Electronics Giants Jump Into Health Care

Samsung Electronics Co., 005930.SE +2.70%the South Korean company that has dominated many Western rivals in the market for consumer gadgets, now has its eyes on medical equipment.
It is an area that General Electric Co., GE +0.13%Philips Electronics NV, PHIA.AE +2.51%and Siemens AG SIE.XE +0.32%—three of the U.S. and Europe's biggest industrial groups—are counting on for much of their growth and profit.

While the Asian companies will likely take years to build up big medical-equipment businesses of their own, not least because the barriers to entry in the tightly regulated health-care sector are higher than in retail markets, the history of consumer electronics is one of collapsing margins and declining returns for the Asian upstarts' established rivals in Europe and North America.

Philips on Tuesday said it is throwing in the towel on its consumer-electronics business, selling the remnants of its once-core activity to Japanese gadget-maker Funai Electric Co. 6839.OK -1.41%

Meanwhile, Samsung, the electronics powerhouse behind the Galaxy line of smartphones, said Tuesday it has acquired NeuroLogica, a Danvers, Mass.-based developer of medical equipment such as computed tomography, or CT scanners. Samsung didn't disclose the financial terms of the deal.

The move by the South Korean company is just the latest healthcare-related acquisition, following the 2011 purchase of Nexus, a San Diego, Calif.-based provider of cardiac-testing systems, and the 2010 acquisition of Medison Co., a South Korean maker of ultrasound monitors.

Japan's Sony Corp. 6758.TO -1.56%and Canon Inc. 7751.TO -1.20%also have made acquisitions in the sector, betting on rich returns from helping serve the health-care needs of Asia's aging population as they move away from consumer electronics. The number of elderly persons in the region is expected to triple to more than 1.2 billion by 2050, according to the United Nations Economic and Social Commission for Asia and the Pacific.

While population aging poses major challenges for governments and societies around the world, it is also creating new opportunities for electronics makers to find broader applications for their technologies.

"There is a growing need for a faster and more accurate diagnostic environment due to fast-aging population around the world," a Samsung spokesman said.

Philips and Siemens, having abandoned their struggle to compete with Asian companies in consumer electronics, are counting on the same trends for their well-established medical-equipment businesses. General Electric Co. is also one of the world's biggest medical suppliers.

The value of Philips's sales of health-care equipment to emerging markets, including China, rose 19% in the three months to Dec. 31, contributing nearly a quarter of Philips's health-care revenue for the whole year. Healthcare contributed around 40% of Philips's revenue of €24.79 billion ($33.35 billion) last year.

"I think we are better positioned than our competitors in the health-care market because we think in solutions rather than products," said Philips CEO Frans van Houten, commenting on Samsung's NeuroLogica deal and the increasing competition in health care.

Still, while the health-care market could provide electronics makers with a more predictable source of growth and profitability, it will take many years for medical-technology businesses to make meaningful contributions to the Asian companies' growth, said Nicolas Baratte, CLSA's head of Asia Pacific technology research. "This is a very long-term strategy."

Samsung's announcement of its latest medical-business acquisition came days after the company posted a 76% rise in its fourth-quarter profit to a record high of 7.04 trillion won, thanks to strong sales of smartphones, of which it is the world's largest vendor, and higher margins in its chip business.

The companies' push into the sector has come as Philips has struggled to generate sufficiently large profits from consumer electronics despite steadily reducing its exposure over the years.

The Dutch company isn't the only developed-world consumer-goods group that has taken a beating. With the notable exception of Apple Inc., AAPL +1.10%companies such as Finland's Nokia Corp., NOK1V.HE +1.61%Canada's Research In Motion RIM.T -7.61%and Sony have struggled to match the investment in research and development and marketing by Samsung, whose integrated electronics business stretches from smartphones to televisions, appliances and semiconductor chips.

"Our consumer lifestyle business was margin dilutive to the group, so it was time to decide to move away from consumer electronics," said Philips's Van Houten."Since we have online entertainment, people do not buy Blu-ray and DVD players anymore."

The move brings to an end more than 80 years of often innovative but increasingly lackluster investment in consumer electronics by the Dutch company invented the audio cassette in 1963, made the first videocassette recorder in 1972, and launched the compact disc in 1983. Philips struggled to make the most of its inventions, most notoriously by losing a battle for the dominant videotape standard to Japan's VHS in the 1970s and 1980s before failing to anticipate today's disc-free, digital-entertainment era dominated by downloaded and streamed entertainment via the Internet.

Mr. Van Houten, who took the helm at Philips almost two years ago, has focused his efforts on streamlining the group. As well a hospital scanners and light-emitting diode (LED) lighting and control systems such as the one that lights up the Empire State Building in New York, Philips makes consumer products such as shavers and coffee machines.

Philips said its fourth-quarter net loss was €358 million compared with a €162 million loss in the fourth quarter of 2011, weighed down by a restructuring charge and a fine for price fixing. The company warned that it expects a slow start to its sales this year.

Philips sold the audio, video, multimedia and accessories activities to Funai for the almost token sum of €150 million in cash and a brand-license fee.


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