Philips Electronics NV is expected finally to throw in the towel on its mobile phone business in the coming weeks, after almost four years of dashed hopes and sizeable losses.
If it does so, it would be the first European company in the fragile mobile market to close a handset unit but it may not be the last.
Philips Consumer Communications (PCC), born as a 60:40 joint venture with Lucent Technologies in 1997, has drained Philips' funds for most of its existence -- eating up about 850 million euros.
Only in one year, the mobile boom of 2000, did it report an operating profit -- a modest one million euros -- as capacity constraints left it far short of its sales target. This year, PCC is back in the red.
Philips, Europe's largest maker of consumer electronics and lighting and number three in semiconductors under new President Gerard Kleisterlee, has indicated that its mobile patience is running out.
Philips, which will make an announcement by the end of June, had three options: a joint venture, a sale or a closure.
Speculation about a pull-out began earlier this year when Kleisterlee said selling the unit was an option after limited success at finding a joint venture partner.
Philips had talked to LG Electronics, with whom it already has two separate partnerships, about joining their handset divisions, but the discussions failed.
Analysts sense that appeals to other groups might have fallen on deaf ears and that closing PCC is the likely option.Most second tier players are more willing to get out of the business, than increase their exposure, said one London-based analyst.
Closure would cost Philips around 300-350 million euros ($259-302 million), analysts say, in addition to the 350 million euros already announced to cover up to 7,000 job cuts at the Philips group.
Moreover, given that the HQ and European production facility are in Le Mans, Philips is likely to face strong opposition to closure from French unions and politicians -- as UK retailer Marks & Spencer found when announcing Europe-wide cuts.
It could take quite a long time and it's certainly not good for the image, said Marisa Baldo, analyst at Societe Generale.
POOR START, LOSSES RETURN
PCC was launched with much fanfare in October 1997 as a $2.5 billion joint venture, with its eyes on a top three position in the world mobile phone market by 2000 and an ambition to break even by late 1998.
Instead, PCC racked up losses of about a billion guilders ($391 million) in 1998 and, within a year of its start, Philips had cut its ties with Lucent and scaled down its ambitions to just the GSM (Global System for Mobile Communications) market.
In hindsight, they lost the battle with the Lucent venture. It looked impressive with its global reach and range of technology standards. In fact, Philips lost a year, said analyst Steven Vrolijk of ING Barings.
Furthermore, the market has toughened in the last year. Industry forecasts for 2001 worldwide handset sales have fallen to 400-450 million units from expectations of over 600 million.
Competition has intensified as market growth has slowed, while costs for the next generation of handsets are high.
For Philips, with less than 10 percent of the GSM market, continuing alone would simply be uneconomic, analysts said.
Some also said their production facilities are old-fashioned, while models since the Genie have not had the state-of-the-art feel that fashion-conscious consumers demand.
PCC fell back into the red in the fourth quarter last year and will be loss-making in the first six months of 2001.
Cor Boonstra, Philips president until the end of April, oversaw the start of PCC and has insisted mobile technology was essential for a company providing chips and components to the industry. Some analysts said economics has taken second place.
A lot of it comes down to pride... and that's not just with Philips, said one analyst who declined to be named.
New man Kleisterlee, who took charge at the start of May, may have fewer qualms wielding the axe.
JOINT VENTURE HOPEFULS TRAIL NOKIA
A lingering hope was that Philips had sealed a joint venture deal -- having reassessed terms with LG or found another party.
Navdeep Sheera, analyst at Schroder Salomon Smith Barney said the delay in announcing PCC's fate could mean that Philips was about to pull a rabbit out of a seemingly empty hat.
If they were just going to close it down, you would think they could have announced it last
month... Why they haven't done so up to now suggests difficulties from legal regulations or that they have something up their sleeve, he said.
A joint venture would be a winning start for Kleisterlee, but memories of the Lucent experience may be tough to shift.For many, the joint venture route is becoming a well-trodden path as the slowdown bites. World leader Nokia is almost the only company still capable of ringing up profits.
For European producers, the path leads to Asia, which is forecast to overtake Europe as the biggest handset market in unit sales this year.
Ericsson and Japanese electronics group Sony Corp announced plans last month to pool their mobile phone talents. Ericsson, the third largest handset supplier, had already outsourced all handset production to Singapore-based Flextronics.
Germany's Siemens signed an agreement last year with Toshiba Corp to develop nextgeneration sets. There have been rumours that Japan's world number 3, Mitsubishi Electric would link with number 2, Motorola.
Alcatel said in April it was not necessarily 100 percent committed to the handset market. Chairman Serg Tchuruk said he want edAlcatel to be an active player in industry consolidation.
For Philips, however, the path may have reached a dead end.