Turning Up the Volume at Phonak

The maker of hearing aids is expanding through acquisitions, improving its technology, and changing its name to Sonova

Valentin Chapero can sympathize with peers who sell things that people don't like to admit they need, like antiwrinkle cream and adult diapers. Chapero is chief executive of Swiss company Phonak Holding, one of the world's top producers of hearing aids. By Chapero's reckoning, some 10% of the world's population is hard of hearing, but only about one-tenth of them get a hearing system. Some are unsatisfied with the technology's performance. Many don't want to admit they need one. "It's very difficult when you are making a product that actually nobody wants," Chapero says.

Phonak is determined to change that, through rebranding, improved technology, and expansion. Phonak, an owner of several brands, plans to adopt the brand-neutral name Sonova in August. And as the No. 3 producer of hearing aids by sales, Phonak also wants to get bigger through acquisitions. The company said in October it would acquire smaller German rival ReSound. Phonak is appealing a decision by Germany's Federal Cartel Office to nix the acquisition.

For Phonak and other companies specializing in hearing technology, the time for expansion is now, as the number of aging baby boomers in need of hearing help climbs rapidly. "Demographics are on our side," says Chapero. In the U.S., where about 2 million hearing aids are sold a year, boomers are "turning 60 at a rate of several hundred per minute," adds Dave Fabry, a Phonak vice-president.

Competitors Are Thriving

Investors share the optimism. Phonak, which last month reported a 40% increase in profit for the year ended Mar. 31, has seen its stock surge 52% over the past 12 months. It earned $200 million on sales of $890 million in fiscal 2007. Competitors are doing well, too. Danish rival William Demant, No. 2 in the hearing aid business, has climbed 32% in the past year. And the stock price of Cochlear (CHEOF), the Australian company that is the world's top producer of cochlear implants, is up 23%. The world's largest maker of hearing aids is German giant Siemens, which has many other products, making an apples-to-apples comparison difficult.

Phonak, which ranked No. 60 on the most recent BusinessWeek Europe's Hot Growth Companies report (see BusinessWeek.com, 10/19/06, "Europe's Hot Growth Companies"), aims to keep outperforming rivals by making its products more reliable and, well, cool. In April, Phonak introduced Audéo, a new top-of-the-line hearing aid that costs about $3,000 per ear, almost double that of more conventional hearing aids. The device has technology that can appeal to baby boomers sensitive about aging, say Chapero and Fabry.

For starters, it fits behind the ear, rather than in the ear, making it less visible. And if other people can see the Audéo, they might think that it looks hip since it comes in 15 different colors ranging from "Green with Envy" and "Crème Brule" to "Pinot Noir" and "Royal Velvet." The goal, says Fabry, is for the device to look less like a hearing aid and more like a Bluetooth device for hands-free chatting via cell phone.

Audéo also performs better than competing aids, Phonak claims. With two microphones feeding sound into a tiny Phonak-designed chipset, the Audéo can cancel out annoying background noise and echoes while also helping users to switch easily from omnidirectional sound (listening to music) to more focused sound (taking part in one-on-one conversation).

Underdeveloped Chinese Market

While the biggest markets for hearing aids are now in the U.S. and Europe, the fast-growing (and fast-aging) populations of Asia are likely to be the real growth markets in the years ahead. Both China and Japan lag behind Western nations in adoption of hearing aids. "Asia in general is a very under-penetrated part of the world," says Chapero. "The stigma is very strong."

China, with a population more than 10 times that of Germany, has sales of only 200,000 hearing aids annually, vs. 700,000 in the German market. "China is brutally underdeveloped," says Chapero. The U.S. has more than 13,000 retail outlets where consumers can purchase hearing aids; in China, the figure is at most 500. Japan is better, but not by much: Annual sales of hearing aids in Japan, with a population of 127 million compared with Germany's 82 million, are only about 400,000. Phonak is trying to find Japanese partners, and in China the company has opened retail outlets of its own in more than 20 cities.

Chapero is hopeful that advances in hearing-aid technology will make people in Asia—not to mention in the U.S. and other Western countries—more willing to put up with hearing aids. The goal, he says, is to get people to change the way they think of the devices. One way to do that: Ban the words "hearing aid." Says Chapero of the new Audéo device: "We don't call it a hearing aid. It's your PCA, a personal communication assistant."

In Chapero's best of all possible worlds, people will use their PCAs not only to hear better but also to connect to their mobile phones. "I do see within a few years a product where you actually can hear the headline of the e-mails coming in," he says. "So instead of people nervously grabbing their BlackBerry (RIMM) all they time, they will have a voice in their PCA" alerting them about incoming messages.

If the prospect of hearing a voice in your head that nags you about your boss's e-mails is too frightening, though, not to worry. The feature, says Chapero cheerfully, will "definitely be something that can be turned off." That's just another way he's trying to make hearing aids—or PCAs, rather—more appealing.