Philips Continues to Expand in China through the Acquisition of Povos

Koninklijke Philips Electronics has announced its intention to acquire Povos, a Chinese manufacturer of consumer appliances, and one of the leaders in small cooking appliances in China. The transaction is still subject to several closing conditions, and is not expected to close until Q4 2011.

In line with Philips growth strategy

The development of Asia Pacific has been central to Philips’s leadership of the global consumer appliances market. Regional sales in 2010 accounted for 38% of the company’s global volume sales, having surpassed Western Europe as the company’s main market in 2008. Philips has stated that expansion into emerging markets is one of its key strategies, particularly into emerging markets in Asia Pacific, and this deal, which comes hot on the heels of the Preethi acquisition in India earlier this year, is living proof of this. In fact, in early 2011, Philips moved its consumer appliances headquarters to Shanghai in an attempt to become more engrained in one of the fastest growing markets in the world.

Philips Geographic Presence

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What Philips will gain from the deal

Povos, which is also headquartered in Shanghai, employs close to 1,800 people and will become part of Philips’ Domestic Appliances business within Consumer Lifestyle division once the deal is completed. Povos posted relatively strong growth in its domestic market, with volume sales growing at a 13% CAGR during 2005-2010. Philips is hoping to take advantage of its developing, design and manufacturing capabilities, while honeying these with its strong brand equity and distribution network. Philips already holds third place in the ranking in small appliances in China, with a 6% volume share in 2010. The Povos acquisition will grant it an additional 2% volume share, enough to move it into second place ahead of the domestic company Joyoung.

Top 15 Small Appliances Manufacturers in China 2010

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Philips already owns a manufacturing site in China; however, the acquisition will grant the company access to Povos’ manufacturing site, with a capacity to produce over 20 million units per year, thus allowing the expansion of Philips’ product portfolio. Philips already holds strong positioning in food preparation appliances, irons, personal care appliances, small kitchen appliances (non-cooking) and vacuum cleaners. Povos ranks third in small cooking appliances, a category which Philips is not present in, and is particularly strong in rice cookers and freestanding hobs, commanding 6% and 7% volume shares respectively in 2010. Small cooking appliances expects to see one of the least dynamic growth rates in small appliances in the medium term in China, up by 4% in constant value and 5% in volume terms during 2010-2015; however, it is the second largest category in value terms in small appliances after air treatment products, worth RMB14.3 billion in 2010 (US$2.0 billion).

Philips’ strong commitment to emerging markets, particularly China, is a wise move, especially in light of the bleak results it recently announced for Q2 2011, which the company blamed on a poor performance in Western Europe. More importantly, the Povos acquisition will provide Philips with local insights on the competitive landscape in the Chinese market, a very valuable asset when trying to succeed in the challenging competitive environment that this market poses.