A gloomy future may be averted with new Philips turnaround plans. One third of the company’s units are underperforming or need turnaround. Van Houten, who was appointed CEO in April, believes there’s room for further upside. He believes there’s more potential to be unlocked, but that it’s imperative the company stay on turnaround for five years before it can fully reap the rewards of its new strategy.
Philips is a cautious company
Shares of the Dutch electronics giant fell more than 10% on Monday after it announced an expansion of its ventilator recall. It also flagged multiple risks to its growth outlook. Though it still expects its revenue and profitability to rebound in the second half of the year, it warned that the situation in China and the ongoing war in Ukraine could affect its outlook. Moreover, the company also warned of supply chain challenges and inflationary pressures.
The restructuring plans were supposed to improve the profitability of the lighting and consumer businesses, but they’ve turned out to be too much. The company has cut about 1,500 jobs since the start of the year. The move also affected Philips’ exports to China, which are now the company’s second-largest market. It had been experiencing double-digit growth in recent years but has now shrunk to single-digit levels.
It is investing heavily in high-definition television
The company is already making large investments in the technology, and recently introduced the Compact Disc-Interactive (CD-I), a digital format that combines sound and images. This technology will help TVs deliver a better picture and sound than ever before. Philips is also working with NBC to develop an HDTV system. In the future, these high-definition televisions will have more than one tuner and can be connected to other TVs.
The company is a self-help story with a modest upside potential. Its cost reduction programs are on track. Its upcoming spinoff, which is expected to take place in early 2015, acts as a near-term catalyst. The company’s solid A3/A credit rating, consistent dividend payments, and record of share buybacks, are also positive factors. As a long-term investor, Philips is a solid stock to consider.
It is battling with low-cost manufacturers in Asia
As prices continue to fall, Philips is turning to lower-cost manufacturers in Asia to compete. While the company is still located in Europe, it is moving its manufacturing abroad and has sold about half of its production facilities there. Despite this, Philips still manufactures products in Europe, including its fancy car headlights. The company has also sold majority stakes in manufacturing facilities in Germany and South Korea.
The LED industry has become a major battleground for Asian companies, and Philips has been undergoing a constant restructuring. It suffered massive losses in 2001-02 and had to lay off 55,000 employees. In 2002, the company had thirty separate divisions, which were consolidated into five. It reported a net loss of EUR3.2 billion in 2002, but a profit of EUR2.8 billion a year later. The company’s quarterly results have been poor for over 12 months. Its restructuring efforts have only exacerbated the problems.
It is investing in healthcare equipment
The multi-million dollar expansion of Philips’ connected care unit is just one of several recent announcements that have highlighted the company’s commitment to the healthcare industry. The company has also recently signed three deals with major hospitals. However, this growth will come at a price: Philips will need to increase production capacity to keep pace with the growing demand. It may also be difficult to convert new business into repeat customers. Philips is stepping up its investments in healthcare equipment to meet the growing demand.
The company is also putting a greater focus on India, where it recently announced the setting up of a manufacturing plant to produce healthcare equipment. The proposed unit will integrate two Indian firms that Philips acquired last year and will position India as a major supplier of healthcare products globally. Company executives said the plant will become a center of excellence and will support exports of healthcare products. However, the company is not disclosing how much it plans to spend on the project.
It is investing in energy-efficient lighting
With the economic downturn continuing to bite, companies like Philips have been stepping up their efforts to develop more energy-efficient lighting solutions. The company has spent $4 billion over the past two years on LED lighting companies, including Genlyte and Color Kinetics. Philips also recently announced plans to invest heavily in next-generation lights that incorporate computer chips into the light, or LEDs. These lights will be more efficient than incandescent bulbs and last longer than the competition.
While Philips has made a significant investment in energy-efficient lighting, it is still not widely available. Consumers are still conditioned to reach for the traditional, bell-shaped incandescent bulbs. Despite this, two-thirds of lighting technology in homes is at least five decades old. As a result, Philips is doubling down on its energy-efficient lighting efforts to attract more customers.
