Philips' Big Gamble

When Jan D. Timmer took over as chief executive officer of century-old Philips Electronics last July and promised a revolution, many rivals doubted it would ever happen. But suddenly, the makeover of the troubled Dutch technology giant is in full swing. Once notorious for slow-footedness in pushing products out of its labs, Philips under Timmer's sharp prodding has stolen a march on its Japanese rivals with a splashy new recording medium: the digital compact cassette (DCC), an audiotape system with crystal-clear sound.

Then, on July 23, Timmer rattled more cages when he struck a deal to sell off Philips' money-losing minicomputer division and its $1 billion in sales to Digital Equipment Corp. for $300 million to $350 million. The message? He's dead serious about unloading the laggards in Philips' motley portfolio of businesses (table). While DEC thinks it's getting a good deal, the sale will rid Timmer of a major headache. Too small to survive on its own, Philips' minicomputer unit had racked up about $250 million in losses in recent years. "Philips will sleep a lot easier with this one behind them," says a source involved in the deal.

SHOCK THERAPY. Timmer, who has earned a reputation as a freewheeling turnaround specialist in his 38 years at Philips, is moving into high gear on the biggest, riskiest project of his career. To revive the faltering $28 billion company, which suffered a $2.2 billion loss last year, the burly 58-year-old is in the midst of cutting $1.2 billion in costs by slashing 55,000 jobs--nearly 20% of the work force. As if the firings weren't enough, Timmer has also cooked up a sweeping reeducation program known as Operation Centurion. It's shock therapy to focus managers' minds on something that has been neglected at Philips for years: profits.

To fire up those profits in the 1990s, Timmer is betting more than $2.5 billion on the DCC and other cutting-edge technologies. He's leaning on Philips' vaunted labs to spring high-definition TV, multimedia personal computers, and an ambitious entertainment and education system known as CDI over the next couple of years. At the same time, he is retrenching in businesses that once were the company's big hopes, such as computers, semiconductors, and appliances.

In a series of rapid-fire moves, Timmer is turning to Japanese, American, and European rivals to provide technology too expensive for Philips to develop by itself. All told, it shapes up as a radical restructuring that will either restore Philips to its role as a global powerhouse or relegate it to a has-been. "Timmer's our very own Schwarzkopf," says a senior staff manager, "and he's driving a tank through the place."

Hanging on Timmer's efforts is the future of the West's biggest maker of consumer electronics. Philips is the only European company besides Siemens that's still a leading player across a broad spectrum of electronic technologies. If Philips can't stake out a place in the sun for itself in the competitive 1990s, then Europe's indulgent research subsidies and trade policies will have been for naught. And increasingly, Japanese and American giants will have Europe to themselves. "We have to prove that Europe is not a second-rate power in electronics," says Einar Kloster, a director on Philips' management board.

Timmer will be riding a tiger as he strives to score big hits with his hot new products. The financially weakened Philips no longer has the financial muscle to absorb the kind of big loss it took on its bungled entry into VCRs in the early 1970s. The cash-cow lighting division that once was milked to fund research has had its margins trimmed in a price war with Siemens and General Electric. Already, interest charges on debt of $7.5 billion sucked up 88% of last year's operating profits.

'ANOTHER CLIFF'? The savings from layoffs and asset-shedding alone almost guarantee improved earnings through 1992. First-quarter profits of $68 million showed signs of life surprisingly early. And although the net margin will still languish below 2%, analysts expect profits to hit $500 million for 1991. That includes the roughly $175 million net gain from the July sale of its 47%-owned joint venture in household appliances with Whirlpool Corp. The rebound in Philips' stock, by 60% to $16 in the past 15 months, makes it one of Europe's hottest performers, though it still is at about half its 1986 peak. But unless Operation Centurion boosts productivity, "Philips could walk off another cliff by 1993," warns James Capel & Co. analyst William T. Coleman.

The management shake-up hits just as Timmer is readying a stream of risky new consumer-electronics technologies for the 1990s. Among his bevy of new products, none has more immediate potential than the digital compact cassette. Due out next spring in home, portable, and car models, the DCC packs 90 minutes of sterling sound on tape using a revolutionary recording technique. The DCC's great selling point is that buyers will be able to play their old, ordinary, analog-tape cassettes on the new machines. The chief rival, a portable compact-disk system called Mini Disc from Sony Corp., cannot play either existing CDs or cassettes.

Recording industry observers say this new war may lead to the kind of showdown in which Matsushita Electric Industrial Co.'s VCRs vanquished Sony's Betamax in the early 1980s. If the history of the compact disk, introduced by co-developers Philips and Sony in 1982, is any guide, whoever wins this battle will also reap sales of speakers, receivers, and other audio components.

Philips is counting on the DCC to juice up the flagging cassette market, where sales dipped last year for the first time. Cassette tapes account for 46% of the recording industry's $7.5 billion revenues, so soft sales worry not only Philips audio division but also its PolyGram recording subsidiary.

DIRE STRAITS. In short, Philips cannot afford to botch this one. So it bent over backward to line up world leader Matsushita to co-develop and manufacture the DCC, as well as music-industry leaders EMI, Warner, Bertelsmann, and its own PolyGram to provide the cassettes. It also signed the rock band Dire Straits to promote the technology on their world tour this year. In a sign that Philips may win out, even Sony recently said that it, too, might license the DCC in addition to pushing the Mini Disc. "So far," adds Paul Gluckman, managing editor of Audio Week, "Philips has made all the right moves."

If anyone can shake up stuffy, hidebound Philips, it is Timmer. Unlike some other Philips managers, Timmer is constantly on the move, crisscrossing Europe from Cannes to London flogging Philips products. He speaks Dutch, English, German, and French, but he speaks more English than his native language because he spends so much time traveling and trying to reshape Philips' global operations.

During the last year, a Timmer-directed series of Operation Centurion weekend seminars has gathered groups of top brass from around the world to brainstorm on mining more profits from their operations. "They come back as if they'd had a religious experience," says one lighting manager. "They hang up mottoes in their offices like `Your client is your boss.' "

A new flow of profits will be essential if Philips is to pay for the products of the future. It has already plowed $250 million into HDTV technologies and will probably spend another $1.5 billion or more by the mid-1990s. The payback is far from certain.

BIRD'S SONGS. Another big absorber of funds is Compact Disc-Interactive, or CDI, which former executives estimate has sucked up $500 million. This seductive new medium flashes text, graphics, sound, and video stored on an optical disc onto a TV screen. Using their CDI sets, which are expected to sell for $1,000, toddlers will be able to tour the Sesame Street neighborhood and play tunes on Big Bird's jukebox. Their parents will be able to play the St. Andrews golf course while getting tips from their favorite pro. Philips and Nintendo Co. have also teamed up to develop special CDI machines for video games.

Philips will launch CDI in the U. S. in October. But Philips will have to count on sales of the programming software more than on the players themselves--just as it makes more from PolyGram's CDs than from CD machines. Unfortunately, delays have turned off potential suppliers. There is also no assurance that couch potatoes want to interact with their TVs, as CDI requires.

Philips' CDI also runs the risk of competition from similar new features now emerging on multimedia personal computers. To hedge its bets, Philips early next year will bring out its own new line of MPCs, used for everything from job training to splashy business presentations. Its success, however, hinges on executing ambitious plans to turn around its bleeding PC business first.

The high risks put all the more pressure on Timmer to make sure the newly set profit goals and work habits of Operation Centurion turn out to be more than just rhetoric. Philips' Japanese rivals say privately that the financially weakened Dutch have been backed into a corner where they desperately need to score a big hit but have only a handful of new products. In their view, the odds are against Philips. "Philips' choices are limited," says an official of one big Japanese rival. "They have little freedom to experiment."

As a cagey insider, Timmer knows the Philips way well enough not to leave anything to chance. From the consultants he hired to lead Operation Centurion training seminars, say company union officials, he gets regular reports on his own managers to make sure that staff cuts are being made on the basis of performance rather than cronyism. "Timmer says it's now or never. If he fails, Philips dies," says Rudiger Jost, a company researcher, who is chairman of the Philips workers' council in Germany. "And then we're all out on the street." As the old saying goes, there's nothing like the sight of a noose to focus the mind.

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