Will Philips Be Next To Quit The TV Market?

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Philips which like Hitachi and Fujitsu is known for its poor marketing of consumer electronic products could face the same fate as the two Japanese manufacturers who recently quit the competitive flat screen TV markets, according to senior executives of the company.

Philips claims it has not  ruled out a sale of its TV business, which is suffering from low margins, but said it would for now focus on being more selective in what products it offers where. In Australia Philips has for many years struggled to get traction in the mainstream flatscreen TV market and its recent Ambilight flat screen TV is not selling well according to Australian retailers stocking the screen that pumps out light to its front and back.

Philips Chief Executive Gerard Kleisterlee told a news conference yesterday that the business would follow the example of the domestic appliances division that only offers products in stores and markets where it can generate sufficient margins.

The company is suffering tough competition in almost every market where it competes.

Philips would go for “higher margins, at whatever sales level the higher margins will come”, Kleisterlee said.

The company, for instance, does not sell toasters or water kettles in the United States because it cannot generate the margins it wants there, Kleisterlee said.

He explicitly did not rule out selling the TV business, saying Philips would look at all “feasible options”.

Kevin Lewis, the strategy chief of Philips’ new Consumer Lifestyle division, told Reuters earlier this month that north America was a “brutally competitive market”, especially for TVs.

Philips rolled out its new “Aurea” TV set with much fanfare at the IFA consumer electronics show in Berlin last year, hoping the flat-panel TV that creates a glow of color around the set would command higher margins than ordinary TVs.

Yet televisions generate the lowest margins in Philips’ consumer electronics business, which already has by far the lowest core earnings margins of the group at around 3 percent.

“Especially the U.S. television market is a very difficult one,” Petercam analyst Eric de Graaf said. “In Europe… nobody will shop in Italy if they live in Sweden because it’s 50 euros cheaper. In the U.S. it’s all Internet-based.”

“It could well be that they are loss-making or only marginally profitable in the display business in the U.S.”

Dresdner Kleinwort analysts wrote in a note: “A likely exit from the U.S. TV market this year would further reduce the U.S. risk for this stock.” The bank reiterated its “Add” rating and 32 euro price target for Philips stock.

Almost half of Philips’ 13.3 billion euros ($19.3 billion) sales of consumer lifestyle products in 2007 were generated by televisions, Philips said. This figure includes sales of consumer electronics and domestic appliances, which were merged into one division from January.

The consumer electronics division by itself contributed 38 percent of group sales but only 17 percent of earnings before interest, tax and amortization (EBITA).

Kleisterlee said the problem around the television business was largely one of perception.

“Given its revenue, it always draws headlines, and it always leads to the reaction: ‘There’s something in the consumer market, it will hurt Philips,'” he said.

“Then you see again it doesn’t hurt Philips, but because that is the primary reaction, we need to do something about it.”

 

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