Cracking China the Asian electronics challenge

By PETER GRIFFIN IT writer

The boss of 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 fifties and a 30 year veteran of the company.

The 102 year old maker of everything from light bulbs to DVD players and better known as plain old Philips is yet to inject an Asian flavour into a Euro-centric and male dominated management team. That's something that needs to change says Kleisterlee as Philips' future becomes increasingly entwined with that of China's.

Every electronics maker has Chinese consumers in its sights and is scrambling to both base production of its goods there and sell to an increasingly wealthy consumer base.

Kleisterlee sees a day when the spending power of the average Chinese citizen will rival that of citizens in western countries. How far away is that?

"Decades", he suggests. But the market opportunities are vast even now.

Among its electronics rivals present in China, Philips is already well placed. Last year, sales and exports in China totalled US$6 billion, putting Philips behind only Samsung in the value stakes. Philips rival and ironically its key technology co-developer Sony, generated just US$1 billion in sales and exports in comparison.

Philips employs some 25,000 people in the country, more than in its home country of the Netherlands and has factories scattered across China.

"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 sums up.

Which is why Philips is beginning to make a large push to make a perceived European brand sexy to the Chinese.

How will that happen? Branding and adapting Philips Euro-flavoured products for Chinese tastes. Of the 600 variations of Philips hit product the Philishave shaver, several models are designed and built in a specialised Dutch shaver plant specifically for the Chinese. The same goes for other products.

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

Now its increasing its focus on marketing and wants 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," says Kleisterlee.

These days, he claims, manufacturing differentiation is less important in a world where so-called "me-too" manufacturers quickly follow 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," he says.

Which 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 "cooperative 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 in the same week as news broke that Philips planned to divest 50 more factories around the world. It will outsource its manufacturing work in all areas but those where it can differentiate from its competitors.

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

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

Philips has already taken a four per cent stake in emerging Chinese electronics maker, TCL. While 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 Philips will make money as 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," says Kleisterlee.

That's because China is the new Japan. A fast-growing economy with a strong local talent pool and growing consumer spending power. Together with India, the other country in Philip's sights, the two regions boast 2.3 billion consumers representing a mouth-watering opportunity for technology vendors desperate to grow after two years of hard times.

Philips has the intention of doubling sales in China by 2005, a target that Kleisterlee says will be reached largely by sales growth in the semiconductor and health equipment divisions.

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