Philips calls on Chinese for cell phones

Koninklijke Philips Electronics NV will no longer be an independent maker of mobile phones. All Philips-branded phones will now be manufactured in a joint venture with China Electronic Corp. (CEC), Philips announced Tuesday.

CEC will take a controlling stake in the joint venture, which exists today for the manufacturing of mobile phones in Shenzhen, China. Additionally, CEC will buy some manufacturing equipment from Philips and acquire part of Philips' research and development resources, Philips said in a statement that did not give any figures, dates or other specifics.

The deal includes transfer of Philips' know-how and designs for GSM (Global System for Mobile communications) phones to CEC, Philips said. CEC is a huge government-owned company, closely affiliated to the Chinese Ministry of Information IndustryPhilips will have "a significant minority in the joint venture" and the transfer of assets should be completed by July 1, clarified Philips Chief Financial Officer Jan Hommen in a conference call with reporters later Tuesday. There also is a financial arrangement with funds coming to Philips, Hommen said, declining to be more specific.

The CEC-led joint venture will manufacture Philips-branded handsets as well as non-branded phones for other parties to brand. Philips will sell Philips-branded products from the joint venture through its own customer sales and distribution channels, Philips said.

Philips President and Chief Executive Officer (CEO) Gerard Kleisterlee said in the statement that the arrangement with CEC "will give customers renewed trust in the continuity" of its business.

The decision will involve a "major restructuring" of Philips' handset business, particularly in France where the company has a manufacturing facility in Le Mans and employs some 2,800 people.

"We will let go of 1,235 people in France," said Hommen, adding that of the of the remaining 1,565 workers only 350 will remain active in mobile phones. All others will be transferred within Philips or to CEC and other companies. The company plans to take a one-time pretax charge of about 300 million euros (US$258 million) for the restructuring.

The 1,235 layoffs bring the number of layoffs at Philips this year to about 7,000. After Philips Consumer Communications (PCC), the division that manufactures mobile phones, reported a loss of 118 million euros in the first quarter of this year, Philips said it would examine the division's business and decide on its future in the second quarter. The company considered closure, sale, merger, or a combination of the three.

With a worldwide market share of 2.9 percent last year -- in number of phones sold -- Philips was a marginal player in a record year for mobile phones, according to figures from research firm Dataquest., a division of Gartner. In the first quarter of 2001 the market share dropped to 1.8 percent, according to Dataquest.

Philips mobile phones are mainly sold in Europe and Asia, because the GSM standard is common in those areas. The European market has always been a problem for Philips, while its products have been well received in Asia. PCC turned a profit in Asia in the first quarter of this year, according to Philips.

It is unclear whether Philips will bail out of Europe and retreat into Asia, or continue selling phones in Europe. According to the statement Philips will "continue to pursue the opportunity to sell Philips-branded handsets … where this has added value." Hommen stressed in the call that Philips plans to keep selling Philips-branded phones on the European market. This year the company expects to sell 6 million handsets worldwide, Hommen said.

One analyst said Philips is doomed in Europe and will have a tough time in Asia.

"I expect Philips' position in Europe to become weaker and that its market will eventually be limited to China," said Jaap Barendregt, an analyst with Friesland Bank Securities NV in Amsterdam.

Philips' move makes sense if the company intends to focus on China, said Gary Hong, an analyst at International Data Corp. (IDC) Asia-Pacific, in Singapore.

"In order to understand local market demands, bypass import restrictions and take advantage of low labor costs, it makes sense for less prominent foreign handset vendors to develop and manufacture locally the handsets they sell in China," he said. Although Philips does not have a large market share in China, the country is one of its largest markets in Asia-Pacific, Hong added.

At the same time, the Chinese government has strongly encouraged the development of a mobile-phone industry and seen results: At least 15 Chinese companies, including Shenzhen-based telecommunications equipment maker ZTE Corp. and consumer appliances giant Haier, are sizable manufacturers of handsets. The entry of these local players in the past few years has helped to heighten competition and drive down prices, Hong said.

The Chinese mobile telephone market already is the world's second largest behind the U.S. but still represents a fast-growing opportunity for both foreign and domestic handset manufacturers. [See "China has 230M phone, 22.5M Internet subscribers," April 16.]Shenzhen, a Special Economic Zone adjacent to Hong Kong, is growing into a major center for Chinese high-tech development and manufacturing.

Shares in Philips (PHI.AMS) closed down 5.3 percent at 28.74 euros on Tuesday at the Amsterdam stock exchange.

(IDG News Service Hong Kong Correspondent Stephen Lawson contributed to this report.)

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