The fact that Sony is slashing costs once again, cutting 8,000 of its staff, around 5% of its workforce, and taking drastic action elsewhere in its cost base, is, for once, not the fault of the legendary consumer electronics giant, but a direct consequence of the approaching recession.
Over the past five years Sony has perhaps been the company that has struggled the most to accept that the consumer electronics industry needed a more rapid transfer to digital technologies and the need for specialization.
For years Sony continued with outmoded analog music devices, CRT based TV sets, and proliferated product ranges into hundreds of devices rather than one or two leaders, and made all of its profits in just one or two lines while its massive electronics business faltered.
Today it retains a legacy of attempting to transition out of its old habits where it behaved as if it was 6 separate, loosely attached companies, and where it continued to have a hangover from the Japanese ‘job for life’ attitude, which always meant that Sony tended to close overseas operations before touching those based in Japan.
And this week’s announcement looks more like it was concocted to convince Japanese analysts rather than solve the severe problems that the company now faces. Part of the problem is whether or not Sony is taking the recession seriously enough ‘ do its forecasts continue to look to optimistic, something that Japanese and US analysts both conclude ‘ and the other part is that some of the steps that Sony plans to take may damage it further.
By Sony’s own admission it has been caught out yet again in the TV market. Four years ago it was surprised at the speed at which CRT televisions were transitioning to LCD screens. It claimed that it had been planning to shift to OLED screens, but the technology would not be ready until 2007. We are almost in 2009 and it is still not ready. At the time it spent $2 billion tying up a deal where it would ride on the back of Samsung technology as they put all their eggs together in one basket to make LCD screens. The outcome has been fascinating, and despite relying on a key component ‘ LCD panels ‘ from a rival, Sony continues in its Bravia range to turn out the best TV models in LCD. The problem is they are 25% to 30% more expensive than the only slightly inferior Samsung devices, and in a recession that places too much of a margin on video quality.
We would expect today that every TV salesman on the planet is saying, ‘What about the Samsung madam, it’s cheaper and very popular.’
Of course the Sony device prices are also a moveable feast. Initially with sourcing from S-LCD, the joint venture, neither company was in danger of finding that it could not secure LCD panels ‘ but in a glut that’s hardly a benefit. Sony can of course drop its pricing down to the level of Samsung’s but we expect that the improved video quality comes at a cost and this is achieved with more components, putting Sony at a permanent disadvantage.
Even if Sony was to be able to reach the same pricing levels as Samsung, it is in bed with its biggest rival, and because it doesn’t make the part of its key technology, nor does it have it exclusively from another manufacturer, it seems unable to gain an edge in LCD TVs.
While there is a widespread belief that sales of LCD screens have collapsed, it’s not precisely true and monthly sales data was stronger than expected Japan saw sales of LCD sets up 28% during November and Europe much the same during October. It’s not that demand is not there, it’s that money is not there. So these devices will sell, if the price is dropped to the floor, and while these companies hold excess capacity and continue to manufacture more capacity than retailers can ship, prices will continue to undermine profits, not just at Sony, but across the board.
Just this week Corning the glass and ceramics specialist said it would scale back operations in 2009 and it had already announced plans to lower capacity of glass panels for LCD-TV.
This week there were newspaper reports that AU Optronics, one of the larger specialist flat panel makers had experienced sales dropping by a third in the space of one month. This is mostly the effect of inventory adjustments, as its customers base drops as much inventory as it can, by ordering less, and dropping prices to sell more. It’s like an international game of pass-the-parcel as CE firms everywhere try to get components and finished items off their books.
This week the UK Financial Times also reported Chi Mei Optoelectronics, a Taiwanese panel specialist saying revenues were down by 65% from a year ago.
And despite all of this downward pricing pressure, LCDs are a saturated manufacturing market and all the spare capacity that was being built to chase market share going forward, now has to be cancelled.
All of this is being reflected in the Sony statements about cutting back. It has already addressed inventory, it will postpone investment in one factory in Europe which was assembling TVs at Nitra in Slovakia, and it will cut 10% of its 57 manufacturing sites (so either 5 or 6 factories) and move manufacturing to places where it is cheaper and offload some to external ODMs, especially chip making and especially CMOS chips.
One of the areas where Sony plans to make changes is in the creation of CMOS image sensors for use in handsets. This is different from the LCD situation, here Sony is a world leader and last month introduced a next generation technology for CMOS image sensors. The top of the range allows 12.25 megapixels resolution, about 50% ahead of where handset cameras are today, and other versions offer 8 MP and 5 MP. The modules are the smallest made today and are a fraction of the size of previous generations and come pre-built with a lens and auto focus functions.
These devices don’t only drive Sony’s handset cameras, but are also in its dominant ranges of digital SLR cameras and high definition digital video cameras as well.
By putting this technology out to ODMs, Sony could be taking an enormous technological lead and diluting it, and at the same time risk bringing that lead to rivals. In the creation of the S-LCD joint venture, Sony had little choice, but in outsourcing the manufacture of its CMOS image sensors, it could be giving away one of the crown jewels.
Sony may well argue that it has the intellectual property in these devices and through tight control of ODM contracts it can prevent anyone else getting the same benefit. But in order to create competition in this market it will have to court several sources and potentially allow these components to be made for other companies to create a market and drive down pricing. ON the flip side it will get royalties if this happens.
Sony was once supreme in handheld music devices, TV sets, games consoles and DVD technology. Today it is the market leader in all types of cameras ‘ both video and still, has third place globally in making handsets through its Sony Ericsson joint venture, is currently in a fight for leadership in games consoles, is second in TV set manufacture and has lost its lead to Apple in handheld music consoles. It may still lead in DVD technology after it bet the farm on Blu-ray and won. Just. The point is that it is hardly winning anywhere except in cameras and DVDs.
Sony may argue that its music and phone rival Apple has not retained any control in the manufacturing and technology markets and yet it still makes inroads into Sony markets by leveraging off services such as iTunes, but if Sony wanted to emulate Apple it would have to get out of a lot more than 6 factories.
Sony says that it has adjusted production, lowered inventory levels, and reduced operational expenses and will adjust pricing to mitigate against the appreciation of the yen. It will cut or delay investment plans, and downsize or withdraw from unprofitable or non-core businesses.
The workforce reduction will be augmented by not renewing contracts on 8,000 further seasonal workers, so it really is cutting 16,000 salaries and it expects savings of 100 billion yen in the next year ($1.1 billion).
We still think of CEO Howard Stringer as the new boy in charge of Sony, still in his honeymoon period, but actually he took over three years ago and immediately cut 10,000 jobs, which has had little or no impact on Sony’s success.
There is a strong sense that Sony is doing yet too little, that its broad brush statements about staffing cuts are not specific enough both in terms of where the jobs will go and how quickly, and its determination not to make chips may see it lose some of the edge it has built up over the past few years. Already the manufacture of the Cell chip for the Sony PS3 has been handed over to Toshiba, potentially putting the control of one the most powerful chips in the world outside of Sony’s reach.
And if this recession continues throughout 2009 there is a feeling that Sony will see yet more cuts, further production rationalizations and a deepening realization that its moves need to be more, not less, dramatic.