'We weren't a consumer electronics company'?
Over the last decade, Dutch giant Philips has been making a marked shift away from its heritage of incandescent bulbs, radios and televisions. Gerard J. Kleisterlee, President and CEO, tells BT’s Rahul Sachitanand why the re-invention was necessary and what the firm’s new plans are.
Where is Philips headed today?
Our new direction is fairly different from what we were doing 8-10 years ago. We have changed the portfolio from high-volume vertically integrated consumer electronics to medical systems and appliances and lighting with a focus on health and wellbeing. We have divested our own operation and joint ventures in upstream technologies such as LCD and semiconductors and components and re-invested that money for a stronger presence in healthcare, strengthened our lighting activity and increased the number of categories in what we now call consumer lifestyle.
What made Philips change strategy?
We weren’t really a consumer electronics company; we started as a lighting company, then we entered medical electronics, because if you can make a lamp, you can make an X-ray tube. The choice we had to make was whether to focus on upstream technology such as components, which require a different skill set, or on downstream applications that have a stronger focus on branding and process management.
What were the trends that pushed you to choose downstream applications?
There were several societal and economic trends that were to our advantage. There was and is a growing and an ageing population across countries. Healthcare is a major concern for them. In the developing world, there are millions without access to basic healthcare. We could point to and ride a major new trend in this market. Then, there was a strong trend towards eco-efficiency. There is a growing demand from populous nations like India and China for (scarce) resources, and you quickly conclude that lighting, which accounts for 30 per cent of the world’s electricity use, will be a focus area. People were also interested in their own well-being.
How has the slowdown affected the transition? You have recently announced 6,000 job cuts…
It has not changed our plans. What doesn’t change is your vision; what changes are your tactics. There has been an impact on consumer lifestyle and on our lighting business due to fewer new installations in offices and retail spaces. There is a lesser impact on healthcare, because there is universal demand for it.
What are the latest trends in lighting?
The first trend is towards energy efficiency, so we moved from incandescent to compact fluorescent as the first step. The next step, LED, is almost on us, with retrofit lamps, but price points for mainstream deployment require a few more years.
Healthcare is a vast segment. What will Philips’ focus be?
For us, the home would have to play an important role in healthcare. The way the healthcare system works today, we simply wouldn’t have enough doctors and nurses to monitor everyone. Therefore, technology and the home need to play an important role. With our presence in the consumer market, we decided to expand in home healthcare, too. In the US, we acquired Independent Living, a company that supports independent living for the elderly. We have also added remote monitoring of cardiac patients and those suffering from breathing illnesses. We think that people can eventually buy some of these services over-the-counter.
Your competition has changed from consumer electronics firms to industrial giants such as GE and Siemens…
Our rivals have chosen different paths to target the healthcare market. GE, for example, acquired Amersham and combined contrast media with imaging. Siemens has gone into IVD (In Vitro Diagnostics) with two of its own buys and combined in vivo and IVD. We have focussed on extending care in hospitals to care at home. We all have diagnostic imaging as the core and we have gone in three different but valid directions to extend our presence in healthcare.
Analysts say Philips is relatively well placed because it has lots of cash. So, will inorganic growth continue?
We have made large acquisitions over the last few years, and redeployed $20 billion received from the divestment in various non-core activities to strengthen our presence in healthcare and lighting. We have a healthy balance sheet to make more deals, but in this scenario we have to be much more prudent to ensure financial flexibility.
What is Philips’ strategy for emerging markets where cost is an issue and healthcare reach is also a concern?
We have a strategy for growth markets. In healthcare, there is huge demand for basic functionality. Rural clinics need to be able to do basic diagnosis and refer patients with serious illnesses to a city hospital. We have made a number of acquisitions in emerging markets, including Alpha X-Ray and Meditronics in India, that have developed products for these fundamental requirements.
In consumer lifestyle, clean drinking water and clean air are two focus areas. In India, PIC (Philips Innovation Campus, the firm’s R&D outfit) has developed a prototype solution for clean drinking water for the local market. After testing it locally, we want to make this range of products available globally. India could then become an export hub for clean drinking water products. We have also developed a number of off-grid lighting solutions, that can be powered by a central power station and use alternate sources like solar when required. We also have a battery powered CFL solution.
Are you happy with the evolution of the Philips Innovation Campus?
I am happy with its evolution. Five years ago, a major part of the research was done on semiconductors and consumer electronics. Today, the largest group is focussed on healthcare and another focusses on IT applications within Philips. We have re-oriented the focus of the consumer lifestyle unit to look at innovative lighting solutions, including solid-state lighting solutions, where we’re looking to expand. Over time, we will look to consolidate the R&D centres we have and phase out some sub-scale units. That will lead to some future opportunities for Bangalore.
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