Sony Gets Serious About Outsourcing Cell Chip

Posted by: Kenji Hall on September 16, 2007

Back in February, Sony’s Yutaka Nakagawa told analysts that he was considering outsourcing production of the high-powered Cell chip. The chip, which Sony developed with IBM and Toshiba, is the brains of the PlayStation 3 gaming console and the platform for an array of new computer and consumer electronics products.

So why would Nakagawa give up production of one of the company’s most promising technologies in years? The prospect of saving the company hundreds of millions, for one.

Over the next couple of months, Sony could reach a deal to sell its Cell production facilities to Toshiba for $870 million, the Japanese daily Nikkei reports. Sony’s senior vice president, Naofumi Hara, says the company is pursuing a “asset-lite” strategy but that no decision about the semiconductor business has been made.

Sony has reportedly spent $1.7 billion on the Cell’s production. Unloading the facility would free up cash for Sony’s semiconductor unit to stick to its strengths—designing and producing imaging chips for digital cameras and video cameras, where it’s No. 1 in the world. That would streamline the company’s chip operations and perhaps allow it to profit this fiscal year, after three years of hemorrhaging red ink.

Turning the business around is important because nearly 10% of Sony’s $70 billion in annual revenues come from semiconductors.

For years, Sony's critics have questioned the logic of pouring billions into new chip facilities. Plenty of other chip companies, such as Broadcom and PMC-Sierra, survive by focusing on design but outsourcing manufacturing to low-cost fabs in Asia, so why can't Sony?

Sony has deflected the criticism, saying that operating its own chip factories gives it more control over supply and keeps tech secrets in-house. But the cost of developing new sophisticated chip-making technology--cramming more, ever-tinier transistors onto a chip--probably forced Sony to reexamine its options and start working out a deal with Toshiba.

It's a sign that the company is finally making the hard decisions to hang onto only the most prized and profitable businesses. That's something Sony boss Howard Stringer has pushed for. It certainly makes his job of rebuilding the company a lot easier.

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