Philips : what use of the euro from 1999-2002?
Back in 1994, Philips Electronics concluded that the decision to start internal preparations for the changeover to the single currency is a function of the complexity of an organisation. When a company should start with this process, largely depends on the structure of the company, whether the business operations are domestic or international and on the number of stakeholders involved.
Philips Electronics is operating in more than 60 countries worldwide, with about 265000 employees, a large number of customers and suppliers and, last but not least, a large number of shareholders. We therefore decided in an early stage to at least investigate what the implications of the introduction of a single currency could be.
In 1995 we established our Philips Single European Currency Platform Group, attended by a selected number of business representatives. In 1996 our European country organisations established a national sub-working group in each European country and we formed separate working groups for Finance and Accounting. In 1997 we transformed the Platform into a large Steering Committee (about 30 senior managers), empowered to take corporate decisions. A full time Euro Project Director was appointed, who reports directly to the Vice-Chairman of the company. And finally, we established sub-working groups in our product divisions. At the moment we are co-ordinating roughly 32 different working groups, involving more than 200 people. Most of them are working part time on the euro, some of them are devoting themselves full time to this subject.
All these people are now dealing with the same question you’ve asked me to talk about today: "What use of the euro from 1999-2002?" I will try to answer this question by taking you through the current status of our internal preparations and our timetable for the next 18 months.
STATUS EURO PREPARATIONS PHILIPS (MAY 1997)
We have decided to publish our quarterly figures and our annual report in euros as from 1st of January 1999. As opposed to the registration of euros, the reporting of company results in euros at a consolidated level is relatively easy. Our internal reporting system is flexible enough to convert the Dutch guilders into euros, despite the large number of reporting units in our company.
With respect to the issuance of debt, you need to know that we always aim for a natural hedge between the currencies required for investment purposes and the currencies in which we borrow long term funds. In other words, we borrow for instance dollars for our American investments and French francs for our expansions in France. Regarding our future investments in Europe we have decided that as from 1.1.99 we will issue bonds in euros or replace maturing debt in euros, assuming that we by then still need to tap the capital markets. You may appreciate that this is a principle statement, rather than a commitment.
Regarding the listing of our stock prices we are just being approached by the Amsterdam Exchanges with the question whether we are expecting any problems in converting our stock price on the 4th of January 1999 from guilders into euros. We don’t expect any problems and we are very much in favour of this conversion, given the fact that we are striving for total conversion in the earliest possible stage of the transition period.
I use the word striving in this respect, because no prohibition/no compulsion during the three year period will force us to build in maximum flexibility in the relationship with our customers and suppliers. For this reason, but also because we don’t know yet which countries will participate, we still have a large number of outstanding issues to address.
To identify commercial opportunities.
We have asked our product divisions to make a distinction between the transition period and thereafter. For instance our subsidiary company Origin has a euro service line, to assist companies in developing their changeover plans and to establish a project management structure for the implementation. And they are preparing themselves for a huge demand for professional IT support in the years to come.
Other Philips businesses are thinking about commercial opportunities in a bigger international single market, compared with their presence in a large number of smaller domestic markets.
To adapt our computer systems and administration
Philips has thousands and thousands of computer systems and we discovered that only a small percentage is not a multi-currency system. Although it is relatively easy to add an additional currency, it will still be very labour intensive to go through the applications almost line by line. In this respect it is a burden not to know which countries, or better …currencies, will be involved. We are simply forced to wait until at least this time next year before we can make any final changes. Bearing in mind that our internal budget process for 1999 starts in the summer of 1998, this will leave us with a small window to start up our adaptations. Combined with the millennium problem that we are being confronted with, I am not surprised that more and more companies are reserving computer time with software companies.
Regarding our administration, it is expected that we will convert our general ledger and our sub-ledgers into euros. Intercompany transactions will be done in euros and, because our consolidated reports are published in euros, our local reporting units are requested to transmit data in euros as well. You will understand that this will also have an impact on our finance and accounting units outside Europe.
In theory, it is our intention to switch our salary administrations in Europe from national currencies to euros. Regarding salary specifications in euros we have to respect the differences in practice between European countries and we don’t think the majority of our employees would appreciate this, at least not initially. But for education purposes we may additionally print the net salary amount in euros. We will be able to transfer the total amount in euros, as and when the banks are ready to convert the individual payments in either euros or national currencies.
To address the invoicing problems
This is one of the biggest challenges for early movers, because it affects a large number of customers and suppliers. I would like to make a distinction between the administrative implications and the marketing issues associated with invoicing.
We concluded that dual currency invoicing should be avoided. Because of the rounding rules it is difficult to get the totals square and conversion from a national currency into euros and back to the national currency is causing a problem. In this respect I would like to mention that the proposal to convert from one national currency into another via the euro, to be rounded up or down to not less than three decimals, is not a very helpful proposal. We are facing reconciliation problems if parties are able to choose the number of decimals and I therefore would like to suggest that, like the 6 significant figures were agreed for the fixed conversion rates, also for the calculation of cross rates the degrees of freedom are being removed.
The important issue here for Philips is that, depending on the differences in infrastructure our invoicing system needs to be flexible. The banks should act as the converter between companies and their customers, but that still doesn’t solve our problem, how to find out what kind of invoice is being requested. We will most likely produce two types of invoices: either in euros or in national currencies, but with the total amount converted into euros.
To investigate the dual pricing problem and to investigate the price transparency issue
Most people think that these issues are becoming important in 2002, but we believe that we have to sort them out before 1999. Although the majority of the consumers is expected to changeover in 2002, an increasing number of consumers will use electronic banking, debit cards, credit cards, electronic wallets and maybe Internet, who knows? As a manufacturer… but the same applies to the average shop owner… we believe this trend cannot be ignored. That’s why we have asked our product divisions to think about these issues well before 1999.
There is one particular point I would like to make in this respect. During the transition period we expect that in some countries the end consumer may have better opportunities to use euro payment cards than in other countries. The banks in Europe seem to be divided on how and when cash dispensers will be converted, for obvious reasons. In our opinion it should be technically easy to convert the cash dispensers in such a way that the customer is able to use a bank card connected to a euro account to draw national bank notes from the dispenser. This would not only bring educational benefits but, in our opinion, it would also smoothen the transition process.
To define a changeover scenario per business
The corporate governance model of our company has given our product divisions full accountability and responsibility for their business results. That means that our country organisations are in principle providing the product divisions with location based services. For the co-ordination of the introduction of the euro at corporate level, but also for our country organisations it is important that we are aware of the business challenges and constraints. The product divisions, through their sub-working groups, are expected to present their changeover scenarios to the Steering Committee on the 2nd of July. We are then able to adopt the following timetable:
THE PHILIPS TIMETABLE
Between now and the end of June we will finalize the establishment of the remaining sub-working groups. The working groups in our product divisions will then concentrate their efforts on Marketing, IT and administrative implications. The country platforms will deal with cash management and banking, human resources, fiscal and legal requirements and with the statutory issues. The functional working teams are setting the corporate policies and guidelines. We will also establish cross functional sub-working groups for the three major outstanding issues: invoicing, dual pricing and price transparency. We prefer to look at these issues from a corporate point of view, rather than from an individual business or country point of view.
The changeover scenario, due on the 2nd of July, should at least cover a timetable per business unit for the adaptation of computer and administrative systems, it should highlight the business opportunities and it should provide a communication plan for the interface with our customers and suppliers.
Between July and March next year we will deal with the outstanding issues I already mentioned.
We expect internal conversion rates to be set around this time next year. This is not only technically important, because the sooner we know these rates the better, but we also believe in the psychological consequences of this. We believe that the majority of our customers and suppliers will become interested in the euro as soon as the conversion rates are fixed and that, as a company, we will be confronted with a large number of questions. The same applies to our own employees. However we also believe, and we have already some disappointing experience with this, that involving the majority of our staff in a too early stage could be counterproductive. We therefore decided to make a start with the training of our trainers as soon as the member states are elected and to educate our staff in the second half of next year.
I would like to conclude with the statement that we owe it to our stakeholders that they are properly informed about the transition, well before the changeover date. For Philips that date is the 1st of January 1999 and we have to take into account that involvement also means involvement of our stakeholders outside Europe, because they are easily forgotten in this process and they are equally important to us.