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Get Four
|  | JANUARY 25, 2006
By Kenji Hall How Turned Around Is Sony?The electronics giant's third-quarter earnings should hint at a brighter future. But Chairman Howard Stringer still has to push through lots of tough changesThe news at Sony (SNE ) has been so dreary for so long that even the smallest glimmer of hope is enough to cheer up shareholders. On Jan. 26, investors may see just such a ray of light when the Japanese electronics and entertainment giant releases third-quarter earnings. Not only are those results likely to beat expectations but the company might also upwardly revise its earnings estimate for the fiscal year through March, analysts say. Depending on whom you ask, Sony's full-year profit forecast could be anywhere from $150 million to $475 million. That's a big change. As recently as September, newly appointed Chairman Howard Stringer was glumly predicting Sony would show a net loss of $86 million. The market, however, seems to have been feeling fairly good about Sony for some time. Since October, its share price has shot up 35% in Tokyo trading, outstripping the 21% rise of the Topix Electric Appliances Index, a benchmark for Japanese electronics makers. "We think [Sony's] electronics segment overall did better than management's expectations," J.P. Morgan analyst Hiroshi Takada wrote in a Jan. 23 report. CUTTING LOSSES. But don't put all your chips on Sony just yet. Stringer is in the midst of a top-to-bottom, $1.7 billion restructuring largely focused on turning around the ailing consumer-electronics and TV unit (see BW Online, 1/9/06, "Hitting the Right Notes at Sony"). Analysts say it could be another year before Stringer, a 63-year-old Welshman, whips all the loss-making units into shape. That's crucial because while the electronics division accounts for 70% of Sony's overall sales, it has been a drag on profits the past two years. And many analysts say they haven't factored in the fallout from a public-relations fiasco caused by a virus-like copy-protection program installed on CDs sold by its Sony BMG Music Entertainment unit (see BW Online, 12/30/05, "Sony BMG Ends a Legal Nightmare "). "Sony still has a long way to go," says Credit Suisse First Boston analyst Koya Tabata. Even Stringer seems to be proceeding with caution. "The worst thing that can happen to you is for things to go too well too soon," Stringer said in a recent interview with BusinessWeek. "I'm slightly nervous because I don't want Sony to fall back into any form of complacency." CATCHING UP ON TV. So why the rosier outlook? The two main reasons have little to do with Stringer's reforms: a weak yen and a rising Tokyo stock market. The yen's fall against the dollar helps Sony because the value of its overseas income rises, and strengthening stocks are adding to robust profits at Sony's financial unit because of its Japanese stock holdings. But one nugget of good news suggests Sony may finally be getting a handle on its real problems: better-than-expected TV sales. Sony's share of the TV market in the U.S. rose to 28% in December, 2005, up from 10% from October of last year, according to Japanese market-research firm BCN. And holiday shoppers in Europe and Japan also bought more Sony TVs, CSFB says. The TV unit's problems have symbolized Sony's recent sluggishness in anticipating consumer trends. A one-time dominant force in TVs -- its Trinitron cathode-ray-tube displays were the gold standard for decades -- Sony waited longer than rivals before shifting to flat-panel sets. To catch up, Sony formed a joint venture in liquid-crystal displays (LCD) with Korea's Samsung Electronics. Now, Sony's Bravia sets -- a 40-inch TV sells for around $3,500 in the U.S. -- rank No. 3 globally among LCDs, behind Sharp and Philips. MASTER PLAN. In Stringer's September reform blueprint, he vowed to cut jobs, close divisions, and retire products, while shifting part of Sony's manufacturing base in Japan to less-costly locales. Only now are the details of the plan finally taking shape. On Jan. 25, Sony said it will shut TV glass and tube plants in New Stanton, Pa., and Rancho Bernardo, Calif., shifting all the work to China and Malaysia. Sony also plans to stop making its Walkman music players in Saitama, just north of Tokyo, the first Japanese facility to be closed under the restructuring. Stringer's ultimate goal is to merge Sony's gizmos and content, which would let consumers download the company's video games, movies, TV shows, and music to play on everything from big-screen TVs to laptop PCs and portable game consoles. Once he's finished, Stringer hopes to fatten profit margins for Sony's electronics division to 4% by March, 2008, from their current dip in the negative territory, and for all divisions combined to 5%, from 1.6% now. Few analysts see how he'll succeed so quickly. In a recent report, Merrill Lynch called the target "optimistic." And CSFB's Tabata says, "We think the electronics division's margin will still only be 3% by March, 2008." RISK TAKING. The logistics of carrying out the reforms are more complex than they might seem. Stringer has to mercilessly cut costs while unifying the rank-and-file and curbing the internal rivalry among engineers that has led to a confusing lineup of products and a diminution of the once-vaunted brand. And he will have to do that without crushing the culture that has long spawned a winning lineup of cool gadgets. In recent months, Sony officials say Stringer has been hosting social gatherings and working the crowd to sell engineers on his plan and get them to work more closely with each other. This year, he'll be mobilizing resources as Sony prepares to launch two technologies that could make or break it. The PlayStation3, containing the highly promoted Cell microprocessor, and a Blu-ray high-definition DVD player, set for launch this spring. And more Blu-ray products will be up against the rival HD-DVD format as early as April. Sony is counting on the royalties from both to produce a steady stream of future income. Overall, it's a strategy that holds huge risks. But if Stringer gets things right, it might just brighten the day for Sony's shareholders.  Hall is a correspondent in BusinessWeek's Tokyo bureau
BW MALL
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