【正文】 ighly pricesensitive, thus skewing market demand towards lowend products. At the same time, reliable performance, ease of use, and good afterservice are important across segments. ? The petition in China is already intense and will continue to increase, as Galanz and Midea have huge ambitions in the market. In addition, the severe overcapacity (about 45%) will continue to force prices downwards thus threatening profitability for all but the lowest cost players. ? LG has built a successful platform for growth, being 2 in China, although far behind Galanz, by focusing on premium products and in the Beijing area. Faced with the issue of further growth and improving profitability, LG now needs to choose between a high growth strategy, with the objective of being the leading player and to reach breakeven in 2023, or to remain a premium niche player for the foreseeable future. ? To achieve the aspiration of being a profitable 1 Player in China, LG needs to launch 5 strategic initiatives: (1) launch a three step regional expansion, first from Beijing to Wuhan, (2) introduce entry products to cover all price points while continuing to introduce high end products to create margins, (3) improve channel coverage by increasing the distributor work and the sales force resources, (4) increase significantly advertising spending while optimizing media mix, (5) reduce aggressively cost by leveraging economies of scale. 21 010326SH_120703_085v5i GALANZ IS THE LEADING COMPETITOR ? Company name: Guangdong Galanz Enterprise (Group) Co. ? Main products: microwave ovens, electronic rice cookers, air conditioners ? Year of establishment: Galanz was established in 1978 under the name “Guizhou Feathers Down Products Factory” and was engaged in the production and marketing of down products in China. ? Year of entering microwave oven market: The pany changes its name to Guangdong Galanz Enterprise (Group) Co. in June 1992 and started to product microwave ovens in July 1992. ? Paidin capital: US$ million ? Net assets: US$ ? Turnover: US$ million ? Profit after tax: US$ million ? Capacity: 12 million sets for microwave oven in 2023 ? Number of employees: 11,000 Source: Literature search, 2023 Galanz unaudited financial statements 22 010326SH_120703_085v5i GALANZ HAS ALWAYS BEEN THE MARKET LEADER, WITH ASTOUNDING GROWTH 9001 , 3 0 02 , 2 0 03 , 0 0 01997 2023 Galanz sales volume estimation Thousand sets 1997 1998 1999 2023 CAGR = 50% Source: Light Industry Information Center, ponent manufacturers, LG, Galanz, SIC, team analysis, High estimate Low estimate 2,400 23 010326SH_120703_085v5i GIVEN EXPANSION IS FINANCED BY SHORT TERM LIABILITIES, GALANZ GROUP IS PROBABLY DROPPING PRICES AND LOADING CHANNELS, WHICH MAY CONTINUE IN THE FUTURE Current assets 1998 1999 2023 Balance sheet RMB millions Sales 1998 1999 2023 Ine statement RMB millions Total liabilities and owners39。 percent 100% = 1997 2023E 2023 CAGR Percent Key assumptions Source: Team analysis, China Statistic Yearbook Beijing Shanghai Guangzhou Shenyang Wuhan Chengdu 1,930 9,800 4,400 18 17 12 23 19 34 20 HIGH ESTIMATE 8 010326SH_120703_085v5i Market size of each region Thousand sets BEIJING, SHANGHAI AND WUHAN WILL BE THE LARGEST MARKETS IN 2023 465 1,028 2023 2023 Chengdu region 453 1,983 2023 2023 Wuhan region 236 561 2023 2023 Shenyang region 1,055 2,233 2023 2023 Beijing region 754 1,853 2023 2023 Guangzhou region 1,399 2,177 2023 2023 Shanghai region HIGH ESTIMATE 9 010326SH_120703_085v5i ALTHOUGH REGIONS OTHER THAN BEIJING ONLY ACCOUNT FOR SMALL SHARE CURRENTLY, TREMENDOUS GROWTH AND HEALTHIER MARGIN ARE EXPECTED THERE 5101520253035404520 25 30 35 40 452023 2023 growth potential CAGR Profitability LG 2023 gross margin percent Market size today Shanghai Beijing Guangzhou Chengdu Shenyang Wuhan HIGH ESTIMATE Source: LG, team analysis 10 010326SH_120703_085v5i SALES FROM SINGLE FUNCTION PRODUCTS HAS SHIFTED TOWARDS MECHANICAL GRILL PRODUCTS * Estimated by LG sales branches Source: SIC Total China sales – YYSC Thousand sets, percent 796443 4091231 3423 22 2312410% 3100% = 633 847 775 1,032 Sensor Computer grill Mechanical grill Single 1997 1998 1999 2023 Sales revenue – YYSC RMB thousands, percent 70553826912283732 283121610% 6100% = 629,680 728,891 592,880 707,582 Sensor Computer grill Mechanical grill Single function 1997 1998 1999 2023 1,584 2023 plus selected hypermarkets* 11 010326SH_120703_085v5i RECENT BUYERS TEND TO BUY MORE MECHANICAL GRILL PRODUCTS THAN BEFORE Type of MWO bought Percent Single function Mechanical grill Computer grill Temperature** control Don39。CONFIDENTIAL Developing a Winning Strategy for the Microwave Oven Business in China LG Electronics Tianjin Appliances Co., Ltd Final progress review April 9,2023 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client anization without prior written approval from McKinsey Company. This material was used by McKinsey Company during an oral presentation。s DISCUSSION ? The Microwave oven market in China will continue its strong growth and should reach million units in 2023. Primary regions will be central China, followed by South and Southwest China. Other regions should develop as ine grows. Computer grill and mechanical grill should further increase their share as prices decline. ? Four customer segments are found from market research: Premium buyers, basic brand buyers, rational technophile, and