Philips May Be Putting Too Many Chips On Chips

Five years ago, when Chief Executive Jan D. Timmer of Philips Electronics was looking to stem his company's horrendous losses, many urged him to dump the semiconductor division. But the taciturn, tough-as-nails Dutchman saw value in the money-losing subsidiary and targeted other plants and divisions for sale or shutdown. Now, Timmer's vision is paying off. In late July, the company announced that first-half profits had more than doubled, to $856 million, from the same period in 1994 (chart). The once-lagging business of semiconductors contributed some 60% of operating profits.

The chip recovery buys the $39 billion company time, as Timmer switches from a survival plan to a growth strategy. For starters, he hopes Philips' newfound strength in chips will help revitalize the consumer-electronics business, which accounts for 35% of sales. Timmer also aims to build strength in software to compete in future multimedia markets. By 2000, he wants 25% of revenues to come from new-media operations, including cable TV, film, and software. Dumping the losers will continue: Philips is selling a chunk of its communications business to AT&T.

WILD SWINGS. Timmer's idea is to be a big player in the new but still fuzzy era of converging technologies. With media, telecommunications, and computers rapidly melding together, Philips can apply its chip skills to new generations of products, from smart car-navigation systems to wristwatch phones. "Semiconductors are the jewel in the crown of Philips," says Timmer.

Timmer's strategy could be hobbled if the boom in semiconductor demand suddenly turns into a bust. But many market researchers insist that the historically wild swings in the semiconductor market are easing, since demand for chips in everything from personal computers to cars and washing machines is entering a sustained period of growth. In 1984, semiconductors represented 6% of the retail value of electronic goods. Today, the number is up to 23%, according to market researcher Dataquest Inc. "Chips are the driving force in consumer electronics and multimedia," says George Verghese, electronics analyst at Deutsche Morgan Grenfell in London. "That's Philips' strength."

In multimedia, Philips is aiming to build on its strength in chips to invest across the board in hardware, software, distribution, and content. It's working on everything from set-top boxes for interactive-TV to personal-computer-compatible compact music disks with advanced video features. Philips' Trimedia division in Sunnyvale, Calif., is developing a next-generation chip that could help bring down the cost of set-top boxes and videoconferencing.

Timmer's toughest challenge is to build up muscle in software and content--the games, interactive books, and other products that make people buy the hardware. "Philips is a box company that has realized it doesn't want to make [just] boxes," says Russ Mould, an analyst at S.G. Warburg in London. Timmer has already seen Philips' compact-disk interactive (CD-i) machine flop disastrously, largely because of limited software. "Philips is seen as hopelessly inept" in multimedia, says a former Philips executive. Yet Philips management, though hunting for a major software firm, has also avoided several richly priced deals. "We're careful not to get carried away by euphoria," says Chief Financial Officer Dudley Eustace.

SEXY STRATEGY. Philips does have content in music subsidiary PolyGram, which has ventured into film with such movies as Four Weddings and a Funeral. PolyGram wants to boost film activities to 25% of total revenues, up from 13% today. In January, it bought Los Angeles' International Television Corp., a film-and-TV library containing 10,000 hours of programming. Philips has also entered a joint venture with Denver's United International Holdings Inc. to create Europe's largest private cable-TV operator, UPC.

It's a sexy strategy, but it's unclear when profits will materialize from all the new ventures. PolyGram, while profitable in music, is losing millions in the film business. Other new projects are also in the red, including a novel chip-based car-navigation system, now being installed in some of BMW's priciest models. And in the race to create a standard for digital video disks, a promising new medium, a Philips-Sony effort may wind up losing out to Toshiba, whose format Hollywood is backing.

At least Philips is healthy enough to invest. The company aims to spend $650 million annually to expand semiconductor production through 2000. The growth is designed to move Philips Semiconductor from a global No.11 to the No.7 rank. Timmer is boldly pushing on. But Philips' future is a work in progress.

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