically, the company's
acquired plants are at strategic locations with Mexico catering to the entire North American Free Trade
Agreement (NAFTA) region, two units catering to Europe, and two in China where the bulk of CTV
production has shifted. However, one has to keep in mind that globally the cathode picture tube is
seeing huge inventory pile-ups. In addition, the cost of maintaining a plant in Western markets is much
higher than in India.

According to Dhoot, another very significant advantage of the acquisition is that it

includes R&D centres and access to over 2,000 patents. This would enable the group to launch new
products to counter the threat posed by the conventional television market being rapidly overtaken by
hi-tech products in overseas markets. In fact, it has already set up a line for plasma television at its unit
in Italy, which it bought earlier from Thomson. This facility initially used to manufacture CRT, The
CRT lines are planned to be relocated to India. It will soon be rolling out high-tech products such as
LCD, plasma, slim tube, and other flat panel display lines. The new technologies would help the
company further consolidate its position in the Indian CTV market. The plant will churn out 100,000
pieces per annum. Meanwhile, it is currently into the assembly of AC’s. It has come up with a
technology breakthrough in LCD back-lighting. This should see the light of day soon. This new
technology, besides giving better picture quality, consumes less power, is much slimmer and
environment-friendly (as it is mercury free), and comes at a much lower cost. The strategy here is to
have a local supplier base for existing imports from Japan, Korea, and Taiwan.

Currently, the Mexico plant is into the manufacture of tubes catering to the Latin
American markets. This plant too will manufacture ACS. Hopefully, once the capacity is enhanced with
a Plasma Display Panel (PDP) line, it should turn around in 2007-08. Chinese facilities have already
stated making profits after the takeover by Videocon. While other plants are fully owned under the
special purpose vehicle (SPV) floated at the time of takeover, there is a minority stake (about 8 per
cent) left with the local partner In China.

The Chinese plants produce about 11 million tubes from its two facilities in Foshan and
Dongguan, in southern China. Sourcing and sales were earlier centralized from Paris (the Thomson
headquarters). Once it moved to regional sourcing and given autonomy, it saw a drop in costs. Since the
owners are big suppliers of glass, which constitutes about 20 per cent of the input costs, the company
was in a much better position to bargain with locals.
 With the roadmap of having Daewoo as its in house brand for the global market (subject
to the deal coming through) and a major part of the cathode ray tube or colour picture tube (CPT)
capacity to be used for contract manufacturing, Videocon will have to compete with the likes of Vestel
PDP, Beko Electronics, and Profilo Telra, all of whom are in the contract manufacturing sphere. 

Questions
1. Which grand business strategies have been followed by Videocon? According to you, should it
continue with the same business strategies or make changes in the future?
Collaboration is one of the main strategy followed by Videocon. The company is not
hesitant to join hands with their enemies in-order to capture the market share added to that they are very
wise enough to acquire those companies they(Videocon) need the most. They are good at planning and
applying those plan i.e. they even foresee the technological advancement that is gonna come and they
plan for it well in advance by setting up the plant in Italy. Videocon is very good at backward
Integration i.e.they will produce their raw material by themselves this will reduce the cost of thier
product which in-turn will improve their sales. They utilized the time between the technological
advancement handsomely added to that they wont miss any of those opportunity that comes for them.
Its better follow this same strategy for their flourishment in their market.

2. How has Videocon aligned its operations strategies with the business strategies adapted by it?
First of all videocon is not hesitant to shit its facility among countries, they shift their facility
into the country where the raw materials are available at the low cost and also to where the demand for
their product is high i.e. they are flexible enough to do this, this show their flexibility towards merging
with other companies. They are having the strong supply chain management, organizational design and
operational design which can be adopted to any kind of strategy that will be put forward by the
Videocon. They are very good at their capacity design i.e. they used manufacture up to their
demand.They are well connected in each and every activity that they are doing in different countries.

3. Which dimensions of operations would be most crucial to focus on for Videocon in the times to
come for competitive advantage? Discuss.
Videocon is very good at the low cost production of their product which provides them the
opportunity to sell their product at the low cost, this one of their competitive advantage they should
maintain this into their future. They are having very good Research and Development team which
supports them to adopt with the technological advancement Videocon has to maintain this. They are
very poor in their customer service they have to focus in this regard for their future success. They
should maintain the same level of flexibility in their manufacturing in-order to survive the forthcoming
future environment.