The Hindu Business Line : Videocon's European Odyssey

In another instance of an Indian company acquiring a foreign entity, Videocon has bought Thomson's colour picture tubes business. Catalyst examines the motives and prospects.

Videocon's colour television facility near Hyderabad

THE growing list of Indian acquisitions abroad has a new addition with the Videocon group emerging as a behemoth on the global consumer electronics scene with its latest acquisition. The group has in one fell swoop become the third largest colour picture tube manufacturer in the world. Further, Videocon had announced the purchase of the colour picture tube business of France-based Thomson SA, which includes units in Mexico, Poland and China, for about Rs 1,260 crore. Videocon is further rumoured to be on the verge of signing a deal with Sweden's Electrolux.

Though at the time of this issue of Catalyst going to print, there was no official confirmation of the proposed acquisition, sources said that the nitty-gritty of a deal was being worked out between AB Electrolux and Videocon. If the deal goes through, it may not only give Videocon a larger presence in the domestic market with seven brands in its portfolio, but also in the neighbouring region with the Mumbai-based group expected to get marketing rights for the Electrolux brand in other Asian countries. Little wonder Videocon is targeting a $7-billion turnover in the next few years.

This will, however, not only include revenues from the electronics businesses but also turnover from Videocon's interest in the oil/energy sector. Meanwhile, despite lower margins affecting profitability of picture tube makers globally and the cathode ray tube market shrinking, analysts are terming Videocon's acquisition of Thomson SA's picture tube business a positive move. "Firstly," points out a market analyst, "the financial impact of the acquisition has been minimised with Thomson SA investing upwards of Rs 1,200 crore to pick up stakes in two Videocon companies — Videocon Industries and Videocon International."

V. N. Dhoot, Chairman, Videocon Group

Videocon has made the acquisitions through an offshore entity called Eagle Corporation, which is 100 per cent owned by the group. According to S.K. Shelgikar, an independent advisor to Videocon, Eagle Corp may come out with an IPO in the next few months in order to raise capital to fund further expansion. Videocon International's Managing Director, V.N. Dhoot, said the company would be investing close to $500 million (including the cost of acquisition) in the newly-acquired plants over the next three years to realign them qualitatively and quantitatively and upgrade them in order to make new products. Dhoot further points out that Videocon's strategy is to synergise its acquired picture tube plants (which includes one unit each in Mexico, Poland and Italy and two units in China) with its glass shell business in India. This would help the company to not only reduce costs of picture tube manufacturing, but also give its glass shell units in Bharuch and Aurangabad a ready market. "We have a total glass shell capacity of about 30 million units, which would now be supplied to the acquired facilities. We are already expanding our glass shells unit in Aurangabad. Capacity expansion at the larger unit located in Bharuch will be carried out after a year," says Dhoot.

Incidentally, Videocon is the largest manufacturer of glass shells for colour television picture tubes in the country. The latest acquisition in turn would give Videocon an additional picture tube capacity of about 19 million units. The synergies with its Indian operations would help the group control costs in the low margin picture tube business. "We can produce glass shells at very low prices in India due to the comparatively low cost of Indian labour," elaborates Dhoot.

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. Also, geographically, the company's acquired plants are at strategic locations with Mexico catering to the entire North American Free Trade Agreement 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, points out an official from a domestic picture tube manufacturing firm.

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 as well as counter the threat posed by the conventional television market being rapidly overtaken by hi-tech products in overseas markets. "In fact, we have already set up a line for plasma television at our unit in Italy, which we bought earlier this year from Thomson. We will soon be rolling out high-tech products such as LCD, plasma, slim tube and set up other flat panel display lines," he says. Also, the new technologies, he adds, would help the company further consolidate its position in the Indian CTV market.

Analysts, however, point out that the immediate worry for Videocon would be that there might just not be enough takers for the huge installed capacity of cathode ray picture tubes. While growth in the Western markets is being 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 newer products such as slim tubes. Dhoot, however, says that though the market for conventional picture tubes 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 CIS states, Eastern Europe and Latin America. There is a significant price difference between a conventional CTV and a premium product such as a LCD. 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, he explains. The eventual success of the acquisition would depend on how quickly Videocon is able to adapt to technology changes, says a market analyst.

Meanwhile, with the turnover of the acquired units being around 850 million Euros (approximately Rs 4,467 crore), this acquisition will raise the Videocon group's turnover to $ 4 billion (approximately Rs 17,500 crore) this year with more than $2 billion (Rs 8,700 crore) coming from global operations. This number may swell even further if Videocon's acquisition of Electrolux Kelvinator comes through. The deal, if it goes through, apart from giving Videocon control over Electrolux Kelvinator's three manufacturing units, may also add three more brands — Electrolux, Kelvinator and Allwyn — to Videocon's already large kitty of brands which consists of brands such as Hyundai, Sansui, Videocon and Akai. Should Videocon play its cards well, it could well emerge as a significant challenger to the Korean chaebols in the consumer electronics market.

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