“The current year is going to be tough for companies like us…” - Views on News from Equitymaster

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  • May 11, 2001 - “The current year is going to be tough for companies like us…”

“The current year is going to be tough for companies like us…”

May 11, 2001

Mr. Rajeev Karwal is credited for turning around the fortunes of two mega corporates Onida and LG. He is armed with a diploma in business management, a course in product management and strategy, an advanced course in market research and much more from prestigious institutes like IMT, IIM, XLRI and ASCI. Currently as the Senior Vice President, Consumer Electronics, Philips India, Rajeev is focusing on turning around Philips by making it a nimble, market savvy player. EQM: How do you see the consumer durable industry moving from here in terms of volumes?

Mr. Karwal: Basically, if you look at the consumer electronic industry, in the last one-year, the black and white television sales have declined by 22%-24%. The colour television industry has not grown last year and in fact, for the first quarter, colour television sales have actually declined by 20-25% although the ORG figures do not reflect it. That is possibly because the penetration in the rural markets for these products is high, but ORG rural dealer sample is not representative. Despite this anomaly ORG also has reported a decline in of about 0.5%-0.6% over the last year for March 2001.

If you look at the audio segment, radio sales have declined hugely, mono-radio records sales have also fallen. I think this is going to be a tough year. We have drought looming large in atleast 8 states. With 50 to 70% of the demand dependent on rural segment, I don’t think it is going to be an easy year. If the monsoons turn out to be good, the benefit will accrue in the coming quarters. Lets keep our fingers crossed. We may see a spurt in sales in the festive season from September onwards.

EQM: Do you see any significant structural change in the consumer profile in the Indian durables market, which would drive growth in the coming years?

Mr. Karwal : No, I don’t think so. Black and white TVs are a smaller product…

EQM:   But we still sell about 3 m B&W TVs every year…

Mr. Karwal: Yes, we sell about 3.1 m to 3.2 m sets every year but the current speed is about 240,000 to 250,000 sets per month and the overall sales is around 2.4 m sets currently for the current year. Going forward, the television is much dependent upon the availability of electricity in the rural markets and poverty eradication. There are incidences where black and white TVs were used with car batteries to spurt demand.

Unless rural electrification programmes are implemented at a faster pace, I don’t think there is any trigger for B&W TVs and now that the replacement demand is almost about 20% of the overall CTV demand, the exchange sets that come out also go into the rural sector for around Rs 3,500 to Rs 4,000. These also affect the B&W market. As a result, 20 inch B&W market is almost finished. Even 14 inch market is also under pressure due to these exchange sets and if you say that the CTV market grows by about 20% then 20% (200k units) of these sets are CTVs that sell at B&W TV prices in the rural markets. This too is affecting our B&W TV sales.

EQM: Do you see any changes in the purchasing pattern of the consumers in Audio?

Mr. Karwal : Yes, I think in the audio segment, people are shifting from the non-CD based to the CD based systems. Then in the radio category, consumers are shifting from AM to FM. I think FM will mainly drive the car audio segment at a faster rate rather than the stand-alone radio sets.

EQM: Which segment in the CTVs is likely to contribute higher to your sales? Is it 21 inch or 29-inch, which is the premium category?

Mr. Karwal : In the CTV segment, as per the industry, it is the 14, 20 and 21 inch TVs, which constitute almost 90% of the industry and for Philips it is almost 75%. Out of this, 21 inch’s contribution is much higher. We would be improving our participation in 14 and 20-inch categories also in the coming years.

EQM: You have increased prices in some of the premium segment CTVs and brought in new schemes in the 21 to 25 inch category. Have these initiatives been well accepted by the consumers? How have new product introductions performed?

Mr. Karwal: Yes, the new product introductions have performed well. Some of our new models in the television segment are back in the top five brand sales recently. But I think we have a long way to go because currently we have only 5.4% market share in the TV segment. The industry is also going to be very tough and we do not want to gain market share at any cost. The happy thing is that, especially in the audio segment, we have gained leadership in all the segments. Last month, for example, we were also the number one manufacturers of Audio VCD systems, where Aiwa had beaten us long time ago. As per ORG, last month, Philips, Aiwa and Sony were almost equal at 27% share each. We have come from 3% in October. We are also looking at growing into new areas like CD portables. We have an astounding 85% market share in this segment, which is quite heartening.

EQM:   There is a general perception that in all the segments, Philips product prices are higher vis-à-vis competitors. What is your view on that?

Mr. Karwal: I don’t think so and it is a wrong perception to have.

EQM:  Then, what is the reason for the decline in market share over the last three years…

Mr. Karwal :   Where is the decline in the market share? For example, in the audio etc, we have maintained a very good market share and even now we have close to 32% market share in the audio industry. In which other industry an industry leader has a 32% market share?

EQM:   But you have lost market share in the CTVs….

Mr. Karwal :  Coming to the CTV segment, BPL has only 17% market share. They have come down from 22% to 17%. If you look at the colour TV, we have lost about 1%-1.5% market share last year and that is basically because we were doing some mix restructuring like taking out some models and introducing new models, to stem the bleeding. I am sure that by the end of this year we will start looking up on the market shares also. It is deliberate that we are not pressing the growth pedal very fast. See the industry is tough and in this point of time if you really show very big ambitions, given the fact that money market is also tight and droughts etc, the cost of gaining market share is very very high. We want growth, which is sustainable & profitable.

EQM:   How you see the concept of Internet televisions faring?

Mr. Karwal: Internet televisions, unless and until they are java compatible, they cannot sustain. Whatever be the outward claims of various companies, Internet TVs are not selling because they are not java compatible. The customer does not want television to check e-mails only. E-mail you can do very well in a PC. He wants to surf the net, he want to chat and he wants to do that from this bed rather than sitting in a table. Internet TVs haven’t taken off all that well interactive TV has. It is practically some time away for India.

EQM:  In light of slow down in the durable sales, are you planning to reduce your adspend, which currently is around 3.2% of sales in FY00?

Mr. Karwal:  No, last year also it was 4.5% of sales for the consumer electronics and this year also it will be around the same level. We think that this is a reasonable amount to spend because awareness is not an issue for us. Awareness is for Philips has always been high. Right from childhood everybody knows the Philips brand. It is only the right investments that we are trying to make in terms of impressing the potential influencers ...Opinion Leaders & the Youth.

EQM:   How do you see the industry growing post WTO regime with import restriction moving out for most of the segments? Does Philips India have any plans to import and sell in the domestic markets?

Mr. Karwal :   India basically is one of the biggest markets for 14, 20 & 21 inch televisions. I don’t think the efficiencies of production for these categories, which we or any other company say, BPL, Videocon have in India for these models any body else can match. It is the taxes that actually make the products much more expensive than a Chinese product.

But freeing of the quantitative restrictions will help in terms of dealing in products at the high end where you can experiment in the market much more and develop the market much better rather than investing in the tools of these products (which have hardly any market size) and then making losses for selling them at very high costs. It is better to bring those products as finished goods, develop the market and then invest in the right kind of product. The consumer will be the gainer ultimately. And because there will be grey interest in imports, even the official imports will not be priced at a very high premium. If they price at a high premium, the grey market will affect the demand.

EQM:   Who do you think is your strongest domestic as well as the international competitor?

Mr. Karwal :   I think all major players are competitors and you can’t pick a specific player.

EQM:  What are your strategies to tackle competition in the coming years? Are you planning to lower prices to boost sales?

Mr. Karwal :  In consumer electronics, every company has to be prepared for price erosion of 3%-4% every year. That is the industry norm. New technology comes in and the old ones lose their competitiveness. Philips recognises that and we are also planning that our cost erosion should always be higher than price erosion that happens in the market.

EQM:   Philips currently has interests in CTVs, audio, home appliances, semiconductors, lamps and recently in the cellular segment? Does Philips have plans to exit any of these business or entering into new segments?

Mr. Karwal :   I cannot comment on products outside the Consumer Electronics. In consumer electronics one must say that, if the B&W industry sales declines to less than 2 m in the next one to two years, then there is no point for us to concentrate on this segment. May be in two years time, we may not be dealing in B&W TVs at all. In terms of new products, monitors and computer peripherals are the new areas that are opening up and are growing at a very fast rate. May be we will start getting active on that. A new product comes and the old one goes out. Audio remains. CTV remains because it is the highest contributor to the industry (almost 51%). We will be getting more and more serious in the PCP segment also.

EQM:  Your favorite books and personalities, which have influenced you the most?

Mr. Karwal :   I think the books, which have influenced me the maximum are "I am OK, You are OK" by Thomas Harris, "Jonathan Livingstone Seagull"by Richard Bach, "Games People Play" by Eric Berne and one recent book called "Who moved my Cheese". These are some of the good books I have read. I like Jack Welsh on the personalities front.


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