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November 9, 2005 5:53 pm

Performance vital to future of Philips chips

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Philips, Europe’s third-largest chip manufacturer, might consider selling its semiconductor division if the unit does not achieve performance goals, the Dutch electronic group’s chief executive said.

While optimistic about the unit, Gerard Kleisterlee told the FT: “There is a good future [within Philips] for divisions that add value for shareholders. And semiconductors can do that. [But] if that cannot be delivered, we might have to come to other conclusions.”

Analysts have long fretted over the wisdom of retaining a volatile division, particularly as earnings from other operations – consumer electronics, medical, lighting and domestic appliances – are more stable.

Mr Kleisterlee said the challenge facing semiconductors, which generate about €5bn ($5.8bn) of €30bn in group annual revenues, was “to find five additional margin [percentage] points”.

Philips has mapped a margin range for the chip division of between 5 per cent, at the bottom of the industry cycle, and 15 per cent at the top. Semiconductors posted a 10 per cent operating margin in mid-2003. By early 2005 that had slumped to barely 2 per cent.

Mr Kleisterlee said it would be “towards the back end of 2006” – after restructuring savings materialise – before Philips reviews the unit’s future.

In September the company announced it intended to strip out €250m in annual costs at semiconductors by that date. The announcement fuelled speculation as to whether it would keep all four of its fully-owned semiconductor factories.

In a separate interview in Beijing, Mr Kleisterlee reiterated his position on semiconductors, but said the unit had a great opportunity to leverage Philips’ know-how. “That provides a basis to be competitive and to add value, but requires better execution than we may have seen in the last few years.”

However, he was optimistic. “I think the semiconductor team, which we have reshaped considerably in the past year, is well on its way . . . I hear good noises.”

Mr Kleisterlee also said Philips was interested in moving into molecular medicine, but ruled out anything as big as the $9.5bn acquisition of Amersham, the UK bioscience company, by GE of the US in 2003, which he described as “a leap of faith”.

Separately, Philips will today announce the creation of a R&D centre in Shanghai to develop chip sets for “ultra low-cost” mobile phone handsets that can be manufactured for less than $20. Philips’ interest in cheap handsets reflects growing interest among electronics companies in extending their product lines to low-income groups in developing countries such as China and India. Mr Kleisterlee said Philips believed that even the cheapest mobile handset systems could be profitable. "Low cost does not necessarily mean lower margins," he said.

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