Europe's electronics giant 'thinks lean' to fend off Japan's inroads
Eindhoven, the Netherlands — On a continent where it is used to having its own way, Philips--the Netherlands' and Europe's giant in electronics--finding a big new player in its ballpark. And the rookie is forcing the old-timer to play by some new rules.
Philips's almost total dominance of the Western European electronics market is being challanged by the Japanese, who have been doing to Europe in recent years what they have done to the United States for two decades.
From a rather small presence in Europe, "Japan Inc." has rapidly increased its sales of television sets, radios, video recorders, computer components, and integrated circuits. Even on Philips's own turf, store windows in Holland display a host of Japanese brands, including Sony, Panasonic, Casio, and Toshiba.
For Philips, part of the strategy for fighting the Japanese onslaught in Europe and the rest of the world is to make itself a leaner organization, consolidating plants and buying companies that have the new technology it needs, instead of trying to develop every new product itself.
Since its founding in what was the tiny town of Eindhoven in 1891 to produce light bulbs, Philips and Eindhoven have both grown considerably. Eindhoven is now the fifth-largest city in the Netherlands and Philips is the largest producer of electrical and electronic products in Europe.
Even as he was starting his light bulb company with the help of an advance from his father, Gerard Philips was trying to figure out ways to expand into other products.
Today, his company seems to be trying to disprove the notion that "you can't be all things to all people." The range of Philips products includes just about everything that runs on electricity or batteries, and includes the batteries, too.
Some observers have faulted Philips for trying to be involved in too many product lines and "reinventing the wheel"--building every appliance and component from scratch themselves, including clocks, televisions, and computers. But company officials retort that to build one product, you have to fully understand related products, so why not build them, too?
Now, however, some new realities are causing a shift in this philosophy and forcing Philips to cut back some of its endeavors. A "rationalization" plan, announced late last year, is supposed to reduce excess capacity and close several of the company's European plants. Instead of having nine European factories producing TV tubes, for instance, the plan calls for this number to be cut to two.
Starting last year, and continuing for the next two years, Philips plans to cut its European work force by about 10,000 a year.
The past year was a good time to start cutting back, because while Philips's sales around the world continued their steady increase, reaching $18.2 billion in 1980, profits have been dropping lately. Last year they slipped a lot, down 42 percent, hitting their lowest level since 1971.
While part of the blame can go to the recent recession, which hit Europe harder than the United States, and cut sales of profitable home electronics products like stereos and televisions, Philips executives acknowledge their company and extended its reach a bit.
"Because of the structure of Europe in the last 20 years, we spread too much all over," admits L. E. Groosman, Philips's director of external affairs. The company, he explained, went too far in taking advantage of liberal trade policies among the members of the European Community.
Returning to the example of the TV factories, he noted that with nine plants, the company was spending too much money to produce the same number of sets it could make in two expanded, more efficient plants. "In two plants, your series are much larger. And there's such a high level of standardization in television now that it [consolidation] is much easier to do."
Cutting 10,000 people a year does not mean laying off nearly that many people , Mr. Groosman noted. The company has over 250,000 employees in Europe (out of a worldwide total of some 370,000), so almost all of these reductions are made through attrition. Some cuts, however, will be painful. An example is a color TV plant in Lowestoft, England, that closed recently, laying off 1,100 workers.
While moves like this help answer short-term problems of inefficiency and reduced earnings, the longer-range question of the growing Japanese presence in Europe raises questions about how well Philips can complete.
Groosman, while recognizing the seriousness of the competition, thinks Philips can hold its own.
"seeing the Japanese strategy for the next decade, you have to be worried," he said. "It is a small island that is overpopulated, and they have their backs to the wall. So they have fought like crazy to win and keep their place in the market."
Philips believes it can hold its own against the Japanese, Grossman said, precisely because it is involved in so many areas. Part of the reason for its wide range of products is that the company spends more than 7 percent of its operating budget on research and development. Its $1 billion R&D effort is one of the largest in the world.
As the Japanese and other importers bring more sophisticated products to Europe, particularly computers and integrated circuits, Philips's emphasis on a wide range of products will keep it ahead, Groosman maintains.
"They will soon discover that you have to have the basic R&D to keep up, to keep building out further."
As an example of the kind of product that requires knowledge of several areas , Groosman points to a compact disc sound system pionered by Philips and being developed by several other companies around the world. Instead of a normal black photograph record using a needle, the compact system uses a gold-toned disc about 4 1/2 inches wide that is played with a laser beam. Each side of the disc has about one hour's playing time, and the operator can use a digital numbering system to select any spot on the record. Because there is noneedle touching the disc, there is nothing to wear it out or scratch it.
To build a system like this, Mr. Groosman argues, a firm needs knowledge of semiconductors to make the digital record system. it must also have a background in lasers, turntable motors, speakers, even the design of cases to hold all the pieces.