RON WIRAHADIRAKSA, CFO OF LG PHILIPS LCD
Interview by David Line

In 1999, South Korea's LG and Dutch technology firm Philips launched a joint venture to manufacture LCD flat-panel displays, with the latter nominating Philips insider Ron Wirahadiraksa as CFO. As one of only three non-Korean senior executives of LG Philips LCD (LPL, now rebranded as LG Display), and “coming from a different planet in terms of financial thinking,” there was inevitable tension as Wirahadiraksa, a Dutch national of Indonesian parentage, sought to modernize the chaebol-linked business’s finance function. His efforts were put to the test in 2006-07 when a price crash led to four successive quarters of losses. Wirahadiraksa (who is due to step down as Philips reduces its stake in the LCD flat-panel business) tells CFO Asia about his “Lone Ranger” battle to change LPL’s volume-first business culture.

How have you tried to shape the finance function at LPL?

LPL is a pretty funny duck in the Korean pond, in terms of our transparency and the ability of our accounting function. We close the books within two days at the end of every month. That is basically unheard of in Korea. We even had to educate the external auditors to also follow due process.

I’m proud of what my team has pulled off, especially because the company was basically Korean; apart from three foreign executives it was 100 percent LG. In the beginning we had to build a lot of trust—it took a while for the organization to embrace the concept. Now, not only do we close the books early in multiple GAAPs (U.S., Korean, and IFRS), we are Sarbanes-Oxley compliant for the second year—and we got it right first time.

How did the company react to the losses in 2006?

The finance function was in good shape before 2006. We had already introduced activity-based management, meaning every month we could see by product, factory, customer, and by process activities and cost-drivers to enable a focus on where to push. But we had sales and marketing and production and development making separate decisions at the C-level. When the results worsened there were no real business discussions going on, even though the financial management infrastructure was already in place.

So we restructured the business into three business units: TV, IT, and Applications. That was one of the best things we did in 2006. I had monthly performance review meetings with each one. Reporting makes you think, structure, plan, and reason about your business. On the one hand, it was a matter of control—what's the business doing, what's the outlook, where are the pain points? But on the other hand, supporting the business unit leaders, telling them how to use the available systems, is vital.

Did the poor results exacerbate the clash of business cultures?

The results really forced us to start to rationalize production and inventory management, and that was not an easy task. Many of the technical people came from the telecoms business, where it’s all about fixed costs and the more volume, the better. And I demonstrated to them that in a time when the marginal costs do not decline in the same way your marginal revenues do, if you keep up pressure on the volume pump—economically it’s not a good thing! That was a kind of an eye-opener for the Korean management.

We also cut capital expenditure by 25 percent. It was not an easy thing.

That must have caused some tension.

It was a kind of a Lone Ranger exercise. Of course I had my finance guys behind me, but there’s a difference between them being behind you and them saying in public that they’re behind you.

Thanks to the rebuilding of the finance function I was in the best position to deal with [the production managers] challenging and questioning me, and I had a very good, constructive round of boxing with the chief production officer and other key decision makers. I didn’t just sit down and say ‘the results are bad’, I told them: ‘under these assumptions, if we go ahead with planned capex then this will be the result. Is this what we want to do?’ I provided the data for that and the reasoning—I made it transparent so that they could review and ask questions and attack it if they wanted to. But it was kind of a lonely exercise.

The company had record profits in 2007. How did you turn things around so dramatically?

It’s been easier for me because I’m in a position to speak out and people more or less expect that from me. But for other people in the organization it’s not very easy. We held a workshop on "The Need for Change" in February 2006, and some very difficult, almost undiscussable issues came up. The managers at the workshop may have presented these issues with a red face or in a halting voice but they did present them.
It’s one thing to talk about these problems during workshops, but outside the workshop

it’s not easy for people to start changing things or raising difficult issues. Towards the middle of ‘06 the situation got really ugly. The problems were so imminent and the results were so bad that people just wanted to focus on the short-term fix.

In a Korean company it’s very important what the CEO says, and it wasn’t until a new CEO came in 2007 [Young Soo Kwon, former CFO of LG Electronics], who was very familiar with value-based management, that the kind of changes we had discussed before were actually made. He immediately put his finger on a number of key areas: headcount, overheads, cost reduction, supply base, restructuring, efficiency organization; he did extremely good work.

You’re about to step down as CFO. What would you see as your legacy to LPL?

Value-based management. The finance infrastructure had been put in place to enable that, but it needs more seasoning. In particular we should be pricing on a more dynamic basis, and that’s what we’re learning now. We are now reassessing for this year: we know the business plan, we have the activity-based management in place, we can calculate costs per product, and are those costs changing, and if so can we meet our targets? And that’s a very different mindset than sticking a pole in the ground and then lighting the candle of hope. Hope can provide light, but it’s a bad travel guide.