Following Ericsson's lead, the Dutch giant will outsource its mobile handset business to China Electronics. The mobile division loses too much money and doesn't have a large enough share of the market to justify continued operations. Philips should do better once it has cut out the bad wood, allowing it to concentrate on strengthening its healthier branches.
Philips has decided that its mobile phone manufacturing business, despite accounting for 6% of the global GSM market, is just too expensive to keep afloat. The company has just completed a strategic review of the business unit, coming to the conclusion that it is no longer viable and therefore warrants the E300 million charge incurred for its closure.
Such a step has been on the cards for some time. Its mobile business has struggled to break even in recent months, cancelling out profits made by other sectors of the company. It is the latest in a long line of profit warnings, job cuts and plant closures by mobile manufacturers. The industry has been suffering for around a year as the demand for handsets has waned.
This move does not however mark Philips' complete withdrawal from the mobile market. The company has simultaneously announced a partnership with the China Electronics Corporation, which essentially means it will outsource mobile manufacturing operations. The Dutch electronics group is already involved in a joint venture with China Electronics, which will now take a controlling stake as a result of the new agreement. China Electronics will manufacture handsets for the company, which will then be sold under the Philips brand.
Although the E300 million charge, payable later this year, will come as a blow (especially on top of other charges of E350 million in components and consumer electronics and E90 million for restructuring in semiconductors), it will free up the company to concentrate on its role as a technology provider and dramatically cut costs. The move should bring Philips' more profitable business activities to the fore, accentuating the company's strengths to give it the best possible chance of prospering.