• Healthcare is a leading theme

Businessworld
Healthcare is a leading theme
GERARD KLEISTERLEE
'Healthcare is a leading theme for PHILIPS'
In 1998, Asia was in crisis. The US was in fashion. After the tech bubble, things got back to normal and I said: "Guys,
it's Asia!"
Gerard Kleisterlee, 59, chairman, Royal Philips Electronics, is presiding over the fortunes of the 114-year-old
electronics giant during extraordinary times. Markets are shifting away from Europe and the US towards Asia. The
Asia-Pacific today accounts for 23.4 per cent of Philips sales, up from 5.8 per cent in 1996. Meanwhile, rapid
commoditisation of consumer electronics is squeezing margins.
In 2001, the year Kleisterlee took over, Philips' revenues had shrunk to 32 billion euros from the previous year's
37.8 billion euros. It also incurred net losses of 2.6 billion euro. By 2002, revenues were 31.8 billion euros and losses
3.2 billion euros. In 2003, though revenues fell to 29 billion euros, profits rose to 695 million euros. In 2004, revenues
stood at 30.3 billion euros and profits at 2.8 billion euro. In an interview, Kleisterlee talks to BW's Nandini Vaish about
coping in times like this. Tip: you need to keep reinventing the business model.
What brings you to India?
We came in 2003 with the board to challenge our Indian organisation to speed up growth; to capture the full potential
that the Indian economy was offering. I also brought the board to create the right level of attention in the company. You
can have ambition and a fantastic crew here, but if you don't get the support of R&D, or business creation, or marketing,
little will happen.
It seems that the Koreans have taken the initiative in electronics here.
I would like to correct you on that. Philips was an early entrant in India and we have set up many manufacturing
operations here, particularly in lighting, where we still have a strong presence. We've gone up and down with the
changes in the Indian economy.
We have restructured the company, not only globally, but also in India. With 40-45 per cent, we have by far the leading
market share in lighting across all categories. There is an opportunity in consumer electronics and the team here has
done an excellent job. In the last two years, we have been able to more than double the number of televisions that we
sell in India. That apart, we are among the top three semiconductor suppliers to India and our strengths lie in the
platforms we provide for home entertainment, mobile communication and audio. We are also increasing local
manufacturing with companies like Elcoteq, Flextronics, Nokia, etc.
We want to become the leading solutions provider in 'healthcare lifestyle technology'.... In the late 1990s to the early
2000s, we made a number of acquisitions that made us a Top Three player in the league of our competitors, GE and
Siemens. We plan to strengthen our position in the local healthcare markets by moving down in our product offering and
launching a range of economy X-ray equipment that will further enlarge our footprint in hospitals.
Does that mean, relative to the other businesses, there is a deliberate defocusing of consumer electronics?
There is a focus on consumer electronics in categories in which we can get a global leadership position. For
example, we are pushing very hard for categories like flat-screen televisions. In the third quarter, we were the largest
brand in LCD (liquid crystal display) TVs globally. We are playing very hard to be a leading player in DVD. In Asia, in
South America, in the US and Europe, we have good shares in DVDs.
Does the rapid pace of commoditisation in consumer electronics bother you? Even if you invent a technology, the
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window of opportunity to get a premium on it is getting narrower. So, does it make sense to look at, perhaps, less
commoditised electronic products like healthcare?
You have formulated the essence of our strategy. We have done two things. One, we have reengineered the
consumer electronics value chain. In the 1990s we were fully vertically integrated. Today, it is clear that value in the
chain is at the two ends: as close to the customer as possible, and upstream, in key technology, particularly in
intellectual property (IP) and, to an extent, in semiconductor platforms. It's not in the middle part of the value chain.
So what did we do? We changed the business model from [that of] an integrated manufacturer by divesting our circuit
board assembly to Jabil, and by outsourcing all the commodity products to OEM (original equipment manufacturer)
and ODM (original design manufacturer) partners. We created alliances with TCL, which supplies about (2005-2006
projections) 4 million TVs to us. We created a joint venture (JV) with TPV of Taiwan for them to become our OEM
supplier for monitors and small-sized flat TVs. So, now, we move to an OEM/ODM model as soon as we hit the
commodity phase and focus only on the initial stage.
We took out a big part of the middle by focusing on the marketing, brand management and IP. Philips then looked at
world demographics. In the West, there's ageing population [and, thus, demand for healthcare]. In developing
countries, there's a big need for basic healthcare. Whenever I talk to governments about the problems of society,
healthcare is on the agenda, whether it is in the US, where people can't pay for it anymore, or India and China, where
people don't have access to it. Healthcare is a leading theme for Philips and we will grow via acquisitions and
organically.
What is the most exciting technology at Philips right now?
There are different things. Lighting was for long seen as a mature and declining activity. Yes, you're good at it, but who
cares? That is going to change with LEDs (light-emitting diodes). Out of our research, I see a lot of new developments
where the combination of lighting, electronics and software will create a new paradigm in the future of lighting.
I see many exciting things in health care coming out of our R&D. We want to create better and faster MRI (magnetic
resonance imaging), allow personal monitoring of patients in an unobtrusive way, we have monitoring pilots where
people are being monitored at home. Technology has become so versatile that it can be integrated into clothing: you
can wear it without people noticing.
Other interesting developments are in our appliance division. We create whole new categories by finding new models
of cooperating between the appliance and the FMCG industries. We look for new formats to bring coffee and beer to the
markets. That creates new interesting avenues where the innovation is not so much in the technology, but in the
business model.
Design has been a focus for Philips. What are the major changes that you have made in the design division and how
has it changed the company?
Sometimes design comes in too late. Design has insights into people's behaviour; designers do a lot of socio-cultural
research. That needs to be fully linked to new product development early.
Second, we have given design authority to see that there's uniform signature so that you recognise a Philips product
on sight.
Third, in 2003, for the first time in Philips history, we engaged a chief marketing officer at the corporate level to lead
the effort not only of the corporation, but also all the business activities. We changed our communication from 'Lets
make things better' to 'Sense and simplicity' because the feel of the research showed that people like what technology
can do for them, but are sometimes a bit scared of the complexity with which it comes. The other side of complexity is
simplicity. With this theme, there was a focus on design-led innovation. The total package changes the market profile of
the company.
Is an increasing portion of your revenues coming from Asia?
Yes. That is the faster growing part. If you look at the split of Philips revenues in 2004, around 45 per cent came from
Europe, 30 per cent from the US around 20 per cent from Asia. Europe is a low growth economy and Philips' market
share is established. In the US, Philips is growing at 5-6 per cent. In Asia, the growth is in the order of 16-17 per cent.
Organisationally, how do you deal with this? Does the head office need to be closer to the more active market?
Absolutely. The first Asia growth plan that I know of was formulated in 1996 by a new president for the Asia-Pacific
who was a member of the board. He then became the president of the company - my predecessor. In 1998, came the
crisis, and Asia was out of fashion. The US was the fashion. You needed to be in the US. After the tech bubble, things
got back to normal, I said: 'Guys, it's Asia.' But it was also clear that if you wanted to focus on Asia, you needed to do
things differently.
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First of all, you needed to get people out of their offices in the US and in Europe. So we decided to organise field trips
for the board to India and China. In August-September 2003, we came to India. We went to Bangalore, Mumbai and
Delhi. ... We talked to business leaders, people who run software companies, people who did BPO processes... those
who were in totally different industries.
In November that year, we took the board to China and did the same thing there. We even went into homes to see
how people use products. We formulated ambitious growth plans for China and India. I myself visit Asia at least 4-5
times a year.
We have, for example, the business centre for our total home entertainment activities (set-top boxes, DVDs, etc.) in
Singapore. Standard television is in Shanghai, and so is semiconductors. The business centre for our optical storage
data activities is in Shanghai too. (Philips has invested approximately 2.5 billion euros in China till now.)
Is managing the migration of markets the biggest challenge for multinational companies?
It is a challenge in the sense that it is a balancing act. The sophisticated, high-end markets are still predominantly the
US and western Europe. They are also there in Asia. Just 5-6 weeks ago, when I was in China, we launched the first 64-
slide CT scanner in Beijing. The challenge for a company like us is that more than half of the revenues of Philips [in
China] is in medical systems. And globally, it's over 20 per cent. In India, the consumer electronics market [is the
largest], then is the lighting market.
In consumer electronics, what are the lessons that Philips may have learned from the Koreans?
I don't think that we have learned lessons from the Koreans. I think Philips tried to learn from the computer industry. It
was clear that as consumer electronics move from analogue to digital, the rules of the PC industry would apply. And
what are the rules? You specify your product, you manage your brand, and you manage your channel - whether it's an
online channel like Dell's, or a retail channel. You're good at supply-chain management and you go to Asia and work
with OEM/ODM manufacturers.
We spoke to Michael Dell and his people. We looked at the essence of their success and reengineered our consumer
electronics in that fashion.
Philips has been at the forefront of introducing new products. But in consumer electronics in India, you have not been
able to maintain your leadership position for too long.I think that we have maintained a fairly strong leadership in all
audio categories and we have been able to migrate that leadership, for example, into a leading position in DVD players.
Where we failed to make a transition at the right moment was in colour TVs.
But the audio market itself isn't too large, and it is moving towards portable music players where Philips does not have
a strong presence, especially after your venture with Nike was called off.
Absolutely. The Nike tie-up was an interesting marketing experiment from which we learned a lot. But it was not the
mainstream of our presence in MP3 players. (Philips had tied-up with Nike to develop portable sport audio products.
The tie-up was called off earlier this year.) We do have a full range of MP3 players and, in Europe, we are the second-
largest MP3 player brand. But I agree with you, that is a smaller part of the consumer electronics category.
Apple has the iPod and Sony has the Walkman. What is the global consumer's favourite Philips product?
The global consumer's favourite product today in consumer electronics probably is the Ambilight television. It is a
product that is totally different from what you see in the flat screen television market. It has been very well received by
consumers.
Would you have liked it if you had invented the iPod?
Of course. Who would not?
Did you do any research on it?
It was not a matter of research. Creative had the product before Apple had it. We, too, had the product at the same
time, but the brilliance of Steve Jobs was to connect the iPod with iTunes.
What is the next big wave in consumer electronics and what role will Philips play in it?
The role that Philips will play is very clear. We want to win in flat TVs, and that's what we've focused on. We want to
be a large global player in what goes with the flat TV. You could say home entertainment network. We have introduced
the concept of a connected planet as what we have around the TV will be connected wirelessly. That is something that
has to happen.
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The other is an accessory company (Gemini Industries) we bought one-and-a-half-years ago. That's an interesting
category that we would like to drive hard. We are increasingly successful in set-top boxes, particularly since it merged
with satellite, cable and Internet protocol TV. We tied up recently with large telecom providers like British Telecom for
triple play set-top boxes.
What do you think Philips will look like in the next 10 years?
The consumer will increasingly see Philips as a lifestyle electronics company. And I say lifestyle electronics in
contrast to consumer electronics as that is too narrowly defined. Lifestyle also includes electronics to manage your
health and your wellness. Health and wellness is a category that we will bring to consumer markets.
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