Philips seeks spark for new success: Mary Fagan chronicles an electronics giant's battle to restore its fortunes with a series of new ventures

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The Independent Online
JAN TIMMER, chairman of Philips, has the look of a man who could cope with anything.

A massive man who strains his suit at every seam, he looks capable of wreaking at least as much destruction as the Incredible Hulk. And for the staff at Philips it must feel as though he has.

He has waded through the ranks of the beleaguered electronics giant with an axe over the past two years in a ruthless effort to restore the group's fortunes.

Around 45,000 heads have rolled since Philips plunged into crisis at the beginning of 1990 - a year when the company made a loss of 4bn guilders ( pounds 1.3bn).

After such massive restructuring, not yet complete, investors might well feel that an end to turmoil - and a return to dividend payments - should be in sight.

Yet the gloom surrounding Philips persists. Last Thursday the group announced that profits had plunged in the first half of the year and warned that 1992 will not match last years 981m guilders on ordinary operations.

For Mr Timmer it must be galling that Philips' consumer electronics, which he helped to pull out of previous difficulties, is the current bete noire of the group.

As he has pointed out, its problems owe much to the recession, which has hit the consumer electronics industry worldwide. Sales in the sector are down year on year and in the first six months of 1992, forcing Philips' prices down by an average of 6 per cent.

The company, like its competitors, is cutting prices to retain market share, and it hopes to be well positioned to grab the winnings when the longed-for upturn finally begins. Mr Timmer says that, problems notwithstanding, Philips is in there as a mainstream player for the long haul.

He also insists that the restructuring programme, Centurion, is working and only consumer electronics is masking progress. Lighting and professional products are doing well and so is Polygram, the music giant in which Philips has an 80 per cent stake.

While the components and semiconductors division did less well, that can again be blamed on the consumer electronics slump. A large part of its business is the supply of television tubes to rival TV manufacturers.

Blame recession as Philips may, critics of the company will not allow it to pass the buck so easily. They say product innovation at consumer electronics has been sluggish and marketing poor.

Dennis Exton, an analyst at Merrill Lynch, says that while Mr Timmer might be attempting a sea-change from his Eindhoven headquarters some of the subsidiaries are still acting as a technology-driven, rather than market- driven, organisation.

At least part of the Centurion philosophy was that the lumbering giant should change the habits of a lifetime and become market- and customer-led.

Philips has completed the bulk of its programme of disposals, including defence and much of the computer business. Now the company's watchers are wondering what can be done to stop the consumer electronics business dragging the recovery down.

There is a growing consensus that Mr Timmer should grab the bull by the horns and cut over-capacity in consumer electronics manufacturing, or at least convert the factories to produce lines that are feeling less of a pinch.

Yet last week the company said that any further job cuts would be through natural wastage. This is not, say some analysts, nearly aggressive enough.

Recent announcements of delays in a key new product, the digital compact cassette, have also clouded the outlook. The DCC has been hailed as a key in turning consumer electronics around.

It will produce music with the same crystal clarity as compact discs, but its players will accept existing cassettes as well. More important, it is scheduled to hit the market before the rival Minidisc from Sony and in time to take advantage of the Christmas rush.

It is significant that the announced delay in the European launch of DCC of only two weeks, slipping to October, was met with such howls of despair. Two weeks is barely worth mentioning, yet the slippage produced mutterings about the drip-feed of negative news from Eindhoven.

Philips' excuse is that it wants the transition from test to mass production to be hiccup-free. The likelihood is that Philips wants to make sure that the software - the music tapes - is ready at the same time so that sales begin immediately and large inventories of stock do not build up.

The giants of the music industry, from EMI and Virgin (now also part of Thorn) to MCA and even Sony, have decided that they will produce software for the DCC system.

There are other potential hits for Philips on the horizon, although these too are tinged with uncertainty. They are high definition television, in which the Dutch giant is a leading light in Europe, and interactive compact disc.

Europe's HDTV project, driven by the European Commission and costing hundreds of millions of pounds, is deemed by the commission to be vital to the survival of the EC's electronics industry, both in semiconductors and consumer products.

As such it has become highly political, all the more so because Japan is leading the race. But the Commission has had problems in getting manufacturers of television sets, production equipment companies and broadcasters to agree on standards, fuelling speculation that it may not succeed.

Critics of HDTV, which is based on analogue technology, say that the industry should leapfrog to more advanced digital television, an idea that is gathering strength in the US.

Mr Timmer raised the temperature of the HDTV debate last week when he said that Philips would not suffer if its system fails.

Mr Exton believes the company should abandon what he regards as a halfway house and jump ahead to digital television. It could help to fend off the attempts of US companies to make a comeback as leaders in the consumer electronics world. But such a decision would not go down well in Brussels.

Compact disc interactive is another story. This system, which combines high quality sound, video and graphics, is Philips' own baby and is dear to the company's heart. It is on sale in the US for around dollars 1,000 but sales have been less than sparkling, although Philips says they are 'to plan'.

In America the main customers so far are in higher education. With the European launch due in September there is a need to achieve more popular appeal.

But this is a product which raises the old question of whether Philips has been driven by a vision of new technology rather than consumer wants and needs.

Invention for its own sake may be admirable, but, as Mr Timmer knows, it is no way of surviving against the cut-throat Japanese.

(Photograph and graph omitted)