SPIEGEL Interview with the CEO of Philips "China Has Become too Expensive"

SPIEGEL spoke to Philips CEO Gerard Kleisterlee about the importance of the European semi-conductor industry, the future of consumer electronics and the ways in which globalization is impacting the Dutch electronics giant. During the past 30 years, Philips has outsourced much of its manufacturing and shrunken its workforce from 400,000 to 160,000.

SPIEGEL: Mr. Kleisterlee, you want to re-organize Philips and turn it into a lifestyle corporation, one that accompanies consumers throughout their lives. What Philips products have you already used today?

Gerard Kleisterlee: I wake up to a Philips radio alarm clock in the morning, brush my teeth with a Philips toothbrush, shave with a Philips razor and then get a cup of coffee from the Senseo coffee machine, brought to me by my wife. Then I watch the morning news on a flat-screen Philips TV and go to the office, where I'm surrounded by Philips light all day -- depending on the time of year.

SPIEGEL: That sounds like you're faithful to the brand, but it also sounds pretty conventional. You mean you're not yet living in the networked house that the electronics industry has been so excited about for years, where all machines are connected to each other and to the Internet?

Kleisterlee: Many people talk about that, and our engineers are working hard on it. But in keeping with our brand motto "Sense and Simplicity," what we want most is for our products to make life easier. And no producer has really succeeded in achieving that yet, as far as the networked house is concerned. But we're working on it. For example, we've developed machines that automatically recognize and connect with each other.

SPIEGEL: Do you also have the impression that consumers often find new products overly challenging, and that they're overwhelmed with technical jargon in what amounts to a battle of the control consoles?

Kleisterlee: This deplorable custom has unfortunately still not been eradicated. Because I believe all we do with abbreviations -- like DVD-RW, +RW, Wi-Fi or 802.11 -- is intimidate people. I think we did a good job when we introduced the flat-screen TV. At first we didn't talk about LCD or plasma screens, but just about flat screens. Now that these products have become a gigantic success, more precise distinctions are needed of course.

SPIEGEL: Another development you've celebrated as a grand success was the divestiture from your computer chip department, which you sold to an international finance syndicate for €6.4 billion ($8.2 billion) in August. Doesn't this decision to abandon chip production really testify to the miserable state of the European high-tech industry?

Kleisterlee: Why should it?

SPIEGEL: For years European electronics corporations have said the development of their own computer chip industry is necessary for keeping up in the global technology race. But now that the Europeans have caught up, with the three chip producers ST Microelectronics, Infineon and Philips joining the top ten of the industry, you abandon the branch, which was supposed to be so important. Do past statements no longer count?

Kleisterlee: The semiconductor industry continues to be a driving force in technological progress. Nothing has changed as far as that's concerned. It also remains true that the European industry has made great progress in chip research -- thanks also to support from various European Union-subsidized programs -- and that we're in many ways ahead of the competition in Asia or America.

SPIEGEL: All that only makes the divestiture harder to understand.

Kleisterlee: The decisive difference from the 1980s, when we began the effort to catch up, is this: It used to be that every corporation produced its own computer chips -- now that's no longer necessary. Computer chip production has increasingly become an industry in itself, one in which you can purchase everything tailor-made. The days of vertical integration are over. As far as our products are concerned, for example, we get less than 10 percent of our computer chips from our own factories.

SPIEGEL: Just two years ago, you flatly refused to divest from the computer chip branch.

Kleisterlee: Of course there are good reasons for not selling -- that's why we thought long and hard before taking this step. But in the end we reached the conclusion that the synergy effects we achieve by producing within our corporation aren't significant enough for us to accept the disadvantages on the stock market, in the long term. The computer chip sector is very susceptible to fluctuations, and that leads to losses on the stock market, in the form of lower stock prices.

SPIEGEL: You're selling the chip branch to finance investors. Isn't there reason for you to fear that they're interested mainly in good revenue and that they'll close or merge the factories as soon as the next crisis comes along? Then the roughly 20,000 jobs that were created with EU subsidies would be gone, and Europe would fall behind again in the technology race.

Kleisterlee: As far as the chip industry is concerned, we're on a par with the international competition, and that's not going to change under the new owners. Two-thousand-five-hundred new jobs have been created since 2004 alone, and the new owners have fully adopted our business plans. That means the next three to five years will be years of expansion -- even if there is a low point during that time.

SPIEGEL: But still: Doesn't your abandonment of the chip industry mean you're also abandoning the possibility of distinguishing yourself from competitors?

Kleisterlee: No, the general availability of chips doesn't lead to a leveling of the playing field. There is just a shift in the relations between competitors. In the case of TV sets, for example, picture quality and the operation system are becoming increasingly important. Those are things we know about. They remain our strong point irrespective of whether the basic chip is produced in our factory or by a subcontractor. And then of course design plays an increasingly important role.

SPIEGEL: So the new technology is becoming increasingly less important?

Kleisterlee: I'm convinced of it -- unless it's unique. What the consumer wants most of all is emotions. He buys the high quality product that looks good and fits his life style. He doesn't care where it was made and what its components are.

SPIEGEL: But then wouldn't it be best for you to convert all of Philips into a marketing company?

Kleisterlee: That's exactly what we've done in the area of consumer electronics. And I'm firmly convinced the competition there will follow our example soon, because there's no other way to go about that business.

SPIEGEL: What's the new strategy?

Kleisterlee: In recent years, we've outsourced almost all of our production in this unit. We only have eight factories in the consumer electronics sector now -- and we keep those mainly for logistical reasons. About 90 percent of the appliances are produced entirely by subcontractors, based on our specific requests. That means we're more flexible than all of our competitors.

SPIEGEL: So strictly speaking Philips is just a trading company, as far as the consumer electronics sector is concerned?

Kleisterlee: No. We're still much more than a trading company. We run a think tank that develops product concepts and gets them onto the market with the help of subcontractors. What distinguishes us from a trading company or a no-name producer is the creative achievement of our engineers, designers and marketing experts.

Globalization pains

SPIEGEL: Some 30 years ago, Philips employed more than 400,000 people -- now it employs only about 160,000. Only 15,000 people are employed in the consumer electronics branch, the one with the highest turnover. Will this downward trend accelerate, with production being shifted to low-wage countries or outsourced?

Kleisterlee: Wait a moment. The comparison you're drawing gives the wrong impression. Most of the jobs lost at Philips during the last 30 years weren't in production. They were service-related. We had our own plant security, our own cafeterias, our own despatch department, an IT department and so on. These jobs haven't disappeared -- they've just been outsourced. They've moved to other companies, which have specialized on these services.

SPIEGEL: But at the same time more than 100 factories were shut down. Are other branches facing the same fate as your consumer electronics branch?

Kleisterlee: No. And it's pointless fighting yesterday's battles. Globalization began 30 years ago in the consumer electronics sector. Ever since then, production has moved from one low-wage country to the next. Some of our subcontractors are already moving their plants from China to Vietnam, because China has become too expensive. We're not playing that game anymore -- and it's no longer necessary to do so either.

SPIEGEL: Is globalization turning Philips into a corporation without factories?

Kleisterlee: Not at all. We only give up our factories when it no longer makes sense producing for ourselves. In branches such as lighting, household appliances and medical technology, maintaining our own production facilities is still a crucial factor in keeping up with the competition, and this will continue to be the case in the foreseeable future.

SPIEGEL: Why?

Kleisterlee: We have very specific production know-how in these branches, which can't be easily transferred to low-wage countries. What's more, groups of subcontractors have developed organically around these factories. And then there are the transportation costs. They're especially weighty in the case of large medical instruments.

SPIEGEL: How many factories does Philips still have today?

Kleisterlee: We run 132 factories worldwide. About half of them are in Europe, and they're fully competitive by global standards. Some are even being expanded, such as our lamp factory in the German city of Aachen.

SPIEGEL: Globalization stops short of light bulbs, of all things?

Kleisterlee: Don't underestimate the amount of know-how in the production process. But it's not just about simple light bulbs either. It's about energy-saving lamps, beamer lamps and xenon lamps for cars -- in Japan we even control 70 percent of the market. When Toyota wanted to produce lead-free xenon lamps, for example, there was only one factory in the whole world that could produce them -- our plant in Aachen. We have to maintain and develop this competitive edge.

SPIEGEL: Why are producers in low-wage countries unable to represent a viable alternative in this sector?

Kleisterlee: Because it's not a question of standards that are clearly defined and binding. In the consumer electronics sector, when new technologies are developed, they're described in detail and documented. This is done in accordance with norms that are absolutely necessary in this sector -- for consumer safety reasons, among other things. That way, it's relatively easy to adopt the new technology. But when it comes to xenon lamps, for example, there are virtually no norms. And we're keeping our knowledge about how these lamps are produced nicely to ourselves. Often we don't even patent it.

SPIEGEL: Lighting technology isn't exactly a growth market.

Kleisterlee: On the contrary, a great future lies ahead for lighting. Just think of the explosively rising energy costs. We sank the Eiffel Tower's electricity costs by 38 percent by using new lamps, for example. And in just a few years we'll have altogether different forms of lighting. There's a lot going on. And no one beats the Europeans in this sector.

SPIEGEL: Are there other divisions where production isn't threatened by outsourcing, in your view?

Kleisterlee: We Europeans have always been good at constructing highly complex systems. Take the Airbus, or the German car industry, or the machine industry. That's also the reason why two of the three world's leading producers of medical technology come from Europe: Siemens and Philips. We're investing very heavily in this sector -- including in Germany.

SPIEGEL: You want medical technology to boost the corporation's turnover, which has stagnated for years?

Kleisterlee: The boost is already happening. We want to achieve significantly higher turnovers with x-ray machines and computer tomographs, but also with appliances for private and domestic health care. That's also the branch where we have the highest number of production jobs, after lighting. Because production in this branch is highly complex and requires an infrastructure of subcontractors that simply doesn't exist in Asia. What's even more important is that medical technology is a high-revenue sector.

SPIEGEL: On the other hand, almost all industrialized nations are complaining about explosively rising costs in the health care sector. Surely that's a clear warning signal to a company that trades in medical technology.

Kleisterlee: The demographic development in the industrialized nations shows that health care will be an enormous growth market in future years. More and more people are interested in their health, and they're willing to pay more for it. It's just that we all have to realize that not everything will be financed by the state or by health insurance funds.

SPIEGEL: Mr Kleisterlee, thank you for this interview.

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