Why Sony is lagging behind rivals

by Megumi Iizuka, Kyodo

Posted at May 25 2014 09:03 AM | Updated as of May 26 2014 05:04 PM

Sony Corp's President and Chief Executive Officer Kazuo Hirai speaks during its corporate strategy meeting in Tokyo. Photo by Yuya Shino, Reuters

TOKYO - Japanese electronics giant Sony Corp. has been lagging behind its rivals with huge losses as it struggles to restructure its money-losing electronics business, which has faced fierce international competition.

Analysts warn the prospects for the current business year remain dim as its sales forecast for electronics appliances seems too optimistic, raising doubt about its business plans.

The Tokyo-based manufacturer of the PlayStation 4 home gaming console and Bravia TVs, reported last week a group net loss of 128.37 billion yen in fiscal 2013 ended in March, mainly due to the huge costs to withdraw from its flagging Vaio personal computer business.

Its performance also deteriorated due to an impairment loss for its overseas disc manufacturing business as demand for blu-ray discs and DVDs contracted quicker than it had anticipated amid an increase in webcast contents.

For the current year through March 2015, it forecasts it will remain in the red for the second consecutive year, the sixth annual loss in seven years, raising concern among investors and leading its shares to lose more than 10 percent in five trading days following the announcement.

While Sony has had poor earnings, performances for peers Panasonic Corp. and Sharp Corp. are recovering due to the effects of their restructuring efforts and the yen's depreciation versus other major currencies.

Both Panasonic and Sharp returned to the black for the first time in three years in the year ended in March with a consolidated net profit of 120.44 billion yen and 11.56 billion yen respectively. They expect to post a group net profit of 140 billion yen and 30 billion yen in the current year.

One of the reasons that made Sony a distinct loser among Japanese electronics makers has been its failure to drastically and quickly reform its businesses by ending unprofitable operations, according to the analysts.

Chief Financial Officer Kenichiro Yoshida admitted that in a recent press conference in Tokyo, saying, "The measures to adjust our cost structure in line with the changes in the business environment were either insufficient or slow."

As part of such measures, the company finally decided in February to sell its PC business to Tokyo-based investment fund Japan Industrial Partners Inc. in July and spin off the television operation into a wholly owned unit, while cutting 5,000 jobs both at home and abroad by next March.

The restructuring-related costs totaled 177 billion yen in the past business year and are expected to mount to 135 billion yen in the current year. As a result, 100 billion yen costs per year are expected to be cut from fiscal 2015.

With such measures, Sony President Kazuo Hirai vowed Thursday to complete structural reform of the electronics business this year, saying, "We can aim at an operating profit of about 400 billion yen in fiscal 2015," with the combined effects of cost cuts from the restructuring and stable profits from its entertainment and financial businesses.

However, after three rounds of downward revision in its earnings forecasts for the past year, market participants and consumers are skeptical about whether the company can actually start seeing solid profits, especially in the electronics business such as the TV operation.

The TV business remained in the red for the 10th straight year in fiscal 2013 with accumulated loss of about 790 billion yen.

Yasuo Nakane, senior analyst at Deutsche Securities Inc., said he recognizes as positive Sony's restructuring efforts to end the PC business and sales of some assets, but added, "The problem is that their main businesses are not generating profits as expected. And their response as well as sales plans are too optimistic."

For instance, Sony expects to sell 50 million smartphones in fiscal 2014, up about 28 percent from a year earlier, and 16 million liquid crystal televisions, up some 19 percent.

Nakane said the sales targets are higher than anticipated market growth. "There's a big risk the company will fail to achieve the goals," he said, noting it is possible that the firm will slash the sales projections.

To turn around its overall performance, Hirai said the company will continue to focus on the game, imaging, mobile, entertainment and financial sectors, which have seen relatively solid earnings.

As part of such efforts, Sony aims to further increase sales of its PlayStation 4 game consoles and retain the No. 1 position in the home console market this year as well as introduce its new flagship Xperia handsets models in a timely manner.

But it remains uncertain to what extent the earnings will improve without an absolute big hit product that can boost the performance of the whole company, according to some analysts.

Hirai and about 40 top executives will return bonuses related to the business performance for fiscal 2013, but if the company fails to improve earnings, it could cast doubt over the leadership of Hirai, who took the helm about two years ago, the analysts said.

"If the problem lies in the unrealistic plans of the operational divisions, that needs to be changed. But if management isn't able to make proper decisions, it should be replaced (to improve the performance)," said Nakane.

"More drastic structural reform such as organizational change would also be necessary (to further reduce costs) unlike stopgap measures they have taken before," he said.