OCTOBER 12, 2003
 Cover Story
 Personal Finance
 Back of the Book

Kashmir On The Map
After a succession of false starts, this might actually be something worth taking note of. The World Travel and Tourism Council has joined hands with the Jammu & Kashmir government to promote the state as an international tourist destination for just about anybody who appreciates natural beauty. The plan.

Cancun Round-Up
The drumbeats on the way to Mexico were low-key, but audible enough. Now that the World Trade Organisation is back in pow-wow mode and India has attained some clarity on what the country's trade agenda is, it's time to do a quick round-up of the Cancun meet.

More Net Specials
Business Today,  September 28, 2003
Interview with G. Kleisterlee/CEO & President/ Philips
"We Want $200-300 Million in Exports, in 3-5 Years"

When, in early September, Gerard Kleisterlee, President & CEO, Royal Philips Electronics, descended on India along with his entire board of management and key members of the Group Management Committee, it was difficult not to take notice. After all, this wasn't just Kleisterlee's first visit to India since taking over in April 2001, it's for the first time that such a team of management heavyweights from the Netherlands-based technology powerhouse was visiting the country. The 57-year-old CEO visited Delhi, Mumbai, Bangalore, and Hyderabad during his week-long whistle-stop visit to get a grip of the progress that Philips has made in the Indian market, and the potential that exists. In between he found time for this exclusive interview with BT's .

What significance should we assume from this visit of the entire board of management of Philips?

One reason for the visit has to do with India, another part has to do with the change in the way our board works. India is the second largest economy in Asia, and Asia, in general, is an area of growth for us. We grow in double digits in Asia and we can't say that about Europe unfortunately. Later in the year we will also visit China. It is important for us to have a collective experience, and not just of one or a few, in order to understand the dynamics of an economy and of a society. Therefore we have come with the whole board. We have met with a couple of a dozen of business leaders, both collectively and individually, we've talked with our employees, seen our operations, we've had an opportunity to meet with your President in Delhi and listen to his vision for the country. We hope all this will give us a good understanding of the opportunities for Philips in India, a better chance of capturing these opportunities, and in the process find out what contributions Philips can make to the development of the Indian economy and society.

"Philips India's lighting operations are the most competitive in the world''

So what are the learnings that you will be taking back?

The first thing we feel is that India is a country of contrasts where you have a fairly sizable number of households with a good income, and that prosperity compares well with Western developed countries. So that's a part of the market we can cater to with, you can say, our normal product range, the one we sell in the rest of Asia, Europe and the US. And then there is another part of India with around 120 million households that is at the bottom of the income pyramid. They have very different needs, very basic needs-access to healthcare, education, and communication. And what we try to understand from some interesting insights is how we can apply technology in a different way, in a unique way to also address the needs of this group of people with the use of technology, and at price levels that are affordable to them.

Accessibility and affordability...these seem to be the buzzwords. How far has Philips reached in providing a product or service that could meet these two objectives?

I'll give you an example: Half of the Indian households did not have a radio. We have developed for the local market a very basic radio function at the price point of $5. That gives people an immediate opportunity to become a part of the connected world, to listen to information, to listen to music. Another example: Clean drinking water is a big problem. Purification through ultra-violet light technology is something we are already providing to some players in the market. Then the other problem that people in rural areas have is little or no access to electricity. And we are into solar energy too. We cannot produce solar panels ourselves, but we do all the electronics and technology that can make solar energy usable in a practical way. If we combine some of these things-solar energy power, DC current control and UV light water treatment-we can bring clean drinking water to many millions of people. We can link with a number of healthcare units by working together with NGOs and the medical profession in this country and see how we can use technology to give people in rural areas access to basic health care. We are doing this in other parts of the world, we can do it in India as well.

These are some of the insights we take and of course, we are highly impressed by the pace at which Indian it, software, BPO industry has developed, as we saw in Bangalore and Hyderabad. So we learn. On one hand, you have a country that has a partly developed economy, that is the leader in the world in software and it, and on the other hand, a country that has a large population whose basic needs have to be fulfilled.

How long do you think will it take for these 120-million households to be the main market for Philips?

It'll take a long time. But this is a market that has so far been neglected. And we feel that in the interest of economic development, and in the interest of mankind, that this neglect should not continue.

And it makes commercial sense also?

We see these two things (development and business) going hand in hand. Taking care of the underprivileged could be a simple charity issue, but we've seen that charity does not work. Yes, sometimes it may help, but what you need to do is to give people the ability, the capacity to take their own lives into their own hands. And that means access to basic education, and that means very basic technologies so that they can be productive participants in the socio-economic system.

"Both China and India have the potential to prosper as manufacturing bases''

Philips in China, which is a $6 billion business, has moved miles ahead of the Indian operations. Do you think Philips India has lost out somewhere along the way?

Development in the last 10 years has been faster in China on many fronts, particularly on the manufacturing front. India has a better position in software services, its engineers and scientists are as good, as educated, as brilliant as the Chinese, the supply of University graduates is as good as in China. But I think China at an earlier stage focused on becoming a manufacturing powerhouse. The creation of export zones and special economic zones has helped China advance rapidly, as a result of which a good deal of the world's electronic goods are manufactured in China. I've seen some very interesting developments in India as well. For example, our lighting and lamp-manufacturing operations, after their recent transformation, are the most competitive in the world, and they are as cost-effective as some of the best plants we have in China or Indonesia. And therefore, we've challenged them (Philips India) to step up their efforts and become an exporter of manufactured products. So yes, in many manufacturing areas, India may be lagging behind China, but there is no reason not to see a future with the right focus and the right determination.

What are the chances of India becoming a genuine outsourcing hub for Philips?

Well, already 25 per cent of Philips' total software is produced in India, and it's not simple coding work but embedded software that comes out of India-it's a creative task of making competitive software for product and functional design. We're investigating the possibility of bringing more of our back-office activity into India. We've paid visits to a number of companies that have large BPOs here.

But what about manufacturing?

Well, I gave an example of lighting where our Indian lighting factories are competitive. I see also other areas where this can be the case. What we have assigned as a task to our local organisation is a particular focus of creating a product range for emerging markets. The first goal is to have an adaptive product range and have a better coverage of the Indian market. If that proves to be successful, those products will be used to penetrate other emerging markets. That is the second plan of thought that we have developed.

How long would it take for this adaptive product range to begin rolling out?

Oh, pretty soon, because in such cases we need just minor modifications to the stuff we already have. A simple example is that in the Indian markets, people want more sound in their TVs than in the average western markets, so we have to crank up the power of sound system. These are modifications the local team was previously not allowed to do because we had global product concepts. But we now realise that we need to localise more, and these are quick localisations which, if successful, can open up more markets for us.

In consumer electronics (CE) you've been around in India for quite a long time now, and you still haven't been able to crack the market...

You cannot say that generally. The CE market covers a wide spectrum of products and on the audio side, we have, by far, a leading marketshare. Also, as far as new products go, we have the highest market share in DVD players, which is a product of recent years. So in new CE products, we can have leading market shares. Yes, in colour TVs we missed a number of opportunities as the market took off. That is where at the moment the focus of the team is, and that is where the product adaptations to local specifications will help make a difference.

Even globally, I don't think consumer electronics contribute much to your profits...

Everyone has a problem globally with CE. It's fiercely competitive, and even the No. 1 player has to struggle to make a profit. We are No. 3 globally. You have a choice: Do you want to play in this industry or not. I see a number of trends that augur for the better in the western world. There's a consolidation going on in the industry, and globally you have the top three to four players gaining an increasing share of the market. Yes, there are new entrants, predominantly from China, that will create new competition, but there are also new categories of products emerging that will throw up new opportunities. Also, you have to look beyond just our market position, or our products, or the profits or the lack of profits. Our presence in CE also allows us to generate a lot of patents in our research because we use our application know-how to generate new unique technologies and concepts for the CE domain. Every year we file about 3,000 patents, we use those patents with others to create standards. That's why our licence income is rapidly increasing.

At one point in time, were you seriously considering closing down the CE business?

I had said that we could not go on throwing good money after bad money for ever which we were doing in particular. I said that with reference to our position in the US, which is the most competitive market in CE where we are now doing a good job and our market position is improving considerably. Our distribution coverage has improved considerably month by month, so I'm very confident that we'll get into a position that's similar to the one we enjoy in European markets, where we are well placed. We've also done a lot to change our business model in CE. At one point, we had $3 billion (Rs 13,800 crore) capital tied up, and we were doing $10 billion (Rs 46,000 crore) worth of business with $3 billion of capital tied up. Today, we still do $9-9.5 billion (Rs 41,400-43,700 crore), and we have only $300 million (Rs 1,380 crore) as operating capital. So we are getting fairly good returns on a much lower capital.

What is the vision you've set for the Indian operations?

Well, like I think , in line with the vision of Philips globally, we want to establish ourselves as the prime leading healthcare lifestyle technology company. We want to grow above average, we want to outgrow the market and we've challenged the Indian operations that in the coming years-say in the next three to five years-we want to double the revenue, increase the profitability and establish a position in the order of $200-300 million (Rs 920-1,380 crore) in export supplies. That may sound very challenging, but we need to use China as a reference-where at this point we have a $6 billion (Rs 27,600 crore) activity, with $2.5 billion (Rs 15,000 crore) sales in the local market and $3.5 billion (Rs 16,100 crore) of exports. In China and India, we see a good model of complementarity and potential to prosper as manufacturing bases.

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