ecch: 310-279-1

Dr Rakesh Mohan Joshi London Business School REF: CS-10-003

Date: 2008

Videocon’s Strategic Acquisitions to Become a Global

Player in Consumer Electronics

Videocon struck a deal to acquire the Thomson colour picture tube (CPT) business on 29th
June, 2005. With this deal, Videocon acquired global CPT manufacturing capacity of 19
million units per year putting it in the league of global market leaders like LG-Philips,
Samsung and Matsushita. This acquisition was made at a time when cathode ray tube
(CRT) technology was at a decline and most global players were moving away from the
business and it was financed with little outflow of funds.

Background

Videocon Industries Limited was incorporated in 1987 mainly to manufacture televisions,

both black & white and colour and washing machines. Over the years, the company grew
(Exhibit I) to become India‟s largest consumer electronics and home appliance company
with up to 80 percent market penetration on a domestic level. Videocon gradually added
new product lines such as home entertainment systems, electric motors and air
conditioners in 1990, refrigerators and coolers in 1991, glass shells for CRT in 1995,
kitchen appliances and crude oil in 1996 and compressors and compressor motors in 1998.

Videocon broadly segmented its domestic and international business under two core
activities, which included the manufacturing, assembly, marketing and distribution of
consumer electronics and home appliances, and exploration and production of oil and gas.

This case was prepared by Dr Rakesh Mohan Joshi, Indian Institute of Foreign Trade, New Delhi, India as a basis for
classroom discussion rather than to illustrate either effective or ineffective handling of a management situation. The case
study was supported by the Aditya Birla India Centre at London Business School.

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retrieval system, or transmitted in any form or by any means electronic, photocopying, recording or otherwise without written
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It owned 17 manufacturing facilities across India and also had operations in multiple
countries as shown in Exhibit II.

The consumer electronics segment included products such as televisions, video and home
entertainment products whereas the household appliances segment included refrigerators,
washing machines, air conditioners, microwave ovens, vacuum cleaners, dishwashers and
small appliances such as irons, heaters, fans, mixers, water purifiers, etc. The company‟s
CRT glass segment included Videocon Narmada Glass that offered glass products for
television panels and funnels.

The company had capacities to globally manufacture 22 million units of colour picture
tubes and 32 million colour picture tube glass panels, 5.6 million TV sets, 2.5 million
refrigerators, 1 million washing machines, and 400,000 air-conditioners annually, making it
one of the largest in the world.

Videocon later entered into exploration and production of crude oil in the form of a
consortium. The company set-up India‟s largest crude-oil extraction venture in the private
sector with Cairn Energy of UK at Ravva oil-fields located on the Krishna-Godavari basin
off the coast of Andhra Pradesh. It had reserves of over 250 million barrels, producing
50,000 barrels of oil per day. Out of the private sector crude oil production of the country,
about 7 percent was produced by Videocon at Ravva. The operating cost of the Ravva oil
field was reported to be lowest in the world, at less than € 0.78 per barrel of oil. The
company had also acquired exploration blocks in Australia and Oman with world‟s leading
oil and gas companies. The oil business was likely to help the company in acquiring global
assets in the fiercely competitive consumer electronics business.

In pursuit of further business expansion, the company ventured into diversified business
arenas such as consumer electronics, home appliances, petroleum, components, office
automation, internet service provider and power generation. Although diversifying business
helped mitigate risks associated with a specific industrial sector, this also led to a diffused
corporate identity.

Among the Indian TV companies, Videocon was the only one that not only managed to
survive the intense market competition due to multinationals entering the country in late
nineties, but also exhibited growth. Its share in TV receivers (including spares and kits), as
shown in Fig 1, grew marginally from 21.72 percent in 2001-02 to 23.2 percent in 2004-05,
but declined subsequently to 19.91 percent in 2005-06, however, it jumped rapidly to 37.7
percent in 2006-07.

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Fig 1: Market Share of TV Receivers

(Including spares and kits)

100

90

80

70

60

50

40

30

20

10

Videocon Industries LG Electronics Samsung India Mirc Electronics Trend Electronics Phillips Electronics Panasonic Others

Industry: Market Size & Shares, Centre for Monitoring Indian Economy, April 2008, pp 344-345

Videocon remained the largest player in the Indian colour television market. The group had
the highest share in Indian colour TV market of total 15.879 million units in 2007 with 27.2
percent, (Fig 2) followed by LG (20.4%), Samsung (10.1%), Onida group (9.8%). However,
Samsung led in the Indian LCD TV market of total 407, 900 units with 36.8 percent share
(Fig 3) followed by Sony (17.2%), LG (15.9%), Videocon Group (8.3), Phillips (6.6%), and
Sharp (4.4%), whereas LG has the highest share of 26.4 percent in Indian Plasma TV
market of total 45,500 units 1 in 2007 (Fig 4) followed by Panasonic (26.4%), Samsung
(26.4%), Videocon (7.7%), Hitachi (7.7%) and TCL (5.5%).

1
TV Veopar Journal, ADI Media Publication, April 2008, New Delhi, pp.55-65.

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Fig 2: Indian Colour Television Market

(In Percentage)

Others, 18.6 Videocon Group*, 27.2

ELCOT***, 8.8

Sony,

Phillips, 2.5
LG, 20.4

Onida Group**, 9.8 Samsung, 10.1

* Includes Videocon, Sansui, Akai, Hyundai, Kenstar & ELCOT order

** Includes Onida, Igo
*** Does not include Videocon's supplies of 10.7 lakhs sets to ELCOT
Source: TV Veopar Journal, ADI Media Publication, April 2008, New Delhi pp.55-65

Fig 3: Indian LCD Television Market

(In percentage)

Panasonic, 1.5
Haier, 1.6
Hitachi, 2.1 Others**,

Onida, 2.5

Sharp, 4.4
Phillips, 6.6 Samsung, 36.8

Videocon Group*, 8.3

LG, 15.9
Sony, 17.2

*Includes Videocon, Sansui & Akai

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** Include Toshiba, Sanyo BPL, TCL, FTD and Videotex

Source: TV Veopar Journal, ADI Media Publication, April 2008, New Delhi, pp.55-65

Fig 4: Indian Plasma Television Market

(In Percentage)

TCL, 5.5
Hitachi, 7.7
LG, 26.4
Videocon , 7.7

Samsung, 26.6
Panasonic, 26.4

Source: TV Veopar Journal, ADI Media Publication, April 2008, New Delhi, pp.55-65

Videocon’s Business Strategy

Videocon‟s business strategy had been based on a low-cost high-turnover. Being one of
the largest manufacturers of television and its components, Videocon had the advantage
of economies of scale and low cost due to indigenisation. However, with the considerable
fall in import duties on CPTs, the cost advantage of Indian manufacturers including
Videocon was on the decline.

Although the company focussed on the low-end, low-tech and first-time-buyer segment, it
also adopted a multi-brand strategy so as to cater to various market segments and make
optimum use of its deep-rooted distribution network in India.

Videocon faced stiff competition from big branded players like LG, Samsung and Haier
following India‟s economic liberalisation. Videocon‟s massive production capabilities at
geographically diverse locations placed it among the leading contract manufacturers to
major global brands. Image of Videocon had been that of a brand in low to medium price
segment whereas the MNEs relied heavily on their cutting edge technology and global
image.

Videocon adopted a multi-brand strategy to benefit from scale economies in manufacturing

and distribution. This was done by forging tie-ups with several global brands to serve the

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needs of all customer segments in the low-end, middle class and even in the up market.
Apart from the flagship brand Videocon, the company housed about ten brands like
Toshiba, Sansui, Akai and Hyundai, catering to almost 30 percent of the entire Indian
market.

Videocon acquired Akai India, from Baron International in 1999, but could only manage to
sell a few products at select dealer outlets in small towns. It also bought manufacturing
and marketing rights of Hyundai electronics in 2005 for the high-end consumer durable
range but Hyundai could not compete with other Korean brands such as LG and Samsung,
which enjoyed tremendous brand equity in India.

Multiplicity of brands at the same price point also led to cannibalisation of sales among the
brands. For instance Sansui competed in the same price segment of company‟s umbrella
brand, Videocon, leading to erosion of its market share. Over the years Videocon, the
group‟s mother brand slipped in the Indian market and found it difficult to compete in the
high-end space. At best, it was positioned as a main market brand. This led to a state of
diffused positioning for its brands. Videocon seemed to be struggling over its desire to
continue with its multi-brand strategy.

Rationale

At a time when the markets were fast moving away from CRT/CPT to plasma and LCD
(Liquid Crystal Display) technology, Videocon explored its fortunes in the outdated assets
of Thomson‟s CPT business. With the breakthroughs in technology, the new trend in
television industry was Flat Panel Display (FPD). The FPD market comprised of LCD TV
and Plasma TV. FPD market was undergoing metamorphism turning from high price, low
volume and low consumer awareness to affordable pricing and consumers‟ growing desire
for enhanced technology and cinematic viewing experience. As the technology became
increasingly available, the prices of LCD TVs were likely to fall considerably leading to
increase in market share in all parts of the world.

In high income countries, the LCD technology had already penetrated deeply in markets
whereas in low income countries, it was still making inroads. The LCD TVs accounted for
86 percent market share in Japan, 84 percent in west Europe and 78 percent in North
America2.

Despite CRT technology being in the declining phase of life cycle, it remained the most
widely used technology in the Indian colour television segment. The share of CRT TV was
likely to decline3, as shown in Fig 5, from 92.9 percent in 2008 to 45.2 per cent in 2012
whereas the LCD was likely to become most prominent technology from a meagre share of

2
iSupply Corporation, March, 2008.
3
Display Search India TV Market: TV‟s Emerging Land of Opportunity, Sep 2008.

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6.6 percent in 2008 to 56.2 per cent in 2012. Besides, the PDP (Plasma display) was likely
to grow from 0.5 percent in 2008 to 1.3 percent in 2012, as shown in Fig 5.

Fig 5: Indian TV Segment Forecast by Technology

(in percentage)

120

100
96.2
92.9

86.4

80
74.2

60
57.8 56.2

45.5
40 41.0

24.8
20

12.9

6.
3.
0
2007 2008 2009 2010 2011 2012

CRT LC PDP

Source: Display Search: India TV Market: TV's Emerging Land of Opportunity, September, 2008

Videocon‟s global acquisition strategy had been based on buying distressed assets at
through away prices, financing them through innovative means and turning them around
by leveraging its experience in managing large scale operations at diverse locations and
complex supply chains. To consolidate its operations on a global scale, Videocon had
been eyeing the ailing electronic business of South Korea‟s Daewoo Group4. It also had
acquisition intentions across the globe including Japan‟s Pioneer, Taiwan‟s Chungwa
Picture Tubes and a host of other companies.

Videocon had a relationship with the French media and electronic major Thomson SA who
had been supplying colour picture tubes to Videocon for the last 15 years from its
European factories. Thomson SA also purchased glass from Videocon‟s Glass Plants in
India. In 2004, Thomson also sold some equipment and provided technology support to
Videocon.

On June 29, 2005 Videocon entered a deal with Thomson SA to acquire its CPT
manufacturing business for 240 Million Euros. This gave Videocon ownership control over
Thomson SA‟s CPT manufacturing plants across China, Poland and Mexico with an
aggregate capacity of around 19,000,000 units of CPTs along with 4000,000 pieces CPT
glass per annum. In a separate deal, a month earlier it acquired Thomson‟s Italian CPT

4
“Morgan Arm Ahead in Race for Daewoo Electronics”, Business Standard, February 17, 2008.

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plant for US $100 Million. A week later, on July 8, 2005, Videocon announced takeover of
Swedish white goods major AB Electrolux‟s loss making Indian operations, Electrolux
Kelvinator Limited (EKL). As a result, Videocon‟s total turnover were expected to double to
US $ 4billion with more than US $2 billion coming from its global operations5.

The Thomson CPT deal also provided Videocon access to over 2,000 patents and state-
of-the art manufacturing and R&D (research and development) facilities in Italy, Poland,
Mexico and France. The acquisition also helped Videocon group achieve a global scale of
operations and efficiencies in integrated manufacturing of CPTs with CPT glass and
transform into one of the largest players in the world.

Valuation & Due Diligence

Videocon adopted an aptly crafted strategy to finance its trans-national acquisitions. The
deal to acquire Thomson SA‟s CPT business was completed through a special purpose
vehicle, Eagle electronics. While, Videocon agreed to pay the asking price of 240 million
Euros without negotiating, the net of cash and debt, continued to be Thomson‟s. Videocon
managed to sell its oil and gas story to Thomson as a great investment opportunity and got
it to agree to invest 225 million Euros in Videocon Industries Limited for a 15 percent stake
and two board seats. Thomson SA also agreed to buy a limited number of strategic equity
interest for 15 million Euros in Videocon International Ltd. This financing strategy gave
Videocon a good cash-flow for expanding further in international markets.

Videocon also consolidated its operations by an amalgamation of Videocon International

(consumer electronics) and cash rich Petrocon (oil and gas) into Videocon Industries
Limited. Apparently, it was carried out to offset the sagging consumer electronics segment
with the shoring up of revenues from oil business with an amalgamated balance sheet.
The merger of oil business with consumer electronics also led to challenges related to
company‟s identity crisis.

Prior to acquisition of Thomson‟s CPT business, televisions contributed 50.4 percent of

Videocon‟s revenue in 2005, as shown in Fig 6, followed by glass shells (16.1%),
refrigerators (9.1%), washing machines (6.5%), air conditioners (5.8%), components (4.9%)
and others (7.1%), whereas after the acquisition, in 2008, televisions contributed 31.9
percent (Fig 7) followed by Thomson CPTs (31.3%), glass shells (9.9%), refrigerators
(8.2%), washing machines (4.6%), air conditioners (5.8%), components (4.3%) and others
(3.9%).

5
“Videocon Emerges as US$ 4 billion Indian Multinational”, Press Release, Videocon, June 28,
2005.

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Fig 6: VIL's Revenue Break-up of the Consumer Electronics & Components Segment
In percentage (2005)

Others, 7.1
Components, 4.9
ACs, 5.8

Washing Machines, 6.5

Televisions, 50.4
Refrigerators,

Glass Shells, 16.1

Source: Videocon

Fig 7: VIL's Revenue Break-up of the Consumer Electronics & Components Segment
In percentage (2008)

Components, 4.3
Others, 3.9
Air conditioners

Washing Machines, 4.6 Televisions, 31.9

Refrigerators, 8.2

Glass Shells, 9.9

Thomson CPTs, 31.3

Source: Videocon

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Post Merger Integration

Videocon leveraged upon its acquisition of Thomson SA‟s CPT business to achieve scale
economies by vertically integrating the glass shell and picture tube business on a global
scale. The acquisition provided strategic edge to the company to access markets such as
Europe and North America, which otherwise presented a much greater hurdle for an Indian
firm to penetrate. The Chinese production facilities offered the most cost-effective
production locations in the world with a good infrastructure support providing competitive
advantage to grab international markets. By way of consolidating its global operations and
inducing professionalism in managing the company, Videocon aspired to become an
Indian multinational.

Upgrading product quality and improving productivity appeared to be Videocon‟s new

focus. The acquisition of Thomson‟s R&D facilities helped the company in creating a
network of five global research centres. The company had three product development
centres at China, India and Italy. As a part of quality improvement efforts, the company
implemented quality systems across all its offices and manufacturing locations in India. It
also undertook a six sigma campaign and implemented an optimal supply chain
management system.

Videocon was in the process of consolidating operations on global basis so as to achieve

competitiveness in the global marketplace. Its Thomson CPT segment was organised into
three strategic business units which were - services that provided end-to-end management
of business-critical services (physical media, electronic media, network operations);
systems and equipment that offered video-focussed systems and equipment; and
technology that developed and monetized technology (research, licensing, silicon solutions,
software and technology solutions), providing third-party licensing.

Videocon planned to upgrade the facilities acquired from Thomson SA by adding new
product lines including Slim Tube, Plasma, LCD and other FPDs. It re-engineered the
Italian plant for assembling end-products such as CTVs for the EU market. It was in the
process of setting up an air conditioner assembly line and a plasma panel assembly line to
meet the growing demand of FPD TV‟s from the EU region.

Videocon‟s plant in Poland employed around 4,100 personnel and manufactured all
components in the value chain, including glass, electron guns and yokes. It had an annual
production capacity of approximately 5.4 million CPT‟s and around 4 million glass shells. It
catered to the Turkish market, Western and Eastern Europe (including TV assemblers
such as Beko and Vestel) as well as the Russian market. Being cheaper than other EU
nations, Poland also acted as a low cost manufacturing base for the company in the EU.

The Mexico facility was strategically located to cater to the NAFTA, Latin American and
European markets. Chinese facilities located in Dongguan and Foshan had capacity of

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around 4.9 million CPT units. These were aimed at serving the huge domestic market in
China and exported to Europe, Russia, NAFTA and South East Asia.

However, Videocon seemed to be hovering upon the issue of consolidating its global
operations so as to evolve a leaner operational structure and cut cost significantly to
improve business profitability 6 . The company was also struggling with the decision to
rationalise its manufacturing in India by reducing the number of manufacturing facilities
and retaining the most effective ones.

Move towards Family Based Management to Professional

Management
Videocon was a family owned company controlled by its promoters. The Dhoot family
owned 67.75 percent share (Fig 8) followed by custodian (13.63%), corporate bodies
(6.05%), individuals (4.7%), mutual funds (MFs)/financial institutions (FIs) (4.01%) and
foreign institutional investors 7 (FIIs) (3.92%). Videocon was not only a family owned
company but perceived to be family managed as well rather than being managed
professionally.

Fig 8: Videocon's Share Holdings*

(In percentage)

MF/FI, 4.01
FII, 3.92
Individual, 4.7

Corporate Bodies,
6.05

Custodian, 13.63

Promoters, 67.75

th
* As on 30 June, 2008: Source: Bombay Stock Exchange Limited

To induce professionalism in the management of the company, Videocon hired a fleet of

professionals including the former M.D. of LG India, K. R Kim as its Vice-Chairman for their
global consumer electronic operations. Kim was expected to inculcate a professional work-
culture in the company and rationalise and consolidate its global business. Videocon

6
“New-Look Videocon to Axe Brands, Plants”, The Economic Times, 24 September, 2008.
7 th
Bombay Stock Exchange Limited, as on 30 June, 2008.

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wanted to leverage its global acquisition of Thomson‟s CPT business to position itself as
„an Indian multinational‟ in its promotional campaigns.

Videocon was the only group globally to have complete backward integration (Fig 9) from
sand to branded TVs. This offered Videocon a unique synergy in global CTV business as it
manufactured its own glass, CRTs and CTVs. Glass Shells (glass panel and funnels)
accounted for nearly 60 percent of the CRT costs. The manufacturing process for glass
shells was capital-intensive. Videocon claimed to have the highest yield (per unit of
investment) of 91 percent in the world in its Bharuch based glass shell facility. Thus the
company aimed at becoming a global sized vertically integrated entity in the display device
segment and CPT glass manufacturing.

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Fig 9: Videocon: The Vertically Integrated Company at Global Scale

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Exhibit I: Videocon: Over the Years

Year Major Events

1987  Incorporation of Videocon Industries Ltd. to manufacture televisions
(Black & White and Colour) and washing machines
1989 - 2000  Initial growth in financial performance but downward trend witnessed in
later years
 Gradual expansion and growth of company;
 New product/s lines added:
1990  Home entertainment systems, electric motors, AC,
1991  Refrigerators, coolers,
1995  Glass shells for CRT
1996  Kitchen appliances, crude oil
1998  Compressors , compressor motors
2001-03  Gradual deterioration in financial performance, drop in sales and
shifting from profits to loss
 Started export business with Toshiba –Indonesia and Thompson-
Poland
 Obtained ISO 14001 & OHSAS 18001 certifications
2004-05  Acquisition of Thompson CPT business in Poland, Italy, Mexico and
China
 Acquisition of AB Electrolux‟s Indian operations
 Gradual improvement in financial performance of the company
2005-08  Consolidation of global operations
 Innovation and diversification in the new areas

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Exhibit II: Videocon’s Global Business Activities

India TVs, Washing Machines, Refrigerators,

Compressors,Air Conditioners, CPT Glass, Olil
& Gas
Anagni, Italy Tubes, TVs, R&D
Plaseczno, Poland Tubes, Glass, Guns, Yokes
Mexicalli, Mexico Tubes
Paris, France CPT, HQ
Foshan, China Tubes, R&D
Dongguan, China Tubes, Guns
Japan Plasma, R&D
Korea R&D
Oman Air Conditioners
Source: Videocon

Postscript

International acquisitions had become increasingly popular instruments among the firms
across the world to consolidate, protect, and advance their positions and enhance their
global competitiveness. The most attractive returns from acquisitions occurred where scale
economies could be achieved, which meant buying consolidation among the peer
companies.

A number of Indian companies were on the fast track to become major twenty-first century
multinationals and likely to play a significant role in the global marketplace. These firms
were fast gaining global market share, making worldwide acquisitions and emerging as
important customers, business partners, and competitors for the world‟s largest companies.

These emerging Indian multinationals with low production costs, leadership, appealing
products and services, state-of-art facilities and systems with their overseas expansion
were likely to radically transform industries and markets around the world. These emerging
multinationals such as Videocon whose journey to globalisation had just begun were likely
to offer formidable challenges to the established companies in quest for innovation, in
competition for supplies, in search for talents, in worldwide acquisitions, and in capturing
markets.

Amid the fear of obliteration among the most indigenous companies in face of onslaught of
fierce competition from MNEs, consequent to opening up of Indian economy, Videocon
demonstrated its aptly crafted business strategy to achieve remarkable growth and global
expansion rather than mere survival.

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