AMSTERDAM Dec 12 Every year Singaporeans and
Malaysians choke on smoke when farmers and plantation firms in
neighbouring Indonesia clear the land with fires during the dry
Last summer, Philips diverted stocks of air
purifiers from Hong Kong and China to the area in time for the
worst pollution in 16 years.
The switch of supplies was emblematic of a more nimble
approach fostered by Chief Executive Frans van Houten that has
helped Philips reinvent itself in healthcare, lighting and
consumer goods and revived the company's fortunes.
By the middle of the last decade the Dutch firm's television
business had lost its battle with cheaper competition from Asian
firms such as Samsung Electronics and LG Electronics
. In 2007 its TV division turned to an operating loss
which ballooned to 436 million euros ($601.26 million)the
Philips response was turn to new products and business
lines. Van Houten, architect of the new strategy, wants Philips
to be much more entrepreneurial in culture.
"It's too early to declare victory - companies stop too
quickly in changing. Change needs to be permanent and only after
five years perhaps can you say 'yes the new culture has been
anchored into the company'," said Van Houten, who has been CEO
of Philips since April 2011.
"We're not done yet".
Philips' turnaround has been propelled in large part by
improvements at its consumer and lighting businesses. Gains at
those two businesses accounted for much of the 54 percent rise
in group earnings in the third quarter. Philips' shares have hit
their highest since mid-2010.
Philips' problem child had long been its consumer
electronics business - which included its TV, audio and video
business. In April 2012, it sold the TV business. It is still
looking for a buyer for its audio and video business.
At the same time Philips has invested in other consumer
products to win market share from rivals such as Procter &
Gamble's Braun, which makes electric shavers and is the
market leader in Germany in electric toothbrushes, and France's
SEB, owner of Moulinex kitchen appliances.
The air purifiers also went through a redesign.
Customers said they wanted to be able to monitor air
pollution at home and outdoors, and to switch the machine on or
off remotely to avoid big electricity bills, so Philips
developed a smartphone app.
A model with those features, priced at 600-700 euros plus
about 50 euros a year for filters, will be launched next year in
the fast-growing Chinese market where Philips is now the leader.
"Parents are busy at work: they want to know that when their
children are at home the air they breathe is okay," said Pieter
Nota, head of Philips' consumer business, whose products are
pitched at middle class buyers seeking a healthy lifestyle.
SOY OR SOUP
Van Houten, 53, has been at Philips most of his career. He
earned a reputation as a restructuring executive after knocking
the former Philips semiconductor unit NXP into shape.
He also had a stint advising ING Groep on its split
into insurance and banking operations before rejoining Philips
in late 2010, becoming chief operating officer in January 2011.
He took over from Gerard Kleisterlee at the helm three months
later when the company was reeling from a prolonged downturn in
the United States and Europe, two of its most important markets.
On a visit to France he found a team demoralised by the
shrinking consumer business that had lost space on the shelves
of major retailers such as Auchan and Darty.
"We did a store visit and the store managers said 'well of
course Philips gets less and less shelf space, why can't you do
something that we want? The word relevance was triggered by
those discussions," Van Houten said.
Philips had already developed a soy milk maker which sold
well in China, where consumers worry about food safety. They
adapted it for the French market to make soup.
Such products have helped the turnaround in performance of
the consumer business, where comparable sales in fast-growing
markets such as Asia rose 15 percent in the third quarter, after
gains of about a fifth in both the first and second quarters.
As CEO, Van Houten set out a new strategy and performance
targets to turn Philips into a business with a greater share of
sales and profits from emerging markets.
To encourage innovation, Van Houten earmarked more money for
research and development. He also targeted 1.5 billion euros in
cuts in overhead costs, chopping layers of management and
simplifying the number of IT platforms. Philips has shed more
than 5,000 jobs, or 4.4 percent of the workforce, since the end
He has also shaken up the corporate culture.
Philips had a reputation as a design-oriented company that
took its time perfecting products, only to find it had missed
its chance or been beaten on price by a more nimble rival.
"It was complacent," said Hans Slob, an analyst at Rabobank
who covers Philips. "Now it's very hands-on, more agile, more
More than half the top 200 managers have been replaced or
re-assigned while about 1,800 staff have been put through
programs with a focus on performance culture. There are
financial incentives too, with remuneration now tied to the
performance of where someone works, not the whole group.
"In the past, if we did well, we were all paid the same. All
of that has completely changed," one employee said.
LIGHTING UP THE REMBRANDTS
The change in culture involved not just new products but new
ways of selling those to make customers more loyal and stave off
the threat from lower-cost rivals at a time of weak consumer,
corporate and government spending in the United States and
Locking in customers is particularly important in the
lighting division, where the focus has shifted to projects such
as street lighting, and in the healthcare unit, which sells
scanners and other medical equipment to hospitals, and had led
to Philips offering complete lighting or hospital equipment
arrangements, or pay-per-use deals.
When the Rijksmuseum in Amsterdam underwent a decade-long
renovation, Philips worked with the museum directors and
architects to redo the lighting system for the entire collection
ranging from marble statues to Rembrandt's "The Night Watch".
The contract was a coup for Philips, and one which it hopes
will lead to similar deals. More recently, Philips agreed to
refurbish 262 government buildings with LED in Dubai, where it
will be paid out of the actual savings made.
"The conventional way of selling products out of the
catalogue no longer works, the relationship needs to become more
sticky," Van Houten said.
In healthcare, Philips is betting on a growing middle class
and greater longevity which has increased demand for medical
equipment, both at home and in hospitals.
More tailored deals have helped to sell healthcare equipment
such as scanners which can reduce a patient's exposure to
dangerous x-rays, improve the quality of images from inside a
patient, or allow a far less invasive approach to treatment,
thus cutting the time spent recuperating in hospital.
The division accounted for 40 percent of group revenue and
nearly 60 percent of operating profit by the third quarter, when
earnings rose nearly 8 percent, a performance in line with its
rivals General Electric and Siemens.
Last year, it agreed a partnership with Abu Dhabi's new,
196-bed Burjeel Hospital to supply, install, maintain and
upgrade medical equipment including MRI and CT scanners, digital
mammography units and ultrasound machines.
An alliance with Georgia Regents Medical Center, a
not-for-profit corporation in Augusta, Georgia, in June provided
a breakthrough in the United States where uncertainty over
spending plans and healthcare reforms has held back orders.
Under the terms of the $300 million deal, Philips will
provide consulting services, advanced medical technologies,
planning and maintenance services with pre-determined monthly
operational costs over a 15-year term.
Philips' rebound means its shares now trade on a forward
price-earnings multiple of 14.7, or a 9 percent premium to its
peer average, according to StarMine SmartEstimates.
The next test will be the fourth-quarter results which will
show whether or not Philips has met its 2013 targets of sales
growth between 4 and 6 percent, a margin on earnings before tax,
interest and amortisation of 10 to 12 percent and a return on
invested capital of 12 to 14 percent.
The fourth quarter is usually its strongest. Consumer
spending picks up in the holiday season, and hospitals and
government agencies which have refrained from blowing their
annual budgets must now place orders or risk losing the funds.
Even so, Rabobank's Slob thinks Philips will struggle to
achieve its sales target given that concerns about Obamacare in
the United States have made American hospitals reluctant to
spend because of uncertainty over the impact of reforms.
He also says it will be hard to maintain the momentum in
growth in the lighting and consumer businesses.
"The focus will be on the healthcare business. You'd need a
pretty good acceleration in the fourth quarter," Slob said. "But
longer term they are very well positioned for recovery."