Can Things Really Get Better?

Not in the near term. And that, for a company at the bleeding edge of innovation globally. But the only way Philips India can become cost-competitive is if it overhauls its manufacturing practices. But that's a tall order.

By Abir Pal

Its sits on the second floor of suburban Mumbai's Technopolis Knowledge Park. Replete with swipe cards, talking elevators, imported coffee machines, Philips India's corporate office lives up to its "cutting edge electronics company" aspirations. But the futuristic chrome-glass façade belies the real state of affairs.

Stagnating market share, a bleeding bottomline and a deteriorating brand image all mean that Philips India is under pressure like never before in its 71-year history. Managing Director K. Ramachandran, who has been at the helm of affairs for the last four years, admits: "Yes, there's a pressing need to get a tighter grip on what the consumer wants. We're redoubling our efforts and all future strategies will centre around the needs of consumers and the marketplace. In fact today my guiding principles are the four Cs: Customer, customer, customer, and customer."

It's about time, too. Losing touch with the customer is costing the company heavily. Philips India ended last year with a loss of Rs 39.5 crore, compared to profits before tax of Rs 31.2 crore the previous year. And the bleeding continued into this year with a net loss of Rs 6.36 crore for the first three months. Had it not been for a satisfactory performance by the lighting division, which managed to increase its market share, the toll would have been higher.

The biggest drag on bottomlines is the consumer electronics division, which contributed 39 per cent to last year's Rs 1,494 crore turnover. Of this colour televisions (CTVs) were the hardest hit, with Philips' marketshare plummeting (see graph). Defends Senior VP, Consumer electronics, Rajeev Karwal: "There has been a slowdown in the market which has taken its toll on all manufacturers. And when you're restructuring and planning long-term there might be some initial hits to your topline. Anyway it's never been our strategy to acquire marketshare at any cost but only when it’s profitable."

But cornering marketshare will get more and more difficult as the Indian CTV market becomes more innovative, aggressive and price-competitive. Says a senior executive at competitor Mirc Electronics, manufacturers of the Onida brand: "Not only do you need to innovate and constantly launch new products, you also have to move fast. Two years back we launched "brand resurgence" exercises and today we have close to 12 per cent of the national market and our target is to double this every three years."

It's exactly this ability to read the market and respond swiftly to changing times that Philips lacks, point out industry watchers. The Philips brand has also become mouldy, buffeted somewhere between price warriors like Akai and premium brands like Sony. Says a Mumbai-based retailer: "While customers are ready to pay even a substantial premium for a Sony, somehow they're not ready to shell out the same for a Philips." Jagdeep Kapoor of Samsika Marketing Consultants succinctly sums it up: "It has a low perceived value, it's dated or not contemporary, its not a happening brand and is always one step behind its competitors."

What isn't helping things is the high turnover of marketing chiefs. Five high-profile marketing professionals have passed through in the last few years. But this time Karwal, who joined from LG Electronics, seems determined. Surrounded by heaps of impressive looking spreadsheets, Karwal points out how Philips intends to fight back. The number of branch offices is being hiked from 7 to 19, inventory levels are being bought down from 60 to 30 days though supply-chain restructuring. Blind tests, dealer feedbacks, direct mailer campaigns and competitive pricing are the other initiatives on the cards. "All these measures should result in a better administration of the local market and bring us closer to our customers," adds Karwal.

Some dealers seem to be convinced. Says Nilesh Gupta, Managing Partner at Vijay Sales, a retail chain with eight outlets spread over Mumbai: "The general perception was that Philips' products were highly priced but of late that's changing. Lets say the 21" which earlier was priced at Rs 15,990 has now been lowered to Rs 12,990 and is doing well."

Apart from price concessions improvements are also being made on the after-sales service front. The number of service centres is being hiked to 114 from the current 20. To improve after-sales-service the company is also moving to a "variable" remuneration system for its franchisees. This is expected to improve efficiency and promptness in tackling customer complaints. An e-shop has also been set up; as has an automated consumer satisfaction feedback. An Ombudsman will monitor the number of complaints, repair time, level of service.

At the corporate level some hard decisions have already been taken---its high labour costs for one. Says an analyst with Taib securities: "Philips inherited a large force which has always been a drain on the company, pushing up its costs of production. Compared to the industry average of about 5 per cent of turnover, Philips' employee-related costs at Rs 140 crore are closer to the 10 per cent mark." With 416 employees availing of its VRS scheme the company has managed to bring down its total workforce to 3,255.

That's in line with what parent---the 31.5 billion euro Philips Electronics NV---is doing. Europe's largest maker of consumer electronics and lighting announced that it would have to cut 7,000 jobs due to market conditions. It is also expected to post losses in the second quarter.

Thus it's not surprising that "cost competitiveness " and "value addition" feature at the top of Ramachandran's to-do list. "We have six to seven ratios at the corporate level alone which measure cost competitiveness apart from the ones at a divisional level. Similarly every rupee I spend should result in greater-value addition for the consumer."

Despite Ramachandran's good intentions, how things finally shape up will depend upon what the Dutch parent's plans are for its Indian subsidiary. Some analysts foresee the company reducing its manufacturing activities in India. All Ramachandran has to say is: "Manufacturing is today a service function; where how I manufacture will be dictated by the cost competitiveness equation"

Post the open offer made last year, the Amsterdam-based parent Koninklijke Philips Electronics NV's stake today stands close to 83 per cent. The company's share price, which had crossed the Rs 100 mark at the time of the offer today languishes in the mid-fifties.

Eventually Philips India may become a 100 per cent subsidiary, which will offer the parent greater operational freedom. Not only will they be able to bring in the latest products and technology more confidently, but disclosure norms will be less stringent.

But till that happens, its shareholders will continue to wonder what happened to the company's claims of "making things better".
  

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