"Das ist nicht fantastisch!" exclaimed Philips (NYSE: PHG), and walked away from the U.S. market in a huff.
(Disclosure: Yes, I know Philips is actually Dutch, not German. But I've been waiting for years to use that quote, and most of the Dutch I know speak German just fine, thank you very much.)
OK, so Philips isn't walking way from the whole U.S. market. Just the margin-crunching market for LCD televisions. And that's where today's story begins.
On Tuesday, the Dutch electronics giant caved to the inevitable, announcing that it will no longer make and sell LCD television sets for the U.S. market. Globally, Philips remains in the LCD game. But here in the birthplace of New Amsterdam, Philips will license its $1.6 billion TV business to Japanese cut-rate manufacturer Funai, effective Sept. 1, for at least five years. This means, for the foreseeable future, that the "Philips" TVs lining the aisles at your local Sears (Nasdaq: SHLD), Best Buy (NYSE: BBY), and Wal-Mart (NYSE: WMT) will not be made by Philips any more than the Emerson sets are made by Emerson Electric (NYSE: EMR). Instead, Funai will make them both, along with Sylvania, Symphonic, and Magnavox.
Analogous to Syntax-Brillian's (Nasdaq: BRLC) decision last year to give up making TVs for the Chinese market, and let South China House of Technology handle the manufacturing, Philips characterized its move as essentially a margin decision. According to The New York Times, Philips has been caught trying to straddle a market divided between prestige brands like Sony (NYSE: SNE) and economy brands like Vizio. The result has been profit margins that Philips describes as "razor-thin."
And so, losing high-margin sales to Sony, and unwilling or unable to compete with Vizio on price, Philips is taking the "discretion is the better part of valor" route. It's outsourcing its margin squeeze to Funai, and accepting steady, dependable licensing revenue in lieu of the headache of trying to make the numbers work in this market.
Foolish takeaway
I liked it when Syntax took the slow boat to profits in China last year. I like it that Philips is making the same move in the U.S. today. With a recession clearly looming in the U.S., Philips was facing little more than more of the same problems here for the next few years. Better to take the licensing money and run, not walk, away from the U.S. LCD market.
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