Royal Philips Electronics and Lucent Technologies Inc. last week said they will dissolve the consumer communications joint venture they established just more than one year ago.
At the time of its formation Oct. 1, 1997, Philips Consumer Communications had high hopes it would be a top-three player in the markets for wireless handsets and pagers, corded/cordless phones and answering machines. Instead, the venture’s short history has been mired in delays and disappointments specifically related to its efforts in the wireless handset arena.
In June, the company scaled back its ambitions for the wireless handset market after financial losses during the first quarter. The situation failed to improve during the second quarter, after which the company announced it would not break even this year as expected and that market delivery of certain wireless products would be delayed.
During that time, high-level executives exited the company, including its chief executive officer, Michael McTighe.
In September, Philips issued an earnings warning that indicated PCC would report higher losses and the parent companies would undertake a review of the joint venture. The culmination of that review is a divorce that will send 5,000 PCC employees back to Philips and 8,400 employees back to Lucent.
Philips said, however, it expects to lay off many of the employees that will return to the company.
Analysts suggested PCC’s failure could be a combination of both technology and management problems at the joint venture. Specifically, some analysts said trying to manufacture products for all three digital wireless technologies could have spread the company too thin and that developing Code Division Multiple Access products may have proven more difficult than the company expected.
“I still think the concept was a great idea,” said Phil Redman, senior analyst, wireless/mobile communications research and consulting at the Yankee Group in Boston. “But it depends on execution. They didn’t execute well.”
PCC joins other companies which have succumb this year to the difficulties associated with a highly competitive handset market that is dominated by Motorola Inc., L.M. Ericsson and Nokia Corp.
Oki Telecom Inc. in August ceased manufacturing, sales and marketing of all mobile phones in the United States. Mitsubishi Consumer Electronics America Inc.’s Cellular Mobile Telephone division transferred its wireless telephone manufacturing assets to Solectron Corp. Northern Telecom Inc.’s Matra Nortel Communications joint venture closed its GSM manufacturing plant and sold its research and development unit in Germany to Nokia because of continuing losses.
Philips, however, indicated it does not plan to bow out of the consumer communications business altogether.
“It is clear that the performance of the venture is a disappointment for both partners,” said Cornelius Boonstra, president and chief executive officer of Philips. “We intend to stay in this business because of its strategic importance for our Consumer Electronics business.”
Philips, which holds a 60-percent stake in the joint venture, will regain control of its wireless business, which mainly consists of Global System for Mobile communications technology, its wired business outside North America and its pager manufacturing business. The company indicated, however, that it is seriously considering selling its pager business.
Philips said it will focus its efforts in the wireless handset market on its core GSM technology as well as development work on third-generation digital mobile phone technology. The company said it is considering technology partnerships for its work in the 3G arena.
For its part, Lucent said it plans to sell its portion of the venture that includes corded and cordless phones and answering machines in the U.S. market, as well as a telephone leasing business. The company said it will continue to make those products and the leasing service available through existing outlets until a buyer is found.
Lucent also said it will close down its wireless handset portion of the venture.
The end of the joint venture will result in a restructuring charge during Philips’ fourth quarter. Philips also said it will scale back its ambitions for the short-term and will streamline its product offerings.
The difficulties at PCC had an impact on Philips’ third-quarter financial results. Income from normal business operations in the third quarter totaled $242.4 million, or 67 cents per share, compared with income of $389.2 million, or $1.11 per share, during the same quarter last year. The company attributed the lower income to reduced operating results in the consumer products, components and semiconductors sectors.
Net income for the first nine months totaled $1.63 billion, down slightly from net income of $1.66 billion for the first three quarters of last year.
Philips’ stock on the New York Stock Exchange Thursday fell 12 percent, or $7.56, following the news, while Lucent’s stock dropped less than 1 percent.
The dissolution of the joint venture is expected to be completed by the first quarter of 1999.
