Philips Electronics North America Corp. Business Information, Profile, and History

History of Philips Electronics North America Corp.

Philips Electronics North America Corp. (PENAC), a subsidiary of the Netherlands-based electronics giant Philips Electronics N.V., is one of the 100 largest manufacturers in the United States. Its products in consumer electronics, components, semiconductors, communications systems, medical systems, diagnostic imaging systems, and other professional equipment are marketed under such familiar brand names as Philips, Magnavox, and Norelco.

For much of its history--from the late 1950s to the late 1980s--PENAC was essentially operated as a separate entity from its Dutch parent, despite an unusual brand of symbiosis: Dutch shareholders gained from the independent company's growth, and the company benefited from its Dutch relative's expertise in electronic innovation and research. In 1987, however, this unusual arrangement was simplified, as PENAC was once again acquired by N.V. Philips as a wholly owned subsidiary. Even as such, however, the company remained covetous of its hard-earned reputation and success as an independently managed firm.

PENAC's early history is closely linked to that of its parent, Philips Electronics N.V., which was founded as a lamp factory, Philips & Company, in 1891 in Eindhoven. Gerard Philips, a young engineer who saw commercial potential in newly developing electrical technology, formed the partnership with his father, Frederik Philips, to manufacture incandescent lamps and other electrical products.

With constant innovations and new product development--from tungsten filament to argon-filled lamps--the young company survived a difficult childhood. It also began a long process of vertical integration in order to become more self-sufficient, establishing its own argon-production facility and its own glass works by the 1920s. After incorporating as N.V. Philips Gloeilampfabrieken in 1912, the company continued to diversify and grow through World War I and the Depression.

By the 1920s, the company was under the management of Anton Philips, the youngest son of the founding patriarch. In addition to the components on which it had based its early growth--light bulbs, X-ray tubes, and radio valves--Philips manufactured complete products--like radio sets--whenever possible, marking a significant change in management strategy.

Anton Philips was also instrumental in setting up a financial organization that protected the Dutch firm from outside forces, especially German financiers. In 1920 N.V. Gemeenschappelijk Bezit van Aandeelen Philips' Gloeilampenfabrieken (known simply as "Bezit") was established as a holding company. Before World War II, Bezit held 89 percent of Philips' shares, with another six percent under the control of General Electric Co. By the late 1950s, Bezit controlled 98 percent of the operating company's shares, and top management held "priority shares" that granted them the power to nominate members of the "board of management." The financial grip of Philips was thus secured in the hands of the Dutch.

During the 1920s, the company's headquarters at Eindhoven underwent extensive renovation and expansion, with the construction of additional buildings for new and existing industrial products. Toward the end of the decade, Philips' Lamp Works set up more overseas subsidiaries in Asia and Africa, as well as in Europe and South America in the 1930s.

Despite Depression-driven cutbacks in the 1930s, the company forged ahead with new products such as gas-discharge lamps, X-ray equipment, car radios, telecommunications equipment, welding rods, and electric shavers, all of which ultimately helped alleviate the company's financial difficulties.

An important administrative reorganization occurred just before World War II. Anton Philips retired in 1939 as president, although he remained active in a supervisory role. He was succeeded as president by his son-in-law, Frans Otten, while his son, Frits Philips, was made a director of the company. Under this leadership, the company took precautionary measures against the war that resulted in the formation of North American Philips (NAP), the precursor to Philips Electronics North America Corp. (PENAC).

Indeed, the ominous political developments in Europe at the end of the 1930s prompted management to prepare for the worst. Philips's legal home was shifted to the Dutch island of Curacao off the coast of Venezuela. Philips created a U.S. trust handled by Hartford National Bank and Trust Co. to hold majority interests in North American Philips (NAP). A separate British trust was established to control the company's British operations. When the Nazis invaded in May 1940, Dutch defenses crumbled and the country capitulated within a week. The management of Philips followed the Dutch government into exile in England. Eventually, the top management made its way to the United States, where NAPC managed operations in non-occupied countries for the duration of the war. Frits Philips, while attempting to maintain as much independence as possible from Nazi authorities, remained behind to manage operations in the Netherlands. After the war, Philips was able to draw from its complex financial network to fully revive operations, even though Eindhoven had been completely demolished. In 1955 Philips repurchased its British businesses, leaving NAP to operate as an independent company until its re-merger with the parent in the late 1980s.

Thus, for more than four formative decades, NAP remained a sort of corporate orphan, invested with many of the character traits of its original parent, but largely independent in its development. Actually, NAP was one in a group of orphans: by 1994, Philips had eight offshoots in the United States, most of which were engaged in war work.

These Philips offshoot companies trod lightly on the turf of other American manufacturers of electrical consumer products. Philips's rather complex presence in the U.S. market enabled the company to skirt the line between being an innocuous, small company and a frightful megalith among electronics concerns. Indeed, Philips received an early slap on the wrist in 1941, when the U.S. Department of Justice filed a light-bulb cartel suit against GE, other electrical producers, and Philips, containing charges of price-fixing and monopolies on patents. Although Philips emerged with few scars, its interests were best served by maintaining a low profile thereafter.

Even with intentions of laying low, Philips's U.S. offshoots--and North American Philips Co. Inc. in particular&mdash--erged as strong market forces after World War II. The company employed a strategy of buying up small, specialized companies and grouping them together to fill specific market niches, from high-fi, X-ray, and lighting equipment to the import and export of specialized components.

This strategy came to a head in 1959, with the incorporation of Consolidated Electronics Industries Corp. (Conelco), a consolidation of a company of that name, Philips Industries, Inc., and Central Public Utility Corp. The first two of these merging companies were already part of the Philips fold: 100 percent of the stock of Philips Industries was owned by Philips's North American trust, and, in turn, Philips Industries owned 64.2 percent of the stock in Philips Electronics, Inc.; Consolidated Electronics, founded in 1919 as Jackson Cushion Spring Co., was 4.4 percent owned by Philips Industries, Inc. and 35.4 percent owned by North American Philips (another "little Philips" that wasn't directly involved in this particular merger). Finally, Central Public Utility Corp. was altogether unrelated, but its big cash position amounting to $13 million would provide the Philips cousins with welcome capital for greater productivity capacity and further R&D.

In the 1960s, Consolidated Electronics began a pattern of continued growth and diversification with the 1961 acquisition of Thompson-Hayward Chemical Co. (which it transferred to Philips Electronics & Pharmaceutical Industries Corp., a subsidiary, a year later). Thereafter, the company's electro-mechanical and electronic products soared through numerous new subsidiaries and their wares, including Advance Transformer Co. (fluorescent lamp ballasts, dimming and control systems for fluorescent lamps); Ferroxcube Corp. of America (ferrite memory cores, recording heads for computers); Alliance Manufacturing Co. (specialized fractional and subfractional horse-power motors for use in sound reproduction equipment, time controls); Ohmite Manufacturing Co. (rheostats, resistors, switches, transformers); Chicago Magnet Wire Corp. (insulated copper, other wire); Dialight Corp. (illuminated push-button switches, indicator lights). The company also ventured into popular, jazz, and classical records (Mercury Record Corp.) and passenger bus services (Carolina Coach Co.). Growth was impressive: From 1955 to 1966, Conelco's sales rose from $11 million to more than $300 million.

A whole new level of growth was reached in 1969, when Conelco merged with North American Philips Co. Inc., another "little Philips" company, to form North American Philips Corp. (NAP). The new entity combined Conelco's strength in electric-electronic products with NAP's leadership in consumer products and services and professional equipment. Pieter C. Vink, one of the original managers trained by Philips to ply overseas trade after the war, took the helm (after having steered North American Philips for decades). NAP found strength in unity and in its widening variety of products--from the first cassette player marketed in the United States, the Norelco "Carry-Corder", to professional equipment such as electronic calculators and computers, training and education systems, broadcast equipment, and electro-optical products such as the popular Plumbicon color-TV camera tubes and cameras.

The merger between publicly owned Conelco and NAP, the privately held subsidiary of Philips, resurrected interest on the part of the press--and investors--concerning NAP's relationship to its original Dutch parent. The merger effectively gave the Dutch concern 66 percent control over the new corporate entity through control of the U.S. Philips Trust. As in other "little Philips" operations, many top managers boasted past and ongoing ties to the Dutch parent; and all of Philips's U.S. operations benefited immeasurably from their access to the parent's products and advanced technology. Still, Vink insisted that his company was totally independent, leading Forbes magazine to conclude that "North American Philips is, among other things, a monument to man's ability to maintain a legal fiction despite its obvious unreality," in a 1969 article called "Orphan Grown Up." Such skepticism in the press persisted well into the 1980s. In 1980, for example, Forbes attributed U.S. investors' coolness toward NAP to the possibility that the Philips Trust, not U.S. investors, stood to gain most from the company's growth. The company's own annual report stated that the purpose of the trust was to pursue the Dutch company's interest in the U.S. market. Analysts throughout Wall Street continued to suggest that the Dutch pulled the strings in the background and that Philips operated as a worldwide conglomerate, whether or not its ownership was fragmented into subsidiaries with varying degrees of autonomy.

Whether or not NAP was part of a conglomerate, expansion over the following two decades was quickly transforming the company into a megalith in its own right. Special emphasis was placed on the lighting industry. In 1970 NAP's Radiant Lamp Corp. subsidiary--which had been acquired by Conelectron in 1968--changed its name to North American Philips Lighting Corp. A series of acquisitions followed: Verd-A-Fay, the lighting products division of Lear-Siegler Inc. (1971); the Large lamp division and the Lustra Lighting Division of International Telephone and Telegraph Corp. (1973); and Solar Electric Corp. (1980). In 1983 North American Philips Lighting Corp. shone particularly bright, with the acquisition of Westinghouse Electric Corp.'s Lamp Division and the acquisition of a Corning Glass Works glass plant, as well as a merger with the Philips Emet Division of NAP.

Meanwhile, NAP forged ahead in electronics, as well. The company's solid R&D base was supplemented by the market weight of strategic acquisitions: Electra/Midland Corp. (1971); Unelec, Inc. (1972); Magnavox Co. and National Components Industries, Inc. (1974); Airpax Electronics, Inc. and Rohe Scientific Corp. (1976); General Electric Co.'s electronic capacitor manufacturing operation (1978); and a majority stake in the Centralab division of Johnson Controls, Inc. (1980).

Capitalizing on the insatiable American appetite for television, NAP also took bold strides into the TV market. Though Magnavox had been acquired just in time for the collapse of U.S. TV manufacturing, falling into the red for a good part of the 1970s, NAP forged ahead. In 1981 the company acquired General Telephone & Electronics Corp.'s television set business, helping boost its market share of the color TV market to 13.1 percent that year. The company also consolidated TV production in a modern plant in eastern Tennessee and integrated cost-cutting automation. NAP found itself wedged between American competitors and increasingly aggressive Japanese manufacturers. By 1987, its market share had slipped to 9.8 percent, though Philips brands of color TVs still ranked third in the United States, behind RCA and Zenith. By 1988, Philips had developed the first demonstration of high definition TV (HDTV) hardware for U.S. satellite transmission. In a joint venture with Hughes Communications, Inc., a subsidiary of Hughes Aircraft Co., NAP began field testing a HDTV satellite feeder signal system in 1989. Through Broadcast Technology Systems, Inc. (BTS)--a joint venture between Philips and Bosch--the company developed a special high definition video camera to create optimal images for the system.

Though NAP showed tremendous promise for the future, the company was not living up to its potential in the 1980s: its consumer electronics division reported a loss of $12.7 million in 1985 and another loss the following year. In response, the company began a process of consolidation and realignment along core business lines. In 1985 it sold its inter-city bus transportation business (Carolina Coach Co. and Seashore Transportation Co.) as well as its hospital attendant TV business, N.A.P. Commercial Electronics Corp. The following year, several subsidiaries merged: Mepco/Electra Inc. and Centralab Inc., as well as Dialight Corp. and Kulka Smith Inc.

Speculation over NAP's curious relationship to its parent finally came to an end in November 1987, when the company became a wholly owned subsidiary of the Dutch giant. Cees Bruynes, chairman and president of NAP, emphasized that the changes were structural in nature and would not affect ongoing operations and operational responsibilities. Still, a sweeping reorganization was initiated in order to streamline the structure of the company's activities in the Unites States and improve coordination with the Philips Group worldwide.

As part of the new organization, the company appointed a new president. On January 1, 1989, Einar Kloster, a former executive vice-president of the North American Philips Corporation, returned as president of the company, replacing Cees Bruynes. Mr. Bruynes, in turn, was named chairman and CEO of a new subsidiary, Consolidated Electronics Industries Corp., which grouped together those subsidiaries that lay outside the company's core electronics business in an effort to improve NAP's focus and performance. The new subsidiary included the Magnavox defense contracting business, which could not be foreign-owned according to Pentagon rules, and various other businesses, including Anchor Brush toothbrushes, Genie garage door openers, Selmer musical instruments, and Magnavox cable television equipment.

As part of its new American organization, Philips also launched a renewed marketing campaign designed to strengthen the Philips presence and visibility in the United States, the largest consumer electronics market. Indeed, in the past, the American offshoots had suffered from poor marketing and timing of new product introductions. Philips had invented the CD player, for example, and had become a leader in the European market, while players sold under the Magnavox name in the United States had barely managed to capture two percent of the market. The company's VCRs, designed in the early 1980s, endured similar hardship; NAP even refused to market them in the United States, selling machines purchased form Matsushita instead.

The new marketing initiative intended to reverse this pattern by aggressively supporting consumer products under such names as Norelco, Magnavox, Philco, and Sylvania, while greatly enhancing market awareness of other products under the Philips name itself. According to Television Digest, immediate results were felt in Philips's color TVs, which saw a rise to 10.7 percent in 1989, from 9.5 percent the previous year, largely due to an ad campaign featuring the Smothers Brothers. Other advertising efforts promoted such products as Norelco's men's and women's electric razors, CleanAir filtering machines, and EZ Irons.

NAP's new image was part and parcel of a general facelift that the parent company underwent well into the 1990s. After reporting heavy losses in 1990, Philips' Board of Directors drafted Jan Trimmer as president to return Philips to profitability. By implementing a so-called Operation Centurion, the company hoped to make itself more responsive to the competitive marketplace by raising productivity, stimulating cost consciousness, and minimizing office bureaucracy. In 1991 the company's name was changed from N.V. Philips Gloeilampenfabrieken to Philips Electronics N.V. Following suit, NAP's name was changed to Philips Electronics North America Corp. to more accurately define its products (especially its renewed emphasis on core consumer electronics) and more closely identify it with the parent company.

Both companies moved to recapture slipping market share in an increasingly competitive electronics arena, especially threatened by Japanese manufacturers. Big Philips's closer ties to its American subsidiary were a calculated attempt to recapture that pivotal market: "To win the battle in consumer electronics, we have to win in America," a Philips executive told Business Week in 1987.

Certainly, Philips's long tradition of innovation and quality gave the company an edge over its competitors. Backed by the tremendous resources and joint projects of its parent--and by the famed Philips Laboratories where it conducted cutting-edge research--Philips Electronics North America Corp. focused on several strategically developed and timed products in the mid-1990s. As early as 1993, the company joined CellularVision and Bell Atlantic in a partnership toward multi-channel, interactive, multimedia services. Meanwhile, expanding on the CD technology it had pioneered, the company moved into CD-I (interactive, multimedia compact disk systems) and a digital videodisc, for which Philips, in alliance with Sony Corp., competed against a Toshiba Corp. / Time Warner Inc. alliance to set industry standards. The company also positioned itself for growing demand in full color, high-resolution, flat panel display systems by entering into a joint venture with Kopin Corp. to develop a new generation of liquid crystal display imaging devices. And in 1995, a joint venture with Cree Research, Inc., made great advances in blue laser diode technology, useful in high density commercial memory systems and for military applications such as lightweight countermeasure systems and covert communications.

These were just some of the innovative products that Philips Electronics North America Corp. is depending on to hold its ground in an increasingly competitive electronics market. With the backing of its impressive parent, renewed marketing program, and focus on its core electronic business, the company stands an excellent chance of setting new standards in the emerging multimedia electronics markets of the 21st century.