Chapter 9 = Production & Logistics
Philips in China
The Dutch consumer electronics, lighting, semiconductor and medical equipment conglomerate Philips NV has been operating factories in china since 1985 when the country first opened its markets to foreign investors. Then china was seen as the land of unlimited demand and Philips like many other Western companies demand of Chinese consumers snapping up its products by the millions, but the company soon found out that one of the big reasons the company like china-the low wages rates-also meant that few Chinese workers could afford to buy the product they are producing. Chinese wage rates are currently one third of those in Mexico and Hungary, and 5 percent of those in United States or Japan. So Philips hit on a new strategy; keep the factories in china but export most of the goods to the United States and elsewhere.
By the mid-2000s, Philips had invested over $2.5 billion in china. The company now operates 25 wholly owned subsidiaries and joint ventures in china. Together they employ approximately 30,000 people. Philips accelerated its Chinese investment in anticipation of Chinese entry into the World Trade Organization. The company plans to move even more even production to china in the future. In 2003, Philips announced it would phase out production of electronic razors in Netherlands, lay off 2000 Dutch employees, and move production to China by 2005. A week earlier Philips had started that it would expand capacity at its semiconductor factories in China, while phasing out production in higher cost locations elsewhere.
The attention of China to Philips include continuing low wage rates, an education workforce, a robust Chinese economy, a stable exchange rate that is pegged to the U.S dollar, a rapidly expanding industrial base that includes many other Western and Chinese companies that Philips uses as supplies and easier access to world markets given China’s entry into WTO. Philips has stated that ultimately its goal is to turn China into a global supply base from which the company’s products will be exported around the world. By the mid-2000s, more than 25 percent of everything Philips made worldwide came from china, and executive say the figure is rising rapidly. Several products, such as CD and DVD players, are now made only in China. Philips was also starting to give its Chinese factories a greater role in product development. In the TV business, for example basic example used to occur in Holland but was moved to Singapore in the early 1990s. Now Philips is transferring TV development work to a new R&D center in Suzhou near Shanghai. Similarly basic product development work on LCD screens for cell phone was recently shifted to Shanghai.
Philips is hardly alone in this process. By the mid-2000s, more than half of all exports from china came from foreign manufacturers or their joint ventures in China. China was the source of more than 80 percent of the DVD players sold worldwide, 50 percent of cameras, 40 percent of all microwave ovens, 30 percent of the air conditioners, 25 percent of all refrigerators.
Some observers worry that Philips and companies pursuing a similar strategy might be over doing it. Too much dependence on China could be dangerous if political economic or other problems disrupt production and the companies’ ability to supply global markets. Some observers believe that it might be better if the manufacturing facilities of companies were more geographically diverse as a hedge against problems in China. The fear of the circuits were given some substance in early 2003 when an outbreak of the pneumonia-like SARS (severe acute respiratory syndrome) virus in China resulted in the temporary shutdown of several plants operated by foreign companies and disrupted their Global supply chains, Although Philips was not directly affected, it did restrict travel by its managers and engineers to its Chinese plants.