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Where Is Philips Electronics Headed?

These last few months, many OEMs, including Nokia and Research in Motion, have been smacked with lower-than-expected income and revenues as consumer and government spending slowed and end-users gravitated towards a limited set of innovative device platforms. If recent news coming out of Amsterdam carries any weight, we soon may be adding {complink 4269|Koninklijke Philips Electronics N.V.} to this list.

A couple of weeks ago, the company reported that weak market demand, mainly in Western Europe's construction and consumer segments, will result in lower quarterly earnings. Philips's Lighting division, a major player on the global stage, is expected to have low single-digit comparable sales growth in the second quarter of 2011.

Besides tempered sales growth and margin pressure, “incremental investments in innovation and marketing will adversely impact EBITA,” the company said.

The bad news will also touch Philips's Consumer Lifestyle group, the company's traditional consumer electronics channel. Soft demand and declining license revenues, among other factors, “will more than offset double-digit growth in Personal Care and Health & Wellness, resulting in an expected low-single digit sales decline.”

How far the bruises have spread will be a main talking point during the company's earnings call with analysts on July 18. And, guess what else we can expect to hear about? “Further decisive actions… including a company-wide cost reduction program” tied to the already-launched Accelerate performance improvement program. There's even talk of Philips pulling out of the television market, another struggling segment.

I'm not surprised to hear about the anticipated top- and bottom-line dips. Although manufacturing, purchasing, and IT spending indices are tipping back into positive territory, there's always a lag time in how and when all the numbers synch up. But, perhaps more disconcertingly, I'm confused by Philips's long-term business model.

Once a heavyweight in the electronics supply chain, during this last decade Philips has been redefining its niche expertise, dumping its semiconductor business and its stakes in TSMC, LG Display, and music giant PolyGram, in favor of focusing on consumer lifestyle products, lighting, and medical equipment. While shedding non-core businesses that stall overall innovation and drag attention away from more valuable projects is (usually) a good idea, I never quite understood the major shift into the lighting industry.

Success in this sector largely depends on new housing construction and municipal or regional government spending in infrastructure improvement. Those segments consistently have large spikes and valleys over time and, as we've seen this time around, can come to a screeching halt when bubbles burst and stimulus measures run out of funding.

Then again, Philips is absorbing some other changes, too, and maybe things need to shake out. For instance, senior management changes are underway: Frans Van Houten stepped into the president, CEO, and board chairman posts this past April; chief design officer Stefano Marzano will retire Nov. 1; Sean Carney, currently chief design officer of Philips Consumer Lifestyle (CL), will pick up Marzano's role in addition to his CL title.

Philips will also have to manage its recently announced acquisition of Indal, a Spanish company mainly focused on outdoor lighting solutions. Financial details were not disclosed, but the acquisition is intended to fuel Philips's growth in professional lighting solutions while strengthening its European market position.

The picture will become clearer when the company announces its first-half results on July 18.

9 comments on “Where Is Philips Electronics Headed?

  1. Taimoor Zubar
    July 6, 2011

    I think it would be a bit harsh to compare Philips with companies like Nokia or RIMS. The cell phone industry is way ahead in terms of innovation and partly it's because of the room for innovation and growing demand. Electronics industry on the other hand can be said to be fairly stable with the market being saturated. There isn't much innovation going on on that side. It would be interesting to see if other electronic giants such as LG and Samsung have made any progress in terms of innovation. Comparing Philips's financial results with these companies would also be worthwhile.

  2. Anand
    July 7, 2011

    “dumping its semiconductor business and its stakes in TSMC, LG Display, and music giant PolyGram, in favor of focusing on consumer lifestyle”

      Although focusing on consumer lifestyle was critical for Philips, but it doesn't justify the dumping of the its semiconductor business and its stakes in TSMC etc. I feel Philips would have been in better shape if it had retained those businesses because it would have given more diversification to their investment.

     

     

  3. Jennifer Baljko
    July 7, 2011

    TaimoorZ – Fair enough. A Samsung-LG-Philips comparison is a good idea.

    But to your point of companies being  “fairly stable with the market being saturated.” Not sure if fairly stable is an ideal state for any consumer electronics company. If the market is saturated, innovation isn't happening, and households don't need more than one – maybe two – electric shavers, how does a company like Philips move from “fairly stable” to “growing” ? Maybe I'm overthinking this – maybe companies have become content with staying on that side of the contraction-growth scale.

  4. Daniel
    July 7, 2011

    Jennifer, you are right. Philips is dumping its many of the bi-products arms from 2005. Initially they dumped the semiconductor to NXP, then their health care division etc. I understood that, they are showing more preference to outside components than in house production of such components. I meant they would like to work in assembly model rather than production mode.

  5. jbond
    July 7, 2011

    Your reply to TaimoorZ is exactly the way I feel. I just don't understand why so many companies now are content just being on the stable side instead of looking at the growth market? One would think that you should always be looking at innovations and growth and seeing where your company can make the next great impact. Maybe they feel better about playing it safe for fears that they might sink.

  6. Barbara Jorgensen
    July 7, 2011

    Great analysis Jenn. It has been awhile since Philips has made any kind of breakthrough and the company seems content to sit on the sidelines in its market niche. It's too bad–Philips was one of the most innovative electronics companies in its heyday. If there is anything we've learned by watching the industry this long, it is the old guard companies have to continue to innovate or chnage their business model in order to stay relevant. IBM is one success story I can think of offhand. I's like to hear some more examples from readers. How about GE?

  7. Wale Bakare
    July 14, 2011

    TaimoorZ,

    Performance of smartphone makers in OEM market has been far overwhelming in the last few years, this is largely due to not only innovation also miniaturisation is another key factor. Comparison with LG and Samsung, these 2 have large market base in developing world – Africa and Asia pacific typical example, philip not really known as such. While Philip market dominance only in europe and other areas.

    But Philip electronics is fairing well in health sector market segment though.

  8. Himanshugupta
    July 14, 2011

    Although i did not understand the reason behind dumping the semiconductor division but i do see a great future ahead for Philips in healthcare and appended sector. There are many companies like GE, CISCO, Intel etc that are trying to get into this sector but it will be interesting how this sector take shape in coming years. 

  9. Kunmi
    July 22, 2011

    Philips is one of the most innovative electronic companies I knew as a young child as far back as 60s, 70s, and 80s. They make the best, durable, quality and long standing electronics and materials. I can remember philips iron, kettles and many more products. I believe they have a great future in health and other sectors. It will be great for them to move on from their stable longstanding name to new innovations and grow up powerful as they use to be. Dumping many of their by products must be very reasonable if they are able to weigh the pros and cons and have market for bigger things. I will advice that they stay focus, strong and motivated as they use to be in the olden days and maintain their good name.

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