Philips takes on Chinese challenges
By Wen Dao (China Daily)
Updated: 2005-04-20 09:10

Jean Claude Germain, chief representative of the French giant PSA Peugeot Citron in China, has been working in the country for a decade and that has led him to a conclusion: The biggest challenge to doing business in China is learning how to cope with regional differences.

Not only is the size of the market huge and the demands of customers diversified, he says, but the policies in different parts in the country can also differ greatly, especially when it comes to foreign investment. Indeed, local officials trying to win investments by multinationals employ various preferential policies on land use, tax incentives, and market guarantees.

Many try to fully take advantages of the differences and win favour from local governments, and choose to open ventures in various regions with different partners when they first arrive in the market.

The Japanese conglomerate Hitachi, as one typical case, has more than 114 ventures scattered in different parts of China, about one 10th of its total number of subsidiaries in the world.

Yet with China's accession to the World Trade Organization and efforts to create a level playing field for both domestic and multinationals, as well as multinationals' efforts to increase their efficiency and reduce costs, consolidation of ventures in China has become a trend among global big names, including the Dutch electronics giant Philips.

A tough task

Philips China, which is expected to celebrate the 20th anniversary of the establishment of its first joint venture in China today (April 20) in Shanghai, has invested more than US$3.4 billion into 35 joint ventures or wholly-owned subsidiaries and has more than 60 offices nationwide.

"Consolidation of the legal persons is not easy, because many legal issues are involved," said David Chang, president of Philips China.

Since regional ventures usually need to pay taxes, hire local employees, and stimulate related industries such as services and housing, multinationals have to bargain with different local governments and guarantee no reduction in investments, employment and taxes, which is usually a long process.

Nokia started to consolidate its production bases in Beijing, Suzhou and Dongguan in 2003 after lengthy preparations, but it still took almost two years for the world's biggest handset maker to finish the work in January.

Chang said in an interview earlier this month that the consolidation of legal entities of Philips' ventures in the country is not an urgent task for the company, considering the current difficulties.

However, he added his company might make some progress in that direction in the second half of this year.

The progress could be achieved both in geographical and industrial dimensions.

While the consolidation of legal entities is quite difficult, the company is trying to streamline the operations of its ventures, which may cause fewer legal difficulties.

Philips has started to integrate some common functions of its ventures into unified platforms under the One Philips principle.

The information technology support unit in the electronics giant has begun to share the same platform in the country.

Chang said the integration of Philips' financial and accounting functions is also about to be completed and it will further connect with its Asia Pacific financial centre in Bangkok.

A unified human resources management system is also well under way, with 5,000 of Philips' 14,000 employees in China already enrolled in the platform, allowing the headquarters more easily handle its employment situation in many ventures.

The other functions which can share a same platform like training, marketing, and public and government relations are all united into one team.

What is more important, Philips China also formed a China Strategy board with the participation of heads of its five business units, namely semiconductor, consumer electronics, medical systems, lighting, and domestic appliance products, plus intellectual property rights division, said Chang. The committee is responsible for formulating the direction of the electronics giant in China.

"Before we only had a global strategy and our job was to execute it in China, but chiefs of every department should sit together and co-ordinate their strategies in China," said Chang.

A China management board, composed of the five business lines and the IPR department, as well as Chang, chief marketing officer, and the firm's chief technological officer, work together to carry out its strategy in the market.

Future-oriented strategy

While the company is restructuring its organization in the market for higher efficiency and stronger execution, research and development and fostering of future users and employers are more future-directed.

Chang said his company would continue to strengthen local research and development capability to design not only for the needs of local customers but also global clients.

Philips started to build a Philips Shanghai Innovation campus with 40 million euros (US$52 million) invested annually.

It aimed to bring all its research facilities scattered in Shanghai together to increase their collaboration and efficiency.

Another function of the campus is to open Philips' technologies to partners, just as it does in its global R&D headquarters in Eindhoven in the Netherlands.

"Technologies are getting increasingly complicated and no company can do all the work alone, so we want to do open research and work with other companies," said Chang.

Partners can work at the campus and share research facilities with Philips. Philips spent 50 million yuan (US$6 million) in China last year and it registered 200 patents, which were all developed locally in the past years.

Besides developing for the future, the electronics company also decides to foster customers and talent for the future.

Philips China became the only sponsor to the 10th Challenge Cup, the biggest contest of science and technological innovations by Chinese university students.

The contest, organized by organizations including the Central Committee of the China Youth League and the China Association of Science and Technology, will run from April to November.

Philips China will host a summer campus and a roadshow in 12 top Chinese universities during the contest and participants can use Philips' materials like semiconductor or technologies to develop some applications.

It will also be able to promote the awareness of Philips brand.

"Young people are the future of the society and it is a high time to increase their understanding of Philips," said Chang.

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