Ultimatum At Philips

Boonstra is giving consumer electronics one more chance

The rural hamlet of Eindhoven, headquarters of Philips Electronics, is hardly a window on the future. Restaurants close by 9:30 in the evening, and the and the ambience in its hotel bars is vintage 1960s. Things change slowly in Eindhoven--and Philips is no exception. Despite six years of restructuring, the company is still moving too sluggishly in global markets. So Chairman Cor Boonstra decided on shock therapy. On Oct. 28, he announced that Philips' headquarters would move to energetic Amsterdam.

The move heralds a looming strategic shift at Philips. Since he took the helm of the troubled company one year ago, the 59-year-old former marketing whiz from food giant Sara Lee Corp. has sold off dozens of money-losing or underperforming businesses and brought every division into the black. Now, Boonstra is out to prove that a European company can prevail against the Asian consumer-electronics powerhouses that put America's players out of business in the 1970s. By February, he will announce the results of a strategic review, detailing a growth plan that will redefine Philips' core businesses.

NEW FOCUS. During a year of rapid-fire moves, Boonstra has kept silent about Philips' future direction. But observers say he's likely to give Philips' traditional base--consumer electronics--one last chance to meet growth and profit targets. As the world's third-largest player, with $36 billion in sales, Philips still has a chance against its far more efficient Japanese rivals. If consumer electronics don't measure up, Boonstra may take the drastic step of selling the flagship business to focus on semiconductors, a profitable unit that contributes $6 billion to Philips' annual sales.

But Boonstra is likely to give consumer electronics, which account for 35% of revenues, at least a two-year lease on life. He recently hired Gerard Dufour, 48, from ad agency Euro RSCG Worldwide to burnish Philips' brand name globally. As Boonstra concentrates on core businesses, many analysts think he may sell Philips' medical and software division, as well as its 75% stake in Polygram and its slow-growing lighting company. "He's focusing on becoming a consumer company--and spending a lot of money on branding," says Neil Barton, an analyst at Merrill Lynch Global Markets in London.

Ever since a crushing $2.2 billion loss in 1990 nearly bankrupted the company, Philips has been struggling to reinvent itself. By the time Boonstra arrived, six years of ruthless restructuring under predecessor Jan D. Timmer and 60,000 layoffs still hadn't produced a cure. Philips plunged into losses in 1992 and in 1996.

Boonstra's first-year performance has been impressive. He has cut 6,000 jobs in consumer electronics, moved more production from Western Europe to Asia and Eastern Europe, and implemented a global purchasing strategy. He sold off underperforming businesses ranging from cable operations and car- navigation systems to television maker Grundig. And he has scored results. Sales for the first nine months of 1997 rose 9%, to $27 billion, and net income from operations was up 133% over the year before, to $966 million.

Now, Boonstra has set a target for return on invested capital of 24% by the end of 1998, up from roughly 17% today. For now, profits are driven by the company's semiconductor business, where operating margins of 12% helped the chip unit contribute more than half of Philips' total earnings in the third quarter. Philips ranks third worldwide in chip sets for consumer electronics such as TVs and VCRs.

But in the consumer-electronics products themselves, Boonstra will have a tough time eking out strong growth and fatter margins. Although consumer products are Philips' strength, margins in the industry are razor-thin. All it takes is one price war to turn a new market like digital video discs into a bloodbath. "Products become commodities very quickly," says Alan Bell, consumer-electronics analyst at Schroder Securities Ltd. in London. Doug Dunn, Philips' new head of consumer electronics, insists that dramatic cost-cutting will keep the unit in the black. He adds that even the TV business is now profitable.

Rather than pouring millions into new products, which has burned Philips in the past 10 years, Boonstra is redoubling efforts to cash in on established technology. He aims to grab a big slice of the fast-growing cellular-phone market. Philips botched early attempts to enter the field and pulled out in the early 1990s. But in February, Boonstra announced plans to enter the Japanese mobile phone market through a joint venture with Marantz, and on Oct. 1 he inked a $2.5 billion joint venture with Lucent Technologies Inc. to rev up the global business.

At the low end of the market, Philips models are grabbing market share by undercutting rivals. Its cheapest phone costs $365 in France vs. $381 for Nokia's. And a high-end, lightweight phone called Genie, which sells for about $665, is causing a stir of admiration. "It's a good product," concedes a rival executive.

Boonstra wants Philips to rank No.3 after Nokia and L.M. Ericsson globally in cellular phones by the turn of the century, displacing Motorola Inc. But it's a long shot. Cellular industry managers say that such an achievement would require perfect execution. "The margins in the mobile business are attractive, but Philips is coming too late," says Susan Anthony, an electronics analyst at Schroder.

Boonstra badly needs to boost Philips' brand recognition in cellular in the U.S., where Nokia, Ericsson, and Motorola dominate. He also must build a global organization and master the high-speed logistics of cell-phone manufacturing. "Mobile phones are the fastest game in town," warns Thomas Vollmann, a professor at IMD, the Lausanne-based international management school.

At the same time, Boonstra wants Philips to make its mark in a new generation of home entertainment products. He aims to tackle the Japanese with their own weapons--mass marketing and mass production. And he is likely to enter more joint ventures with Asian partners in leading-edge technologies.

A Dutchman who began his career at Unilever, Boonstra eases stress by sailing or listening to jazz. After 20 years at Sara Lee, his management style is seen as more American than European. "He has the guts" to change Philips, says a senior exec at the company, adding that Timmer failed because he was "a Philips man" to the bone. As the first CEO in Philips' 106-year history who didn't rise through the ranks, Boonstra is not. From its new headquarters in Amsterdam, Philips is in for even more radical changes.

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