Philips Needs A Keen Focus For This Market

As Philips Electronics was rocked by losses of $2.2 billion last year, pundits feared that CEO Jan D. Timmer's turnaround plan to hack away deadwood might cut into the Dutch giant's technology roots, too. Slashed were memory chips, minicomputers, and some other branches once deemed vital to Philips' future.

Timmer calmed the worriers with a quiet announcement on Oct. 11. He's betting big money that his company can stand up to Japan in one of the most critical technologies of the decade: active-matrix liquid-crystal displays. A complex cousin to the simple readouts on digital watches, the thin, vibrant LCD screens are at the heart of today's pocket TVs.

LIFEBLOOD. That's only the beginning for LCDs. They are already being used in laptop computers, and soon will invade every electronic nook and cranny -- from multimedia workstations and videophones to car dashboards and larger TVs. By late this decade, they could start replacing cathode-ray tubes in wide-screen, high-definition TVs--in short, become the lifeblood of the consumer electronics industry.

Until now, no Western company had dared to go it alone in mass-producing LCDs in the face of Japan's iron grip on the market. "Philips is the first--and may be the only--Western challenge to Japan," says Arthur H. Firester, director of display research at David Sarnoff Research Center in Princeton, N. J.

There may be good reason. Even Philips' $105 million investment, for the first phase of volume production starting in 1993, pales next to the resources Japan has committed. Industry leader Sharp Corp. alone has slated $650 million for LCD production in the next two years. That's only part of $2.7 billion of recently announced Japanese investments. Some 30 private and corporate research labs in Japan, and 10,000 engineers, are working on flat LCDs, says Lawrence E. Tannas, an Orange (Calif.) consultant who recently led a National Science Foundation tour of Japan's LCD facilities.

No wonder most Western efforts, such as those by small U. S. companies and France's Thomson, so far are targeting niches like avionics and avoiding costly large-scale production. IBM abandoned plans to produce its own flat panels in 1989 and formed an LCD joint venture with Toshiba Corp. And Xerox Corp. has

been searching in vain for a partner to commercialize its technology.

Philips may be chasing a moving target. By the time its LCDs come to market in 1993--six years after Sharp's first production--Sharp alone will be turning out as many as 70,000 displays per month. Five Japanese companies already sell the 10-inch screens for laptops that Philips will be targeting. This Japanese experience with volume production could give them a cost edge as prices drop.

CHIP SHOT. The LCD challenge is reminiscent of Philips' entry into memory chips. After investing nearly $1 billion over five years, Timmer pulled the plug last year when Philips couldn't keep up with lower-cost Japanese and American rivals. "The question is if they can succeed in LCDs any more than they did in semiconductors," says Jonathan Drazin, an analyst at market researcher Dataquest Inc. in London.

Assuming its products are competitive, Philips may have some advantages--the biggest being that it's not Japanese. "Quite a few American companies are looking for a non-Japanese source," says Adrien Veenhof, Philips' executive in charge of LCDs. Another edge: Philips won't suffer the 62% antidumping duty levied by the U. S. on Japanese imports earlier this year.

Veenhof is trying to persuade some U. S. companies, as well as Italy's Olivetti, archrival Thomson, and other Europeans, to join Philips in an LCD joint venture. But Philips couldn't afford to wait any longer to jump in. By 1999, the nascent world market for complex LCDs should swell tenfold, to $4.4 billion.

Philips is betting that its offbeat technology will produce LCDs more cheaply than most of the manufacturing processes used by the Japanese. A pilot line has been running for two years. Still, the production process for making all LCDs, like that for producing semiconductors, is exceedingly tricky to master as the screens grow larger. That means it will probably be well into the next century before anyone can affordably make the ultimate mainstream product: a large, thin, extra-sharp screen so light it can hang on a wall. "My fear for Philips, like for any Western company, is that it won't stick with it long enough," says consultant Tannas. If Philips is serious about a future in consumer electronics, it won't have much choice.

Jonathan B. Levine in Paris

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