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Royal Philips Electronics followed the path of Thomson this month in deciding to license off it Philips and Magnavox brands for TVs in North America to Funai, stepping away from years of effort trying to make a profitable business in the price-aggressive U.S. market.
Like Thomson, which licensed off its RCA and Proscan lines to Asian manufacturers in recent years, Philips opted to let someone else take over the fight for dwindling profit dollars from its well-featured and highly differentiated TV products under the Philips line and more price-aggressive, mass-merchant-focused TV offerings under Magnavox.
The five-year minimum agreement, which takes effect Sept. 1, will give Philips royalty payments in exchange for Funai's right to use the Philips and Magnavox brand names for consumer television offerings in Canada and the United States. The agreement is renewable.
Funai has been a long-time manufacturer of products for Philips and had licensed its former Sylvania brand for LCD TVs and other products in North America from rights-holder Siemens, to join its family of brands including Funai, Symphonic and Emerson. Under a previous deal, Funai also produced Magnavox and Philco (another Philips brand) digital-to-analog converter boxes sold under the federally administered DTV converter-box coupon program.
The move was the next step in Philips president and CEO Gerard Kleisterlee's 2010 strategy, which was spelled out in January with the creation of the Philips Consumer Lifestyle company. That action merged the consumer electronics and DAP (personal care appliances) divisions.
The management agenda included finding solutions to cyclical profitability issues in connected displays in North America, said Todd Richardson, the newly appointed Philips Asia Pacifica Middle East and Africa (APMEA) business unit television marketing VP, who had previously worked with the company's U.S. displays.
As for existing Philips consumer electronics television marketing and sales personnel, Richardson said the two companies have identified a transition plan, "and Funai has expressed strong interest in maintaining as much talent as possible in developing the new business."
Philips stressed that the move will only impact Philips- and Magnavox-branded TVs in the United States and Canada. Philips will continue to maintain its TV brands in Latin America and other regions of the world.
"Philips remains committed to TV and we will absolutely maintain our presence in Europe and what we call the BRICA (Brazil, Russia, India, China and Asia) countries," said Richardson.
Philips also said it will continue to take steps to improve the financial performance of its remaining television operations by further optimizing its existing global supply base and focusing its TV business on its strongest markets, especially in Europe and in key emerging countries.
The company has recently been divesting much of its interest in television component parts, including the formerly named LG.Philips LCD panel operation in South Korea.
Other Philips consumer business categories in North America under the consumer lifestyles division are not affected by the agreement and will continue to be manufactured, marketed and sold by Philips, the company said.
To cover the costs of the additional steps, and the costs associated with the transfer of the company's North American TV activities to Funai, Philips will take total charges of up to $196 million during 2008.
"The agreement with Funai and the other measures to improve profitability we are planning follow our commitment that we would take decisive steps in addressing the unacceptable profitability levels in our TV business in 2008," stated Kleisterlee. "We have an 18-year working relationship with Funai and are confident it is an excellent partner to implement this new model for Philips' television business in North America. This agreement will ensure a presence for Philips television in North America and uninterrupted access to innovative products for consumers."
As for current product plans, Richardson said, "Funai will continue to deliver the products that we set out for the 2008 range. In fact, we started launching our 2008 range late last month with the full rollout starting this month. That full range of Philips and Magnavox products will absolutely be continued by Funai through the balance of 2008."
The agreement will allow Funai access to "quartile 2 and quartile 3 positioning so that they will be able to move into new segments using the Philips brand name. We don't see a large overlap between the brands they have today with the Philips and Magnavox brands," Richardson said.
The agreement includes guidelines requiring Funai to uphold Philips' premium design and technology standards, the company said. Philips will continue to cooperate with Funai through the balance of 2009 in the design and development of TV products. Funai will also have access to Philips' proprietary features that it will use globally, Richardson said.
Examples of some of these proprietary products and technologies now open to Funai in the United States include the recently launched Design Collection and energy-efficient range of televisions dubbed the Eco TV. Funai will be required to maintain compliance with Philips' standards for quality, product design and consumer care, the company said.
Philips said its television sales in North America amounted to $1.57 billion in 2007. Completion of the intended agreement is subject to any mandatory governmental regulatory approvals.
Tetsuro Funai, Funai Electric founder, president and CEO, said the companies "have a long history together, and we are proud to be the trusted partner charged with managing this important and high-profile product category for Philips. As a premium brand, Philips will add luster to our existing portfolio and consumers can continue to count on the Philips quality, design and innovation to which they have become accustomed. We look forward to working together to ensure a seamless transition of the business."
Meanwhile, Funai announced in Osaka, Japan, that Tomonori Hayashi, senior executive officer of Funai Electric, will become the company's new president June 19, replacing company founder Tetsuro Funai, who will continue to serve as chairman without representative rights.
Hayashi has served as chief of Funai Electric's North American sales and marketing company since 2006, according to a report from the Nikkei News Service. He was described as a strong negotiator with foreign companies, such as Wal-Mart, which carries Funai televisions and DVD players and is considered one of the company's "major business partners."
The move comes after Funai, which had been among the more profitable Japanese electronics companies in recent years, suffered its first operating loss since going public in 1999.
Tetsuro Funai, 81, started his career at Funai Electric as an electrical engineer in 1969. Nikkei said there were signs that Funai had lost some of his physical strength in recent months.