Philips And Lucent Late At The Party
They dominate their respective markets in cordless phones - handsets which allow their users to roam a short distance from a fixed base station. But cordless phones have yet to fulfil their early promise, while cellular mobile handsets, where neither company has much market share, continue to experience spectacular growth
Motorola of the US, Nokia of Finland and Ericsson of Sweden are the market leaders in mobile telephony, followed by a clutch of European and Asian manufacturers. Philips and Lucent trail far behind.
This goes a long way to explaining why Philips and Lucent this week announced their intention to merge their consumer communications products divisions in a joint venture with $2.5 billion of revenues manufacturing mobile phones, corded and cordless phones, answering machines and screen phones.
Some see it as a move born of desperation. Success in the fast-growing mobile handset market is critical. Philips decision to put its telephone hardware business into the joint venture is the most striking evidence so far of its new top managements determination to fix, sell or close cash consuming activities.
The Lucent deal is a fix. Philips move two years ago into mobile phones, based on the GSM digital standard, was initially regarded by analysts as having come too late to compete profitably with Nokia, Ericsson and Motorola, the established big three. Sentiment has begun to change in recent months, however, as the groups Singapore-made mobiles have gained market share.
The consumer communications division as a whole had 1996 sales of Fl 1.3 billion ($666 million) and was projecting a near doubling to Fl 2.5 billion this year. Philips says more than 1m handsets have been sold. On its own, however, Philips would have had to absorb start-up losses associated with mobile phones for some time yet.
As majority owner of the 60-40 venture, to be called Philips Consumer Communications, it will treat earnings of the New Jersey-based entity as fully consolidated in its accounts. Philips shares closed at a record Fl 137.80 in Amsterdam on Wednesday, up Fl 8.90 on the day and 18.2 per cent on the week.
They have more than doubled in the less than nine months since Cor Boonstra took over as chief executive. His pledges to purge the bleeders from the organisation weighed more with investors than the slide into Fl 590m annual net loss announced in February, or his reluctance to delineate a future course for the group beyond cost cutting.
But apart from the need to stem losses, Boonstra has so far made three things clear. First, the group will not lightly go into further risky enterprises involving the expensive development of new product lines. Second, it regards telephony as one of three activities which, although currently cash consuming, remain at its core - the others are in-car navigation technology and flat-panel displays for computers and future TV screens.
Third, it needs industry partners across a range of sectors. Flat panels were put into a joint venture with Hosiden of Japan, entailing a shift from in-house technology to the industry standard. The Lucent deal leaves its Navtech unit as the only stand-alone business in this category, but it is on a far smaller scale, with few competitors. For Lucent, the deal is an opportunity to revitalise its smallest and least profitable business division. Revenues have been declining at about 7 per cent a year as customers shifted to purchase from rental of phones. Ms Carleton Fiorina, president of the existing division, told analysts the revenue decline also reflected the closure of Lucent phone centre stores. A principal problem will be branding. Lucent, formerly the manufacturing arm of AT&T, sells handsets throughout the US but under the AT&T brand. Lucent is not yet a household name and Philips is only a little better known. The merger is, however, taking place at an important juncture for the mobile phone industry.
A global battle looms between two standards, GSM (favoured by European and some Asian countries) and CDMA (favoured by the US and, increasingly, Japan). But Philips and Lucent are masters of both technologies and will benefit whichever standard takes the honours. The new joint venture may be a latecomer to the mobile business, but it has not yet missed the party. Alan Cane Gordon Cramb Copyright Financial Times Limited 1997. All Rights Reserved.