The Heat On Alain GomezJonathan B. Levine
Brilliant timing it wasn't. With war raging and economies worldwide blowing fuses, French electronics colossus Thomson recently threw a gala affair in Paris to unveil its new Space System television. It's a 34-inch stereophonic marvel offering the panoramic dimensions of cinema--for a lofty $7,000. That's an expensive toy these days. Yet Thomson has precious little choice. The Space System is a forerunner to futuristic high-definition television. And Thomson, a laggard in new consumer technologies, wanted to get out in front of the pack for once.
Playing it close to the edge, though, is nothing new to Thomson's feisty chairman, Alain Gomez. Since assuming control of the ailing state-owned electronics group in 1982, the former paratrooper has pulled off an impressive transformation. He has sold off 20 divisions and cut thousands of jobs to refashion Thomson around defense and consumer electronics. In 1987, Gomez' acquisition of General Electric Co.'s GE and RCA consumer electronics business raised hopes that Thomson might check Japanese rivals such as Sony Corp. and Sharp Corp. from making big inroads into Europe's consumer electronics market.
Now, however, Gomez' two-prong strategy faces a major test. Shrinking military budgets are curbing Thomson's defense profits. Its debt-heavy Thomson Consumer Electronics unit is fighting an already bloody price battle with low-cost Asian competitors--while it's investing billions in HDTV research. Worse, the U. S. recession has also hit Thomson's GE and RCA lines, representing roughly 50% of the company's $6.6 billion in consumer electronics sales.
'DANGEROUS MISTAKES.' In fact, Thomson announced a $365 million write-off on Feb. 26 to consolidate its consumer electronics operations in Europe and the U. S. That's expected to leave the parent with a heavy 1990 loss on flat sales of about $15 billion. "Thomson is under pressure on all fronts," says analyst Christophe Cherblanc at Paris brokerage Cholet-Dupont.
Some French observers wonder whether the write-off was politically motivated. As the head of a nationalized company, Gomez, 52, is an appointee whose three-year term comes up in mid-1992. The write-off, though painful, should bolster profits this year, just as Gomez starts to campaign for a fourth reappointment to his Thomson post. He needs the edge. Some are critical of Gomez' focus on the risky defense and consumer electronics fields. So he's already planning moves back into consumer phone equipment and other areas. Says one director: "Gomez made some dangerous mistakes."
Gomez, for one, isn't flinching. Despite the effects of the gulf war on defense orders, Gomez says, "we're in control of most factors that determine our future." And to his credit, Gomez foresaw declining military spending as early as 1986. Since then, he has slashed 10,000 defense jobs. With Thomson's defense sales of $7.3 billion expected to fall 20% by 1993, Gomez plans to cut by 10% the company's payroll costs starting this year. Analysts hope the savings will mean a 5% boost in earnings, to $451 million in 1991.
That helps. But investors remain unimpressed. Thomson's publicly traded defense unit sells at about $26--a third of its 1986 high. No wonder. For one thing, a key $4 billion air-defense system contract from Saudi Arabia runs out this year. And the benefits from a recent acquisition spree have been undercut by the easing of the cold war.
RELIGIOUS CRUSADE. If the defense business looks tough, consumer electronics "is like a rollerball match," Gomez concedes. To prevail, Gomez has tethered Thomson's future firmly to HDTV. It's lucky that its partner, the Mitterrand government, views fighting Japanese consumer electronics powerhouses as something akin to a religious crusade. The French government has promised to fund a third of Thomson's $1.8 billion HDTV development costs over the next five years--and another $1.2 billion in fresh equity may be on the way. "We'll continue to support Thomson," says a ranking government official. "If not, there's nothing left but the Japanese."
With friends like that, Thomson may catch up with Japan. Only five years ago, the Japanese seemed certain to impose their HDTV standard on Europe. But latecomers Thomson and Dutch rival Philips coaxed the European Commission in 1986 to adopt their own signal-transmission standard, dubbed MAC.
Sure, there was more than a measure of protectionism at play. Yet the MAC standard offers more flexibility than the Japanese plan, allowing television sets to receive both today's pictures and future HDTV signals. It also bought Thomson some valuable time by allowing it to start selling pricey features such as the Space System's extra-wide screen years before HDTV would be ready to market. By creating enthusiasm among consumers for a high-tech gizmo such as Space System, Thomson hopes to raise its image--and sales--of its entire product line. Longer term, it wants to field a base of sets that can pick up HDTV signals--and create demand for real HDTV's in the mid-1990s.
Thomson could use a boost. The 1990 operating margin of Thomson's consumer electronics unit is 2.2%, far shy of leader Sony's 7%. The problem lies chiefly in the U. S. After turning a small mperating profit in 1989, a recessionary drop in TV unit sales of 5%--the first since 1982--pushed the U. S. division into the red. And heavy debt payments forced the 1990 unit-wide losses to $136 million before restructuring costs. Debt payments on capital spending of more than $300 million since 1987 to automate GE/RCA plants aren't helping matters.
True, productivity and quality are up, while a completely refurbished product line from boom boxes to large-screen "home-theater centers" is winning praise from dealers. Even so, Thomson faces a bruising from relentless price discounting by Japanese competitors. Thomson's bold stab at raising prices by 3% on TVs and camcorders this year is being undercut by Sony and Matsushita Electric Industrial Co.
Thomson doesn't expect any miracles from Space System. Still, cashing in on its lead will be tough. Of 20 million color TV sets sold annually in Europe, only 1% are in the 34-inch category, and Thomson's widescreen model TV is priced 25% higher than standard sets of comparable size. Trouble is, the bulk of programming available for broadcast in a wide format is limited to feature films. It does, however, boast plenty of whiz-bang technology. A "zoom" feature lets viewers blow up standard programs to fill the screen, though the picture's top and bottom are slightly cut off. Will it be enough? Jack Schmuckli, president of Sony Europe, says, "We don't see much demand."
To expand the appeal, Thomson desperately needs cooperation from producers to shoot new programs in wide versions and for broadcasters to make investments to transmit them over satellites--the only means of carrying the wide MAC signals. But a series of disasters with European satellites will limit MAC channels until after 1993. It's also uncertain whether studios and stations will want to invest in MAC equipment, when they face investments for HDTV in the mid-1990s.
LONG RIDE. A crucial test is coming up: The European Commission must decide soon whether to extend its expiring 1986 order that mandates MAC as the exclusive standard for all TV broadcast satellites. Many broadcasters want to keep satellites open for today's popular standards. And if they prevail, Thomson would suffer a severe blow.
In any case, Thomson is in for a long ride. Remember that it took RCA 10 years before it turned a profit on one of the biggest TV innovations--color--in 1954. Gomez is settling in: "There will be a day of judgment, and we won't let the Japanese be there alone," he says. Thomson's future depends on it.