Market Watch

Philips - TV or Not TV?


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Dutch electronics group Philips will divest its television business into a joint venture with TPV Technology, a Hong Kong based manufacturer of PC and TV monitors. The joint venture, which will be 70 per cent owned by TPV and 30 per cent by Philips, is licensed to use the existing Philips brand name for an initial 5 years, with an option to then extend for a further 5 years, subject to meeting certain specific performance targets.

Under the terms of the agreement, the new group will be responsible for the design, manufacturing and distribution of Philips TV sets worldwide, with the notable exceptions of mainland China, India and North America, where Philips already has pre-existing licensing arrangements. The partnership between Philips and TPV, who first acquired part of Philips' monitor and entry-level flat screen TV business in September 2005, is set to last for at least 6 years, after which Philips have the option of selling their remaining 30 per cent stake to TPV for a pre-determined amount.

Analysis
The TV manufacturing business is one of intense competition and low profit margins. A lack of hardware differentiation has trended the market towards companies with mass-production facilities that can minimise the cost of an individual unit. For Philips, these conditions have not proved favourable over recent years - the TV group suffered a net loss of €87m in the first quarter of 2011, following on from a €67m loss in Q4 2010. Moreover, Philips market share has dropped significantly over the past 3 years. In 2008, Philips accounted for 7.3 per cent of TV sales worldwide and 14.3 per cent in Western Europe, figures which fell to 2.8 per cent and 9.8 per cent respectively in 2010.

The joint venture with TPV Technology is in many ways equivalent to a licensing arrangement for Philips, and as such follows on from similar such agreements with TPV in China, Videocon in India and Funai in North America. Such a deal makes sense given Philips' decreasing market share and profits - combining the Philips brand with the cost-effective and mass-scale production offered by TPV Technology will enable a higher volume of Philips branded TVs to be shipped, which can better compete on price with Asia-Pacific rivals such as Samsung and LG. The joint venture also opens up possibilities for the traditionally European and North American based brand to increase its penetration in developing markets in South-East Asia and Latin America.

This is not the first time Philips has sold a piece of its consumer electronics (CE) business in the face of strong competition. In December 2007, Philips sold their set-top box (STB) and connectivity solutions (CS) divisions to Pace Micro Technology, following a combined loss of €39m from the two divisions in 2006. Indeed, the these deals reflect the changing nature of the CE industry over time. The advantages of production in both scale and cost have led to Asia-Pacific companies dominating the TV manufacturing industry, and this is beginning to be reflected across the STB industry. Between 2009 and 2010, Chinese and South Korean STB manufacturers accounted for 5 of the top 10 STB vendors worldwide.

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