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issue: June 2004 APPLIANCE Magazine

European Report
European CE Makers Deal with Asian Pressures

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Paul Roggema, European correspondent, APPLIANCE magazine.

European consumer electronics (CE) manufacturers are worried about low-cost Chinese imports.

Through their own business there, they know that they have no chance of survival against U.S. $40 DVD player offerings. Many famous German and French brands have disappeared or have resurfaced as low-priced import labels. Philips Electronics of Holland and French Thomson are the only remaining large CE makers, and they both recently reported profits after years of problems. What are CE players’ answers to the Chinese threat?

Royal Philips Electronics, the Dutch, 165,000-staff, and 29-billion euros electronics giant, returned to profitability in 2003 after heavy losses in previous years. Originally a light and vacuum bulb manufacturer, it now has five divisions: Consumer Electronics (the largest at 9.3 billion euros), Medical (6 billion euros), Lighting (4.5 billion euros), Semiconductors (5.2 billion euros), and their small appliances (DAP) division (2.1 billion euros).

While CE is Philips’ largest division, it is also the most threatened by the global competition.

One element of the Philips’ strategy to get less dependent on the CE market is to invest in the medical division. The division has grown from 2.5 billion euros in 1999 to the current 6 billion euros, mainly through acquisitions. Margins are normally healthy, but pressures on healthcare spending are widely felt. Philips expects 6- to 7-percent growth this year.

But is it really possible to survive in the CE business? “Of course we can face any competition. We did our share of relocating and outsourcing, and with innovative products, you always attract customers,” says Jayson Otke, senior press officer for Philips. “We are focusing on digital products and new technologies such as DVD recording, wireless home networks, and HDTV. With our knowledge, reputation, and distribution network, we believe we can fully compete. In many categories we have a number-one or number-two market position.”

One could call Thomson “the other European CE maker.” About one-third the size of Philips, Thomson has a 59,000-member staff and sales of 8.5-billion euros, with 53 percent of revenues coming from the U.S. market, mainly under its RCA brand. Thomson has three divisions: Consumer Electronics (3.8 billion euros), Digital Content Solutions (such as DVD replication and cinema services, 2.9 billion euros), and Video Networks Solutions (broadcast equipment, set-top boxes, etc., 1.8 billion euros).

Thomson has a major restructuring planned: its TV and DVD business will be transferred to a joint venture with Chinese TCL International, in which Thomson has a 33-percent share. Some 9,000 jobs will move over to China. Also involved are TV plants in Mexico, Poland, and Thailand, and all TV and DVD R&D centers, which means that the company is basically not self-creating video products anymore and will most likely be a sales organization.

The trend towards flat TVs are threatening current European high-end TV makers in a more fundamental way. Danish Bang & Olufsen has traditionally offered stylish CRT TVs at above-premium prices, using design as means of differentiation. But in the flat TV market, there is much less room to distinguish your product through design. These problems clearly showed up in the company’s financial results.

Bang & Olufsen reported a turnover of 356 million euros for the fiscal year June 2003-February 2004, which was 14-percent less compared to the year prior. However, profits before tax were up to 35 million euros, up 8 percent due to “continued improvement in gross margin, which is now 45.5 percent,” the company said.

Still, Bang & Olufsen has recognized Asian pressures and is introducing several new LCD TV sets. The company also announced that it will transfer its Danish electronics factory to Flextronics facilities.


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