I wrote this story in a loft that used to be a Phillips factory. The iconic light tower, Lichttoren, was used to test lightbulbs while the factory below it was one of the largest lightbulb factories in the world. Philips Lighting grew to a global player in lightbulbs and its very heart was here in an extensive complex of buildings built between 1909 and 1921. Next door is the Witte Dame which also was a factory and now houses the Design Academy and the library. Across the street from that is the former headquarters of Philips Netherlands and next to that is the little factory where it all began, a museum now. I’m in what used to be called the forbidden city, a walled-off area where all of Philips’s activities took place.
The company made its own plastics, printed its own packaging, made the packaging, made paper, made its own injection molds, made its own wiring, made its own transistors and chips, made its own machines to make chips, made microscopes and inspection equipment—everything. It built its own buildings, created its own electricity, glass, and industrial gasses. The approach was called “from sand to customer.” And it was literally this with one single city of factories turning bulk raw materials into finished consumer goods. Philips was a completely, totally vertically integrated firm.
Eindhoven grew up around it to serve it. To my left is the PSV stadium, where the Philips Sport Vereniging was started to keep employees healthy. Next to it, we can see the typical workers’ houses that were small and narrow but with a large garden so that a pig could be put in it. Further still are larger homes for engineers, still larger ones for the managers and the owning family’s estate. There were parks and fruit and vegetable gardens where you could come pick fruit. A chain of convenience stores for staff became the national Etos chain later on. There was a musical theater, a medical center, and activities for children.
Son Gerard was instrumental in undertaking research that lead to the industrialization of lightbulbs and consumer electronics later on. Anton later joined the family firm in sales and it was his efforts in this area that led to the expansion of the firm internationally. Anton’s securing of an order of 50,000 lightbulbs for the Russian Tsar for the lighting of the Winter Palace was such a key moment. This helped popularize lighting and, until just before this, the annual production of the firm had been around 40,000 bulbs.
The sand-to-customer approach was undertaken for two very different reasons: because Philips could and because it had to. The world in the 1900s was a very different one than the one we have today. National borders were “harder” and it was more costly and cumbersome to import and export goods. Infrastructure in roads and ports was poorer also, and international networks of efficient supply had yet to be formed. A lot of things from rail to trucks were less reliable and more expensive, whereas the Wright brother’s first flight, a paltry 37 meters, was in December of 1903. Administratively, transport, imports, and communication were difficult. Letters and visits were the norm with the first transatlantic telephone call being made only in 1926.
We live in an instantaneous world and it is perhaps difficult for us to realize just how trickle-slow the world used to be. Imagine the difficulty of just ordering new supplies. Imagine how complex it would be to make sure everything was sent onward to the right destinations. At the same time, international crises, disagreements between countries, and shifting alliances spread political risk, making cross-country imports difficult to guarantee.
During the first world war, the Netherlands was neutral, but the war did cause a shortage of argon that came close to crippling the company. At the same time, boycotts of German goods by allied nations fueled demand for Philips products effectively barring its biggest competitors from many global markets. The firm’s clout also gave it unique access to capital that let it buy machine builders, gas companies and invest so that it could be integrated. Whereas products like beer had national production, there were comparatively few national products let alone international ones. The national supermarkets, retailers, and brands were nascent.
In such a world, localizing all manufacturing in one particular location makes sense. Within one country, shorter supply lines mean less political risk and less issues with getting things to where they need to be. Centralizing manufacturing in one city also reduces the transport costs present in inputs, as well. Proximate factories of chains of goods, therefore, are cost-efficient but also reduce risk. The infrastructure needed for a lightbulb factory that made millions of bulbs was also nonexistent. The firm simply couldn’t go to a place where there was sufficient industrial power. There weren’t any companies that could build factories for Phillips or that had the capacity to make a lot of the things it needed.
There were simply no suppliers that could make a million of anything. You couldn’t get a million boxes, buy injection molds, buy so many tonnes of the right glass, buy so much preformed tungsten wire. There simply weren’t industrial printing machines to make a million prints on a million boxes or the right machines to make so much cardboard. They were, here, the only player playing that game. Philips made millions of things and no one else here did. Outsourcing was simply not an option for the firm.
At the same time, once it built a physics lab for want of one, it may as well also conduct research into X-rays. If you’re trying to sell records, then a record label makes sense so that you can get the content for your records. These records, then, act as the business development engine for your record player sales. And, once you sell record players, then clearly they will act as vehicles for the products of your record label and record factories. This brought in far higher profits than separately selling each device. In tandem investments in one area would catalyze products further downstream. Do you want to sell radios? Start a radio station and a record label.
The demand for its initial products, light in the dark, was so blindingly obvious and strong that everything after would have seemed difficult by comparison to sell. So, developing your own ecosystem to create demand for and business around consumer electronics and all the infrastructure needed for this was important and cost-effective. On the one hand, you needed to build your own factory because no one else could do it and you needed to power it yourself and you may as well make the plastic nearby yourself while you’re at it.
The marginal cost of then, once you had all of this infrastructure, made it so that the company could easily extend its infrastructure to new products. In other words, Philips 100 years ago was just like Amazon is today. Repurposing infrastructure, extending products, the flywheel—it’s all there. Philips was an idea factory that could scale things to a global level at a time when precious few others could do this. What of Philips now? They’ve sold it all. The factories are now all lofts. The firm divested itself from all of its businesses and services and now focuses on a small core of business lines. Lighting is even a separate firm, NXP has been sold and ASML. Production is, in some cases outsourced, and the verticality is almost absent.
By playing in its own league as a completely vertically integrated behemoth, Philips could innovate in many products from shavers to X-ray machines, modems, and cassettes. It went from being a firm trying to survive in a hostile world to a world within one company. Its scale and ability to let ideas scale meant that it was uniquely positioned to grow as transport infrastructure and globalization spread.
But, once the tentacles of industrialization and growth had expanded worldwide, others could compete with many of the products Philips made. At the same time, its core ability to make world-changing idea systems evaporated. For example, through helping to create commercial radio (antennas, radios, and stations), the label system, CDs and cassettes Philips helped shape how the music industry still is organized. Defining the rights of a song as belonging to someone temporarily and creating both universal paths to free music (radio, tv) and “your own” on-demand music that you bought is still relevant in an age of Spotify and YouTube.
The forbidden city in Eindhoven was able to shape the world. This world-shaping ability was lost when it became a more focused and outsourced firm. Now, the vertical age has given way to a truly global competition of outsourced firms. But the future may look very different indeed. And, surprisingly, this future is also from “sand-to-customer” and some of the people pioneering it both live and work in what used to be the forbidden city. Read more in the next installment of From Sand to Customer.
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