Videocon - our own brand

Videocon

Videocon is an industrial conglomerate with interests all over the world and based in India. The group has 17 manufacturing sites in India and plants in China, Poland, Italy and Mexico. It is also the third largest picture tube manufacturer in the world.

Corporate profile

The Videocon group has an annual turnover of US$ 4.1 billion, making it one of the largest consumer electronic and home appliance companies in India. Since 1998, it has expanded its operations globally, especially in the Middle East.[1]

Today the group operates through five key sectors:
Consumer electronics

In India the group sells consumer products like Colour Televisions, Washing Machines, Air Conditioners, Refrigerators, Microwave ovens and many other home appliances, selling them through a Multi-Brand strategy with the largest sales and service network in India.[citation needed] Videocon Group brands include Kenstar,Next etc.
Mobile Phones

In November 2009 Videocon launched its new line of mobile phones in India.
Colour picture tube glass

Videocon is one of the largest CPT Glass manufacturers in the world, operating in Mexico, Italy, Poland and China..
Oil and Gas

An important asset for the group is its Ravva oil field with one of the lowest operating costs in the world producing 50,000 barrels of oil per day.[citation needed]
DTH

In 2009, Videocon launched its DTH product, called 'd2h'. As a pioneering offer in the Indian DTH market, Videocon offered LCD TVs with built-in DTH satellite receiver with sizes 19" and 32".This concept in the DTH service is relatively new in the presence of other players like ZEE tv's Dishtv, Tata Sky, Air tel Digital Tv and Reliance's BIG TV providing only the set top box.
Telecommunication

Videocon has subsidiary named Datacom Solutions Pvt Ltd which has license for Mobile Service operations across India.It is expected to launch service in December 2009.
Acquisition of Thomson SA

Videocon through its Wholly Owned Offshore Subsidiary acquired the Color Picture Tube (CPT) businesses from Thomson S.A having manufacturing facilities in Poland, Italy, Mexico and China along with support research and development facilities.
Acquisition Rationale

The acquisition came at a time when Thomson was facing a fall in demand in developed markets for television with CPTs and was moving more towards Flat-screen and Plasma Television. However, Videocon saw an opportunity in the emerging countries for CPTs and hence pursued with the acquisition. Besides, the acquisition gave Videocon, the access to advanced technology giving the company control over an R&D facility in Agnani, Italy. The major reasons behind this acquisition .[3] were

Cost cutting – Videocon was better positioned to shift the activities to low-cost locations and also it could integrate the operations with the glass panel facility in India with the CPT manufacturing facilities acquired from Thomson S.A. Videocon wanted to leverage its position in the existing parts of the business and this acquisition would give it a strong negotiation position and could reduce impact of glass pricing volatility. Videocon could also reduce the costs by upgrading and improving the existing production lines.

Vertical Integration – The acquisition helped Videocon in vertically integrating its existing glass-shell business where it had been enjoying substantially high margins [4]. Videocon’s glass division had the largest glass shell plant in a single location. This gave the company an unrivalled advantage in terms of economies of scale and a leadership position in the glass shell industry. The acquisition also gave Videocon a ready-market for its glass business and it was part of Videocon’s long-term strategy to have a global vertically-integrated manufacturing facility.

Rationalization of Product Profile – Videocon modified its product profile to cater to the changing market needs like moving away from very large size picture tubes to smaller ones.[5]

Apart from the overall strategy Videocon also had a plan on the technological front. It wanted to improve the setup for the production line and line speed post-merger. Its focus was to increase sales while reducing the costs and thereby improving the productivity of the existing line. The company also wanted to foray in a big way into LCD panels back-end assembly . On the sales front the company wanted to leverage on the existing clients of Thomson and build relation as a preferred supplier to maximise sales. Also, Videocon could benefit from OEM CTV business with the help of Videocon’s CTV division, invest for new models and introduction of new technologies.[6]
Thomson’s perspective

In 2004 Thomson planned entry into the high-growth digital media and technology business. Also, Thomson wanted to exit consumer and electronics businesses as they were incurring significant losses. After sale of its TV business to Chinese group TCL, and Tubes to Videocon, Thomson divested from the audio/video accessories business which was the last unit of its consumer electronics business. The need to divest are quite evident from the losses that it incurred in these businesses particularly that the unit that it sold off to Videocon, the Optical Modules activity, and the Audio/Video & Accessories businesses which totalled around €749 million for 2005. Moreover Thomson had done some acquisitions that were in line with boosting their revenues in the following years. [7]
Other Competitors for the Acquisition

When Videocon entered the race for the colour picture tubes manufacturing capacity of Thomson SA in November 2004, there were 16 other bidders. Videocon stood slim chances given the fact that it had to battle it out with players like LG,Philips, Samsung and Matsushita, Daewoo and several Chinese manufacturers but finally managed to close the deal. The deal catapulted Videocon into the No. 3 slot in the global pecking order for CPTs. An official of Videocon said on the deal "The word is out in the world that India and Indian companies are not just a good bet by themselves, but also a hedge against China.“ [8]
Pre-merger negotiations

The price that Thomson wanted for the deal was euro 240 million (Rs 1,248 Crore) and Videocon agreed to the same without much negotiations (Under the deal the debt continued to be of Thomson’s). A special purpose vehicle, Eagle Electronics was used to complete the acquisition.

As a part of the acquisition, Thomson also agreed to acquire 13.5 % stake in Videocon for 1250 Crore in which 10% was locked for the first three years. Thomson SA has divested the 3.5% stake that was outside the lock-in clause to overseas institutional investors. For the remaining 10% Dhoots retained a right of first refusal(recently this 10% has been sold to the Dhoots).

During the process of negotiations Videocon was less affected by the capital cost component. Dhoot believed that Thomson CPT’s losses arising out from high capital cost of its Mexican Plant could be reduced once the television market in India moved to bigger screen sizes and slims .Videocon could import those from its global factories and hence cut on the losses of Thomson.
Pre-merger scenario analysis

CPT industry is affected by many competitive factors such as change in the consumer preferences ,the product offer strategy of retailers, the progress made by alternative technology manufacturers ,capacity adjustment facility of competitors etc. Based on all of these factors there were two scenarios that emerged from the 2005 budget of Videocon. The first scenario is a conservative one. It mainly assumes Price pressures similar to those in the past(-8 to -12%),capacity reduction over a period of two years, a gradual shift to newer technologies like True Flat and good amount of growth for LCD makers.

The second scenario is a more aggressive one in term of trends predicted. It assumes that the switch to TrueFlat would be faster, more overcapacity, more competition from LCD manufacturers and rising price strategy pressures in general. The second scenario obviously requires an industrial strategy which is more adapted to the environment.

However even if the second scenario arises,Videocon believes there is an opportunity in the CRT business. Though it is very obvious that in the developed markets of the western world the demand is shifting towards the flat panel side(FPD it is expected to contribute 70% of TV market in these regions),in the emerging markets like BRIC CRT still holds fort. CRT holds a dominant 70% share in these markets. When translated into number of units the demand is more than 100 million units. As Videocon is primarily based in these countries, it hopes to harness the value of the Thomson acquisition in the coming years.[citation needed]
Post merger situation (2008)

Videocon has not been able to turn the plant around in Italy still. However it is getting support from the local government(which want to prevent job cuts) in form of grants. The government is in fact trying to set up a Greenfield venture in form of a LCD manufacturing facility in partnership with Videocon. The banks are also supporting Videocon and with help from all these quarters Videocon expects to turn around the plant in Italy.[9] The Thomson plant has not turned around in Mexico as well and in fact production has been reduced over there.In Poland,the situation is more promising and Videocon hopes that plant over there will get in black in the very near future.[10] However the surprise has been in the Chinese market .Despite of facing a highly competitive market Videocon has managed to turn a plant around while the other is on its way. In China Videocon is adopting a different strategy for manufacturing CTVs as the local players dominate the market .It plans to supply these players by taking advantage of low-cost nature of mainland(the number targeted by it about 6 million CPTs).[11]
Role of local government in the acquired units
Italy

The LCD television segment is one of the fastest in terms of growth rate in Italy. The compounded growth rate is projected to be around 70% in the next few years. Videocon in partnership with the local government is going for a Greenfield venture in this segment. The Italian central government is giving a euro 180 million grant whereas the regional authorities are giving a 40 million grant. Videocon would itself pitch in with about euro 300 million whereas bank loans would provide a further 700 million.
China

In the Thomson plant located in China the local Chinese Government is the minority shareholder.
Mexico

When Videocon acquired Thomson’s CPT business, it also gained control of Thomson’s Mexican plants. However Videocon Industries has a view that it would expand in the country only if the government gives it enough incentives. Videocon is demanding a 25-30% cash benefits from the authorities who are currently ready to give only about 20%.
Thomson’s exit from Videocon

Thomson is looking to sell out its stake in Videocon (a 10 percent stake via GDRs) and in most likelihood it would be bought by Videocon itself. Thomson would be exiting at a loss as it had acquired the stake at around Rs 400 per share (approximately equal to $10 per share).The deal is expected to happen at current market prices. Videocon’s GDR is currently traded at around $5.06 on the Luxembourg Stock Exchange. On the Bombay stock exchange its trading around Rs 150 against the 52 week high of Rs 868 in Jan 2008.Another point to be noted is that this won’t attract the market regulator’s “creeping acquisition” norm which comes into force once they acquire more than 5% stake,as the deal would be an overseas one. [12]
Possible purchase of General Electric's Appliance division

On May 23, 2008, Videocon announced that it is studying an invitation from General Electric (GE) to bid for its century-old appliances division, which it has put up for sale.