Philips aims to break away from the pack

  • Business
  • Monday, 15 Sep 2003

StarBiz Editor Wong Sulong in Amsterdam

PHILIPS, the Dutch-based consumer electronics (CE) giant, is embarking on an ambitious strategy to stay ahead of the pack in the fiercely competitive world of consumer electronics. 

Asia, says Philips' president and CEO, Gerard Kleisterlee, will play a very important part in the plan. 

Philips president and CEO Gerard Kleisterlee

The plan (Transforming into One Philips, or TOP) involves getting the 164,000 employees in the group's five operating divisions – semiconductors, lighting, consumer electronics and medical systems – as well as consumers to see Philips as one company with two main business – lifestyle and health care products supported by technology. 

This policy is seen as critical for Philips long-term survival as a world-class consumer electronics giant. And there is little room for error, given the fact the group had suffered heavy losses in the past two years. 

For financial years 2001 and 2002, the group incurred losses of nearly 5.7 billion euros, owing to the depressed technology and computer sectors and costly write-downs of its acquisitions. 

In a keynote address at the International Consumer Electronics Expo (IFA) in Berlin recently, Kleisterlee said after half a century of steady growth, the CE industry is now faced with powerful new factors which demand a fundamentally new business approach from key industry players. 

“Fierce and relentless competition from new entrants to the market, rapid price erosion and low growth are the issues of the day.” 

Kleisterlee told a group of editors from Asia at the group's corporate headquarters in Amsterdam recently that Philips saw Asia not only as a source of cheap labour, but also a source of talent and a market. 

Hence, it has chosen Shanghai as one of its five centres for research. 

Last year, the electronics group recorded world-wide sales of 31.8 billion euros, out of which Europe accounted for 42% , Asia 22% and the United States 31%. 

Philips employs 60,000 people in Asia and Kleisterlee expects Asian sales to rise to 25% of total group sales this year. 

“Asian sales will catch up with our European sales because of the region's faster growth. It's a matter of time and investment and we intend to pursue that” says Kleisterlee, who headed Philips Taiwan between 1996-1998. 

He saw the Asian financial crisis at first hand, and was impressed how fast the Asian economies had rebounded. 

While Kleisterlee sees China as a huge market for Philips, he also acknowledges that Chinese electronics companies are growing fast and have become serious competitors in both the Chinese and world markets. 

Within a few short years, Chinese mobile makers like Ningbo Bird and TCL, have outstripped US, European and Japanese manufacturers. 

Philips developed the DVD, but today the biggest DVD makers are Chinese. 

For Philips, the answer to the Asian challenge is to move up and lead in the technology ladder and walk away from products that have been commoditised. 

I asked Erik van der Walle, business editor of the NRC Handelsblad daily how important is Philips in the life of the ordinary Dutch people. 

“It used to be the number one company in the Netherlands during the 60's and the 70's. But in recent years, it has relocated many of its operations to Asia and eastern Europe; so its importance has lessened, although it's still among the top five or six companies here. 

“Philips is seen as a company making reliable, quality products, but its image is a bit dated. In recent years, it has made many acquisitions in the US, and but I'm not sure whether they are good for the company” he said. 

Kleisterlee concurs Philips has an image problem. “We are too male, too Dutch and too old. We have been too slow in getting global management” he admits, adding this will change. The best way to do this, he says, is to make Philips truly global. 

Part of the responsibility for this falls on Andrea Ragnetti, group chief marketing officer, a newly-created position. 

In India, Philips' once dominant position is coming under challenge from new players, particularly the Japanese and South Koreans. While surveys show that Philips is the most recognisable brand in the market, this is not reflected in sales volume. 

Ragnetti acknowledges Philips has an image problem in India. “We are regarded as a bit old fashioned” he says, adding that the company needs “the sparkle” to make its products distinctly superior to that of its competitors. 

As part of Philips' plan to be a “truly market-driven company”, it has consolidated its world-wide advertising account (US$600mil a year) and given it to one company – DDB Worldwide Communications group of New York. 

The re-making of Philips under Kleisterlee appears to be working. 

For the first half of 2003, Philips recorded a small net profit of 42 million euros, compared to a loss of 1.355 billion euros for the same period in 2002. 

Cost reduction amounted to 388 million euros, surpassing the target of 300 million euros. The company said it was on track of achieving the target of 1billion euros in cost savings by 2004. 

The share price has also been recovering and recent prices are the highest in 15 months. 

“It's encouraging to see that our change programme is paying off” comments Kleisterlee. 

He said the medical systems division produced a strong performance, reflecting the progress of the integration process.  

However, consumer electronics had been hit by weak consumer spending. 

“Focus on cost and asset management clearly remains the best course given the fragile market conditions, while we are continuing to invest in product and marketing innovation to delight our customers” he says. 

Kleisterlee expects the restructuring and consolidation at Philips to be completed by next year, after which the group can look forward to a period of growth and profitability. 

“You will see Philips begin to diverge in important aspects from the paths chosen by competitors like Samsung, Matsushita or Sony. We are re-positioning ourselves not just to lead, but to actively shape the future,” he says. 

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