China looms big for Philips

By PETER GRIFFIN*

The head of Dutch consumer electronics giant Royal Philips Electronics doesn't mince words when he points out a failing in the company's strategy for the fastest growing market opportunity in the world - China.

Philips is "too male, too Dutch, too old", jokes chief executive Gerard Kleisterlee, a Dutchman in his late 50s and a 30-year veteran of the company.

The 102-year-old maker of everything from lightbulbs to DVD players and better known as plain old Philips has yet to inject an Asian flavour into its Euro-centric and male-dominated management team.

That needed to change, said Kleisterlee, because the company was becoming increasingly entwined with China.

He said every electronics maker had Chinese consumers in its sights and was scrambling to make and sell goods there.

Kleisterlee said the spending power of the average Chinese citizen would one day rival the citizens in western countries. That would take decades, but the market opportunities were vast even now.

Philips is already well placed in China. Last year its revenue totalled US$6 billion ($10.4 billion), putting it behind only Samsung in the value stakes. Its rival and key technology co-developer Sony generated Chinese revenues of just US$1 billion.

Philips employs about 25,000 people in China, more than in its home country.

"Philips doesn't have to talk about any of its business divisions much before the word China comes up. The country is integral to Philips," Kleisterlee said.

That was why Philips was beginning to make a large push to make its European brand sexy to the Chinese.

The company was now branding and adapting its Euro-flavoured products for Chinese tastes. For example, of the 600 variations of the Philishave shaver, several models were designed and built in a specialised plant specifically for the Chinese.

Long regarded as an innovator, Philips has never had a great reputation as a good marketer of its products.

Now it is focusing on marketing and wanted to increase its visibility in the US by 50 per cent in three years.

It has centralised all its advertising with DDB in New York in a US$600 million deal and is looking for a new catch-line.

"Philips is a good brand, a solid brand. But it doesn't have that sparkle," said Kleisterlee.

These days manufacturing differentiation was less important because "me-too" manufacturers were quickly following the main electronics makers to market with copycat products at lower cost.

"The differentiating factor in consumer electronics is not necessarily in the manufacturing itself, but in the perception of the product."

That is why Kleisterlee, speaking at the International Funkaustellung (IFA) consumer electronics fair in Berlin last week, called for a change to the business model of the electronics industry.

He said companies should focus more on marketing and "co-operative competition" rather than pure product development and manufacturing.

"What you're seeing is some companies moving away from being vertically integrated manufacturing monoliths to focus on sales and marketing based on technology leadership."

That comment came as news broke that Philips planned to divest 50 more factories around the world.

The company is to outsource its manufacturing work in all areas but those where it can differentiate itself from its competitors.

Kleisterlee pointed to a semiconductor research partnership with Motorola and ST Microelectronics as a model for the future relationships that would increasingly bring together like-minded electronics makers.

"We pool our research and development and manufacturing resources, but still compete head-to-head in the consumer markets," he said.

Philips has already taken a 4 per cent stake in emerging Chinese electronics maker TCL.

Although Philips wants its brand to succeed in its own right in China, the extent of its cross-licensing agreements and partnerships - some 14 joint ventures - means that it will be making money when its shop-shelf rivals prosper.

"Like Japan developed the Sonys, Panasonics and Toshibas of this world and Korea developed Samsung and LG, China will develop the Halers and the TCLs and step-by-step they will become global players," said Kleisterlee.

That was because China was the new Japan. A fast-growing economy with a strong local talent pool and growing consumer spending power.

China and India, the other country in Philips' sights, have a combined 2.3 billion consumers, which represents a mouth-watering opportunity for technology vendors desperate to grow after two years of hard times.

Philips wants to double sales in China by 2005, a target that Kleisterlee said would be reached largely by sales growth in the semiconductor and health equipment divisions.

* Peter Griffin visited Philips in Amsterdam as a guest of Philips.