Philips Investments in China

The Dutch consumer electronics, lighting, semiconductor, and medical equipment conglomerateKoninklijke Philips NV has been operating factories in China since 1985, when the country frstopened its markets to foreign investors. When Philips initially entered China, it had dreams ofChinese consumers snapping up its products by the millions. However, the company soon foundout that the reason it liked China—low wage rates—also meant that few Chinese workers couldafford to buy its products. So Philips hit on a new strategy: Keep the factories in China, but exportmost of the goods to developed nations.The initial attractions of China to Philips included low wage rates, an educated workforce, a robustChinese economy, a stable exchange rate that is linked to the U.S. dollar through a managed foat,a rapidly expanding industrial base that includes many other Western and Chinese companies thatPhilips uses as suppliers, and easier access to world markets given China’s entry into the WorldTrade Organization in 2001. By the early 2000s, Philips employed some 30,000 people in Chinaeither directly or indirectly at joint ventures. Philips exported nearly two-thirds of the $7 billion inproducts that its Chinese factories were producing. At this point, 25 percent of everything thatPhilips made worldwide came from China.As time passed, Philips started to give its Chinese factories a greater role in product development.In the TV business, for example, basic development used to occur in the Netherlands but wasmoved to Singapore in the early 1990s. In the early 2000s, Philips transferred TV developmentwork to a new R&D center in Suzhou near Shanghai. Similarly, basic product development work onLCD screens for cell phones was shifted to Shanghai. In 2011, in a testament to just howimportant China had become to Philips, the company moved the global headquarters of itsdomestic appliances business from Amsterdam to Shanghai. By this point, China was far morethan just an export base. Demand in China had accelerated rapidly, and the country was now thesecond-largest market for Philips.Employees work at a Philips booth during a trade show in Shanghai, China. Source: © Weng leiImaginechina/APImagesSome worry that Philips and companies pursuing a similar strategy might be overdoing it. Toomuch dependence on China could be dangerous if political, economic, or other problems disruptproduction and the company’s ability to supply global markets. Some observers believe that itmight be better if the manufacturing facilities of companies were more geographically diverse as2 of 3 04/12/18a hedge against problems in China. These fears have taken on added importance recently as laborcosts have accelerated in China due to labor shortages. According to estimates, labor costs havebeen growing by 20 percent per year since the 2000s. On the other hand, there is a silver lining tothis cloud: Chinese consumption of many of the products that Philips makes there is now risingrapidly.

a) What are the benefits to Philips of shifting so much of its global production to China?

b) What are the risks associated with a heavy concentration of manufacturing assets in China?

c) What strategies might Philips adopt to maximize the benefits and mitigate the risks associated with moving so much product?