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Tech Industry

Polishing the name of Philips

CEO Frans van Houten talks about the changing nature of consumer electronics and altering the culture inside a large organization.

In the technology industry, Europe often doesn't stand tall.

Many of the dominating players, such as IBM and Microsoft, emerged from the U.S. Asia has become synonymous with contract manufacturing, consumer electronics and broadband initiatives. Europe has companies like Nokia and SAP, but also a reputation for bureaucratic tangles.

Frans van Houten, CEO of Philips Semiconductor, wants to change that. In 1996, he headed up Philips' effort to sell recordable CDs and DVDs for video. By 2002, he was running the entire consumer electronics group. (The Philips conglomerate has five divisions: semiconductors, lighting, medical, consumer electronics and domestic products.)

Last year, he took over the company's semiconductor division. The chip group lost money for a number of years, but it rebounded to profitability in the first part of 2004. Subsequently, sales flattened and then-CEO Scott McGregor took off to become CEO of Broadcom. The new plan is to sell bundles of chips under the Nexperia brand to cell phone makers, auto manufacturers and others.

Van Houten spoke with CNET News.com's Michael Kanellos about his plans for streamlining the chip group, the changing nature of consumer electronics and altering the culture inside a large organization.

Why don't you give us the quick update on Philips Semiconductor.
Van Houten: We can do much more with the semiconductor business than its past performance. The semiconductor business is capital intensive, but it's also an R&D-intensive business and we spent over a billion U.S. dollars in R&D. We need to get a return. We owe that to our shareholders, to our board, to anybody, but also it is much more gratifying if we set a strong goal for business growth and so that's what I did.

Many customers think Philips has a great brand, that it's a strong technology company, that it has intellectual property that is attractive, but they want us to deliver faster, to improve our quality of execution and get a bit more focus in place.

My impression of Philips is that it is one of those companies that has great R&D and great ideas...
Van Houten: Yeah, and then we try to be everything to all people.

Exactly, you'll have 8,000 products and I don't know what they do.
Van Houten: 45,000. So I basically started a renewal effort and said we will do it by focusing on four key areas instead of 20. We will simplify our organization and build a so-called highway to the customer, because in the end, I mean, without customers who are we? We may be a proud technology company, but we need revenue. We will execute with much better quality the first time...As products become more complex, nobody wants to have few returns, because it's so expensive.

Where are you starting with the new approach? With the automotive group?
Van Houten: Automotive is kind of leading that. We have a business unit called automotive and identification. That one was very scattered before, yet it makes 18 percent of our sales. We do entertainment solutions for cars. We have a very high market share also here in the United States with, for instance, Delphi. Safety and comfort we do as well: tire pressure devices, airbag devices, the power train in the car, keyless entry systems.

I basically started a renewal effort and said we will do it by focusing on four key areas instead of 20. We will simplify our organization and build a so-called highway to the customer.

Mobile/personal is 36 percent of our business. Home is around 20 percent. And then automotive is 18 percent and then the multimarket component business (microprocessors) is around 24 percent.

I didn't know mobile was so high, I would have guessed consumer electronics would have been the biggest.
Van Houten: That's what people know us for, but in fact we are the leading supplier of system solutions for mobile phones. My dinky phone, this very successful Samsung D500, which is a hot-selling product in Europe and Asia, is based on the Philips Edge Nexperia integrated solution system platform. Samsung was able to build this product in less than five months because we provide an integrated platform. Soon in the United States we will also have (similar) phones based on our platform.

Do you sell phones under your own name?
Van Houten: Our sister division Philips CE has a modest phone business, which of course we supply to.

Do you ever get in conflicts with potential customers over the fact that you supply chips to Philips, which might be a competitor to them?
Van Houten: Oh, no. Of course, Philips is an internal customer to us. Around 9 percent of my business goes to Philips, so that means 90 percent goes to outside customers. In television, we basically supply to every major brand in the world. Chinese, Japanese, Korean: They all take our system solution for television.

Speaking of TVs, HDTV has finally begun to start taking off in the States? How is it going worldwide?
Van Houten: In the United States it got a big boost because of the mandate of the FCC. We are very proud to have the most cost-effective integrated system for television, (for) which we have now a whole slate of customers. We were actually in Austin (Texas) pitching our products to the famous company there. Europe is going to roll out HD. China and Asia are rolling it out, so we see an acceleration of the HD market.

The big concern, of course, remains content. The Olympics in Beijing are going to be in HD, and the world championship of soccer in Germany next year is going to be in HD digital. I think that will help some sales.

What other consumer applications do you see arriving over the next couple of years?
Van Houten: Well, video is only a step away from photos, right? Many of the portable MP3 players already have stills, so we're waiting for video. Then you see the new delivery methods of bringing content to the home like IP set-top boxes.

In the past, consumer products were always designed as fixed boxes, and you could do a hard wired chip. But in the world of connected products, standards are not as stable as in the good old-fashioned CE world, so everybody has to learn new tricks and that means upgradability and interoperability. That's where the benefits of Nexperia come in, because we can upgrade the product afterwards when it is already in the market. If later on there is a new codec, you will need to upgrade your products.

The studios, however, have been skittish about IP TV because of content control and piracy.
Van Houten: From the content point of view in the U.S., there is still a big debate going on. But look in Asia, Korea and maybe China and some other markets. IP delivery of content is developing very rapidly. In Europe you already have some customers that are rolling out all our IP set-top box technology. Not every market has the same fish, right? The U.S. is leading in digital HDTV. Some other markets in the world are leading in IP delivery of content.

How about in developing nations like India?
Van Houten: It's not yet happening, we expect it to happen, because you can deliver a wide range of content in a very cost-effective way. In China, a lot of kids have PCs, whereas the good old-fashioned TV delivery is actually bad quality. Making the jump from good old-fashioned TV to IP delivery jibes well with the installed base.

That's interesting, because most people in this country tend to wonder why anyone would want a TV tuner in their PC. But that's because everyone has both. If you had to choose between a PC and a TV, it's a different matter.
Van Houten: Yeah, and it is a breakaway from traditional delivery where you had five channels. Suddenly you can have a lot of channels. And it's a generational thing as well. Youngsters will find it normal to look at all these content things on a PC.

Another incarnation of entertainment is entertainment on the go. For TV-on-mobile devices, we have a system-on-package (a group of chips housed in a single package) that's the size of my fingernail. It's for cell phone builders to bring digital terrestrial television into the mobile phone.

Is there a lot of interest in mobile-phone TV?
Van Houten: There was a trial in Berlin last year, and the market research that we've done shows that 80 percent, or actually 78 percent, of consumers are very interested in having television in their mobile phone. Many then tell me, 'Yeah, but the screen is so small.' Well, but that has to do with the viewing distance. In a short viewing distance, the phone, for short videos, is quite attractive. Our TV-on-mobile solution that is shipping later this year will go in products from three brands, both European and Asian.

When you say later this year, does that mean it will be delivered to the cell phone makers or come out in phones that individuals can buy?
Van Houten: We have of course already done the work with the OEMs (original equipment manufacturers) to do the design of the systems, so the final silicon is shipping in the fourth quarter. Then the OEMs will build their products and start shipping in early 2006.

I think we owe it to ourselves to cash in on our birthright to lead in entertainment.

What volume they do--I can't control that, unfortunately. The parallel that we can go on is that FM radio in mobile phones is a huge success, and we are, by the way, the leader in FM on mobile phones. The added cost of PC on mobile is actually not that big because a lot of the elements are already there. You have the screen. The battery is there. You can easily watch 10 hours on your battery, so it will not drain it.

The cost of bringing the PC-on-mobile feature would not make the phone hugely more expensive. Think about $50 or so.

Is that the additional price at retail or the additional total to the BOM (bill of materials)?
Van Houten: The BOM is even lower than that, so it is entirely possible to make this an affordable feature. The prediction is that we will reach 10 percent penetration before the year 2009, and that means 100 million phones, because by that time the market is a billion phones a year.

Turning back to cars for a second, it seems like the greatest interest in in-car entertainment comes from the U.S.
Van Houten: I wouldn't say that. In Japan every car has entertainment, every car has navigation. In the U.S., the rear seat, backseat entertainment is very big. There are just slight differences in the application, depending on the market. But there's an interesting industry challenge again. Because of the fast-changing standards in the entertainment world, the automotive world now has to learn to have shorter design cycles. It is part of our strategy to not (make) the customers figure out everything on their own, but rather, we help with production and design, including the software.

Looking back on your old job running the consumer division, one question that comes up with Philips quite a bit is how come the company isn't bigger? For years, Sony dominated consumer electronics. A few years ago, Samsung came out of nowhere to become a serious player. Philips hasn't capitalized as well as they could have, it seems.
Van Houten: I wouldn't want to compare myself with Sony right now because I'm not sure if they're exactly the shining example anymore, but I agree with you that culture change is important. I tried to bring that to all our people, that the world is moving very fast and that you can have great technology, but you need to run fast, you need to support your customers 24 hours a day, seven days a week.

We tried to help Dell with the design (of a product) and we worked with them in Austin. We also need to work with them simultaneously in Singapore and in Taiwan because some of their work is done in Singapore and manufactured maybe in Taiwan. So it's a 24-hour economy, and some of our competitors are maybe more predatory traditionally than we are. I'm trying to change that. I think we owe it to ourselves to cash in on our birthright to lead in entertainment, and I think we have the IP. We just need to run fast and do it.

One last thing. How much time do you spend on the road?
Van Houten: I find it extremely energizing to be on the road. On Tuesday afternoon after a day's work (in the Netherlands), I left and arrived in Austin late night. Wednesday morning was with Dell, Wednesday in the evening I was here in Cupertino (Calif.).

Yesterday, we had our first Industry Advisory Council. One of the things that I tried to do is make my division more market oriented, and so rather than conceive all of the products in our creepy holes back in our labs, I take the people into it. The Advisory Council we have had six respected analysts, and we shared our road maps and said, "Please critique these road maps." And so we had a very interactive 12-hour session yesterday, going through the road maps, understanding the U.S. market better, getting feedback.

By the way, they also told us that we need to be proud of some of the technologies that we have, because they think they are actually pretty good.