Philips in China -- portrait of a 'win-win' relationship

Speech by Gerard Kleisterlee, president and CEO of Royal Philips Electronics, at the EU-China Business Summit, The Hague, The Netherlands, on December 9 2004.

Your Lordship (Lord Powell);Honourable Prime Minister, Honourable Ministers (if EU/China ministers present); Ladies and Gentlemen;

This morning I want to discuss how multinational companies do business in China, and how we in the EU are learning to live with the phenomenon of China's rapid growth. I'll illustrate this by referring to what I know best -- our own experience at Royal Philips Electronics.

To help paint this picture I'm going to take my subject into three parts:

• Philips' China Strategy
• Our approach to Industrial and Technological Cooperation
• How outsourcing affects EU economies.

We at Philips are driven by a very clear and simple imperative: how to create "win-win" situations that share benefits between our Chinese hosts or partners, and ourselves.

Now in management jargon "win-win" outcomes usually refer to specific financial advantages. At Philips, over the course of our long history, we have come to know that respect is the single most important ingredient in creating a "win-win situation." Once you have that, everything else flows naturally.

That's why we're so pleased to see that the same values contained in our brand promise - Sense and Simplicity - are also a good practical basis for harmonious and respectful business dealings in China.

Today, Philips plays in three big interlocking areas of Healthcare, Lifestyle and enabling Technologies.

So for us, China is much more just than the world's workshop for exportable consumer electronics. And as we pursue new categories such as the market for cost-effective medical diagnostic devices or remote learning aids for rural schools, we find China to be an ideal partner.

We know Chinese people have long memories; and that long-term commitment, consistency - and persistence -- are prized values.

China thinks long-term - and China also thinks big.

China is less than half way through a 70-year plan of socialist modernization conceived back in the late 1970s. And by 2008 the Asia-Pacific region - led by China - is projected to surpass the EU in GDP. By 2020 China's GDP will have quadrupled.

As a respectful and responsive partner, Philips also tries to think long-term and to think big.

History helps us, because Philips first put down roots in China back in the 1920s. In some ways we consider ourselves a Chinese company.

In fact not so long ago a piece our shared history came to light. Philips delivered an early X-Ray machine to China, for the Emperor's personal use. Decades later, the same machine was found in a storage room of the Forbidden City and returned to Philips by the Chinese government. It now has a place in the product demo room of our Medical division.

We are proud to be the largest multinational company in China as measured by overall sales, as well as being one of the largest investors in China.

We formed our first China joint venture in 1985. Today we employ around 20,000 people in the country and generate total sales of over € six billion. Two thirds of that is export sales and supplies.

We're either number one or a top-three player in just about every market sector where we play in China.

So we're thinking big: our declared intention is to double our overall China revenues to €12 billion by 2007.

We have important non-financial targets too: to be the most admired multinational company in China. We define 'most admired' in terms of company reputation, employer branding, and brand preference for customers.

For 20 years our growth has matched China's, as we followed the rapid opening up of industry sectors or regions, building joint ventures or wholly-owned enterprises along the way. It has been an exhilarating ride.

So how does this history determine our China strategy today? It ushers in a period of "good housekeeping" of our existing operations - and of building much deeper, broader foundations for future growth as a more authentically Chinese presence.

I expect some of my fellow panellists will recognize this experience of pausing to take in the extraordinary changes that have taken place.

So our strategy rests on three central planks.

1. Streamlining existing infrastructure in China.
2. Creating support structures and shared facilities
3. Harmonizing a 'multi-China' strategy among our product divisions.

1. Joint ventures or wholly owned enterprises were the vehicles of our expansion through the 1980s and 1990s. This led to a somewhat scattered approach. Now we are creating central services to support our ongoing business operations. This makes our businesses more efficient - and able to grow in sustainable fashion. One good example is our centralized financial strategy.

2. Next, we are building value-added services for all our Product Divisions represented in China. That means:

• A common and coordinated management structure for such critical areas as Human Resources and Talent;
• A unified approach to government relations and public relations;
• A streamlined brand management apparatus to ensure we convert the extraordinarily awareness of our brand into customer preference.

3. Thirdly, we're working to harmonize the ongoing plans of our five product divisions with a China presence. In particular, we are putting in place mechanisms to ensure more business decisions are taken in China with a view to the Chinese market as a whole.

Another important aspect of this streamlining is the drive to bring more and more research and development capacity to China to support local and regional business.

Already, we have 15 R&D centers in China with close to 900 staff. Globally, we spend over € 2.6 billion each year on R&D and are committed to further expansion of our efforts within China. So for us this is not just a workshop, or a marketplace - it's a center of innovation for new products and services with global application.

Now to my second broad theme: how to manage cooperation with China. This is a huge subject so I'll just pick three key topics that should give a flavor of how we strive for "win-win" outcomes.

First: Open Innovation. Some time ago we realised the increasing cost of technology investments such as next-generation microchip plants would be prohibitive. So we joined forces with industrial partners. A great example of Open Innovation is the development of a new standard for China's next generation of mobile phones. Philips has played a key role in supporting China's own 3rd generation standard TD-SCDMA (together with Samsung and China's Datang). Together, we're building a global standard for a market that grows by five million cellphone users each month.

Secondly, support for China's embrace of global standards, including intellectual property rights. Premier Wen Jiabao told me at a meeting in Beijing last September that the Chinese government had IPR at the top of its agenda and was working hard to improve policies and regulations.

What's obvious is that - as in the case of the new 3G telephony standard I just mentioned - China is developing its own valuable intellectual property that will also require robust IP protection.

When you consider how long it took the Western world to achieve the level of IP awareness that China has reached in just 25 years, I think we must be truly appreciative of the progress made.

At Philips, we're trying to do more. Recently, we established the first Philips IP Academy within the law faculties of the two most prestigious universities in Beijing (Renmin University and Tsinghua University). Also we are establishing a similar a similar facility in Shanghai.

** As a brief aside on global standards, let me refer to China's request for Market Economy Status under WTO rules. Let me say Philips recognizes the market in China is in many areas as competitive as any market. We believe those jurisdictions that have still not granted Market Economy Status to China - including the EU - should review this, especially in the light of recent favourable statements from both Germany and Spain.

The third topic I'd briefly mention is supporting sustainable development. China's government is acutely aware of the cost of high-speed development on society, the environment, and the strain it places on energy, water and other resources.

Anything that western companies can do to help China by sharing technologies for energy conservation, recycling and environmentally friendly design, will win respect and contribute to that "win-win situation" I spoke of. Worldwide, Philips has cut packaging material consumption by 11%, energy by 9% and water by 15%. These are the standards we hope every multinational could bring to its Chinese operations.

Sustainability brings me to the third and last of my big themes -- how the Asian outsourcing or offshoring boom is affecting economies here in the EU.

As so often with China, the problem is one of perception: we should be seeing an opportunity, rather than a threat.

As commodity manufacturing moves eastward, EU labor markets are changing. Western societies are no longer driven by manufacturing employment. We can respond to this rationally - or emotionally.

This trend didn't start with China and it won't end there.

Today we must accept that Europe's destiny is to be part of the future "knowledge economy" and that the consequence of our high standard of living is that we specialize in high-end, knowledge-based jobs.

Philips is playing its part by creating high-quality knowledge based jobs in research, marketing and branding here in Europe. Currently over 75% of our R&D spending is carried out in Western Europe.

Although well under 50% of our manufacturing sites are now based in Europe, I would like to emphasize the quality of these operations in what we call High Value Added Manufacturing. Notable here are plants producing Special Lighting units (such as our automotive operations in Germany) and Medical Systems (such as our own high-end diagnostic equipment producing plant in the Netherlands), as well as facilities at the forefront of semiconductors technology. Such as our own plants - for instance in Hamburg- as well as the semiconductors plant in Crolles, near Grenoble in France where Philips works together with Motorola and STMicroelectronics. Another example of high value added activities are the operations at the Interuniversity Micro Electronics Center in Leuven, Belgium. Philips also works with IMEC, which is Europe's leading research centre in microelectroncis and nanotechnology.

So you can see that whatever happens in the commodity sector, we are committed to maintaining a strong European presence in High Value Added Manufacturing.

I've tried to paint a portrait of one company's relations with China: how we've grown; where we're going; and how we see our side of what I truly believe is a "win-win" relationship. I hope the lessons we've learned are useful to others.

I hope the fruits of this seminar -- and of this EU-China Business Summit - will be greater mutual understanding. And greater trust and confidence as Western Europe understands the huge benefits attached to supporting China in realizing its goals of peaceful progress and development.

Thank you.