Wilting In The Heat

The change of guard at Electrolux's Indian operations is yet another symptom of the problems that the $16 billion Swedish white goods giant has had in the last few years. So

when on Monday, May 12, 1997 vice-president, marketing, Craig Ibsen, took over from Arjun

Gursahany, it came as no real surprise.

bsen's brief: consolidate investments, ensure returns and sift out the real business opportunities. In short, pull Electrolux out from the quagmire that it fell into as it strained every sinew to gain business advantage out of the opportunities of the early nineties. Ibsen is no stranger to the quicksilver fortunes of foreign markets. The 36-year old US citizen, who spent most of his 13 years working outside his home country, joined Electrolux about a year ago, quitting his last posting as the regional head with Maytag Corporation in Hongkong.

But by all accounts, Ibsen is likely to find the challenge far from easy. Two years after going on-stream, Electrolux's manufacturing arm, Maharaja International has totted up accumulated losses of Rs 30 crore. And according to Harish Kumar, the chairman and managing director of Maharaja Appliances and the second-largest shareholder in the company, the red blot on its profit and loss account isn't likely to fade away for at least another three years. This is despite the fact that the company might be able to operationally break-even in this current year.

Electrolux's biggest setback began when it was pipped to the post by arch-rival, Whirlpool in the acquisition of Kelvinator of India. That created a piquant situation: although Electrolux owned the global rights to the Kelvinator brand name, it simply did not have the manufacturing and distribution infrastructure to support its business. The option to go it alone was ruled out because a greenfield project to manufacture refrigerators with a 100 million pieces a year capacity would entail investments of between $75 million to $125 million. Besides, setting up such a plant would take up at least two years.

That's when in Febraury, 1995 it patched together the much talked about deal with Whirlpool, where the US company would get to use the Kelvinator brand name till the end of 1996 and the brand would revert to Electrolux from the beginning of 1997. Electrolux's logic was simple: in a fiercely competitive market, keep the Kelvinator brand alive at any cost, even if it meant in the interim, transferring the brand stewardship to its competition.

In the two years, Electrolux hoped it could ramp up its own manufacturing and distribution infrastructure. But there were very few units in the country that were up for sale. With options running out, it finally chose to bail out an ailing Maharaja International Ltd (MIL) by buying out a majority stake. MIL, under its maverick owner, Harish Kumar, had tied itself up in tangles and was desperately looking for a suitor. On its part, Electrolux knew MIL had all the facilities and clearances to set up a refrigerator plant. It could take care of the rest of the problems. Or at least that was the idea.

Today, as it races against time, the logic is beginning to thin. The gaps in MIL's infrastructure are slowly becoming evident. During the last calendar year, when

Kelvinator was in Whirlpool's ambit, the brand generated

sales of around 4,42,000 out of Whirlpool's total sales of 5,28,000 refrigerators according to an industry study. But even as Electrolux hopes to derive full value out of the Kelvinator brand name, it increasingly finds itself in the throes of a capacity crunch.

Ibsen insists,"We have invested around Rs 75 crore in MIL plant. Another investment of Rs 34 crore is on the card with the rights issue. All that has put us in a very comfortable situation. We are the only refrigerator manufacturer which is selling all that it is making," says he. However, the question is: Is he making enough?

The answer to this is far from convincing. While accepting that the capacity is not large enough to meet the demand for Kelvinator, Ibsen insists that the company has been able to put a capacity of 4-5 lakh units a year in place. Market sources put the figure at 2,00,000 a year. Earlier, Ibsen was quoted as saying that the company will be installing capacity of six lakh refrigerators by the turn of the century. Now, he has upped that to 7-10 lakh units a year. Where the money for this will come from is not clear. Recently, FIPB (Foreign Investment Promotion Board) rejected Electrolux's application to raise its equity.

That MIL is stretched for capacity is also borne out by the fact that it has stopped making refrigerators under the Electrolux brand name. Last year, it had sold some 40,000 Electrolux units.

This year, it will be importing refrigerators to market under the Electrolux brand. But there are limitations here too. First, imports of refrigerators below 300 litres are not permitted. Second, there is a 42 per cent import duty and a 18 per cent countervailing duty, which puts the minimum price of the refrigerator at Rs 35,000, well out of reach of most consumers. The market for such refrigeration systems as they are known as is a minuscule 30,000 units a year. And there are several players in the fray such as Samsung, Videocon-Hitachi, Godrej-GE. More players like LG and Daewoo are joining the pack. Even the otherwise optimistic Ibsen is not too sure how many of such systems he will be able to sell.

Another pointer to the capacity crunch is the falling volume. While Ibsen claims that last month Electrolux sold 20,000 refrigerators and the sales are growing and expected to double by June. However, Kelvinator sales have been dropping since December 1996. In December the last month when the brand was with Whirlpool sales were around 36,000. In January when Electrolux took over they dropped to 34,000. In February, 1997, they dropped further to 31,000. The Whirlpool's sales went up from a little over 14,000 units to over 21,000 units during the same period.

How did Electrolux manage to sell in excess of its capacity? Perhaps because it had built up inventories to service that demand. Now as the inventories dry up, the volumes are falling.

What's led to the shortfall in supplies? "Despite buying over MIL, we literally had to start from scratch set-up the factory, hire people etc," explains Ibsen. Recently, Kumar blocked attempts to pump in Rs 70 crore in an automated facility that could have taken the volumes to 5,000 units per day. Kumar doesn't see any point in going in for fully automated operations when labour is cheap. However, any labour-oriented assembly line takes much longer to stabilise. And time is fast running out. (See box: The Indian Maharaja)

Another cause of worry for Electrolux are the findings of a recent study by Marg. Kelvinator's customer and distributor ratings on various parameters have dangerously dropped compared with other competing brands in the marketplace. And to be fair, a lot of these problems owe their origin to the brand's two year stint with Whirlpool. Kelvinator continues to be seen as a reliable, durable but a not-so-exciting refrigerator, without the promise of innovation.

Despite the ominious indicators, it didn't matter as long as the brand did not deviate from its core promise of a no-frills value-for-money refrigerator. Now Electrolux has tinkered with that basic promise. At Rs 8,500, the 165 ltr Kelvinator model comes at a premium of Rs 500-800 over other refrigerators. Its advertising talks about the faster cooling properties which, if anything, reinforces the image of the staid Kelvinator.

In a supply crunch, it is difficult to predict how many customers will accept the price-value equation. But durability and quality are increasingly being taken for granted. Says a leading dealer in New Delhi, "Today, the price premium in consumer durables is linked directly to the brand features. And Kelvinator brand doesn't offer anything special on that front."

So what is forcing the company's hand? "We have to make money," shoots off Ibsen. This is crucial as the entire business strategy hinges on the inherent strength of the Kelvinator brand. The assumption seems to be that the brand pull will help put other things in place.

Take for instance, the distribution strategy. The company has been selective in selection of dealers/distributors. "The trade," feels Ibsen, "is far too fragmented. There are 10,000 retail outlets. The competition between retailers leads to fierce price cutting where no one benefits."

To ensure higher returns for its dealers, Electrolux has appointed fewer dealers. "Yet, narrowing distribution width in a fragamented retail universe can be prove to be counter-productive," avers a rival marketing manager.

Moreover, the company insists that its dealers stick to the mark-up price. By doing that, the company runs the risk of widening the already substantial price differential between Kelvinator and competing brands. Sooner or later, the dealer, who is not allowed to give discounts on Kelvinator, loses sales to another dealer, dealing in another brand. Over time, that's likely to leave the dealer network demotivated. Even today, dealer push is one of the two most important influencers in the purchase decision. The first signs are not very encouraging. The Strategist found some of the common

dealers pushing Whirlpool as Kelvinator in the markets of South Delhi. So either Electrolux will have to quickly justify the price premium and/or increase coverage. That, of course presupposes the creation of sufficient capacities. The latter won't be easy. Apart from Kumar, Ibsen has other things on his plate. He has to get the washing machine venture with Intron off the ground.

To gain economies of scale, some in the business feel that the only way out for Electrolux is to integrate all its businesses in India. Since, the channel is same for all of its products, that will help it cut its marketing and distribution costs. That is a tough task, given the disparate interests of the partners. And of course, the whims and fancies of FIPB.For the moment, Electrolux's fate is tied closely to the fate of Kelvinator. "But for the Kelvinator brand, I wouldn't be smiling," he says. The question is: for how long?