On September 23rd 2014, Philips announced that it would be splitting its business in two; HealthTech will combine Philips Healthcare and Consumer Lifestyle ranges; and Lighting Solutions will be a standalone lighting company. Both will still operate under the Philips brand.
The healthcare and consumer business units have had higher margins, so Philips is looking to expand and invest in these business lines. Philips previously had businesses covering the audio and video market as well as TVs, but was quick to leave these areas once they became less profitable.
Philips believes its lighting solutions business will “be better positioned to build on its existing market leadership in LED lamps, luminaires and connected lighting systems & services and benefit from fundamental lighting industry changes”.
In the short run Philips expects to make approximately €300 million in savings to 2016. Smaller businesses do not have the burden of a large inefficient hierarchical structure, allowing them to be more dynamic, which enables them to react quicker to changing market dynamics. Philips could then potentially price its lamps more aggressively and take back some market share it has lost in certain areas.
Three months earlier on 30th June, Philips announced that it was planning on spin off its Lumileds and Automotive businesses, with Philips still remaining a major shareholder and also a customer. This should enable Lumileds to have more flexibility to attract additional investors to accelerate growth. It also allows Philips Lighting to focus on connected LED lighting systems and services, LED luminaires, and LED lamps for the professional and consumer markets.
This move by Philips follows a similar corporate strategy to Siemens AG last year, when it spun-off OSRAM from Siemens AG and listed on the Frankfurt Stock Exchange. What followed were large scale job cuts in order to streamline the company and make it more profitable. It could then focus on core growth areas and invest in those businesses, such as the Speciality Lighting and Opto Semiconductors business lines. Although some of its general illumination divisions have been struggling, they are implementing large scale restructuring programs, which should lead to revenue growths and higher margins in coming quarters.
It is likely that similar cuts could be on the way at Philips Lighting. What could emerge would be a more streamlined and efficient company that can compete with some of the upcoming dynamic players in the LED lighting market such as Cree, Samsung and LG.
Rumours are now circulating about a possible split of GE’s lighting business. They have recently sold their appliances business to Electrolux for $3.3 billion on 8th September to focus on higher margin industrial and infrastructure markets. GE’s lighting business is more consumer focused, hence, could be spun-off in the future. That being said these are not new rumours and have been circulating for a number of years, but no doubt this latest round of restructuring will only add fuel to the rumours. GE’s lighting business has struggled more than Philips and Osram in recent years with its relatively slow adoption of LED technology, partly due to the fact it is not vertically integrated.What could be the overall effect of this restructuring on the lighting market? It turns the leading lighting manufacturers into pure play lighting companies that can be more focussed and dynamic markets that offer greater growth potential. It will allow them to raise capital for further investment and also allows them to reduce the hierarchal burden associated with being part of a large conglomerate. This could lead to improved margins for the companies themselves and possible lower priced products for consumers.