Pressure Builds on Sony Boss Stringer

The company blames its woes on the strong yen, but some analysts are not convinced. How long can the CEO hang on?

By Dan Slater

Sony yesterday announced an operating loss of ¥18 billion ($197 million) for the crucial Christmas quarter of fiscal 2008 (ending March 2009), compared to a gain of ¥236.2 billion for the same October-December period in 2007.

Operating profit is supposed to reflect the company's actual operations, and does not include tax or "other income." Net income, which does include tax and "other income" (from interest, dividends, net gains on securities investment and gains on changes in interest in subsidiaries and equity investees), amounted to ¥10 billion thanks to a remarkable ¥79 billion foreign exchange gain, which offset losses at the operating level. Net income was nevertheless down 95% on the same period last year.

The Q3 FX gain is somewhat ironic, because the company was at pains on Thursday to blame the ever-strengthening yen for the company's losses. Regarding the operating income of the electronics division, for example, the company blamed the ¥16 billion operating loss mainly on a huge negative ¥94.2 billion charge as a result of the strengthening yen. The effect on the games division was even more striking, with operating income in local currency (non-yen income) up a remarkable 156%, but down 97% in yen terms. Several other divisions told the same story — positive local currency sales, but negative yen sales.

The yen would indeed be the obvious culprit for a Japanese exporter's woes, but less so when you consider that the same company has also benefited from a very weak yen in the past. CEO Howard Stringer joined Sony in June 2005 when the yen was at 105 to the US dollar. It weakened to 123 in June 2007, before beginning the strengthening trend which is still in play today. The earlier weakening (against the euro as well) naturally boosted Sony's overseas sales, while the recent strengthening is having the opposite effect. Sony appears to be unusually sensitive to FX fluctuations for two reasons, say analysts: compared to rivals such as Matsushita, Nintendo and Sharp its operating margins are too narrow; and its exports are also the most heavily dependent on the U.S. and the E.U., with 74% of sales revenue coming from those markets.

And if you delve deeper into the figures, it does not seem possible that currency shifts were the principal cause of the company's losses. Sony's initial guidance for FY08 was ¥450 billion in operating profit, based on an exchange rate of ¥100 to the dollar. According to brokerage CLSA, yen appreciation would have had an impact of around ¥100 billion, meaning a profit of ¥350 billion. Instead, the company is now forecasting an operating loss of ¥260 billion, or a swing of ¥610 billion on top of the currency losses.

The current full-year forecast was announced at a press conference in Tokyo last week that was hosted by CEO Howard Stringer. The company also forecast a full-year net loss of ¥150 billion and said the projections were sharply down on earlier profit forecasts due to ¥60 billion in foreign exchange-related losses and another ¥65 billion in losses related to the stockmarket decline.

Stringer understood the problems facing Sony early on, and he has announced cost cuts of ¥250 billion for FY09 (although at a one-off cost of ¥170 billion), and a policy of integrating software and hardware. Unfortunately, Sony appears to be falling between two stools: it has not managed to imitate the Apple strategy and its elite hardware engineers are demoralised — since Stringer's whole strategy is predicated on knocking them from their high status and forcing them to cooperate with content providers like the movie division and the games software division.

Demoralised and departing hardware engineers may be why Sony is not making money on so much of its hardware: games, TVs and mobile phones in particular are all loss making and are no longer automatically considered "best in class," despite the premium price tags.

Some analysts believe that what Sony is now confronted with is a management failure, and that it won't be long before talk of Stringer's departure becomes more urgent.

However, it's difficult to see where opposition to Stringer might become concentrated.

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