Can Outsourcing Save Sony?

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"Before the electronics division can be healthy, TVs must be profitable," Ryoji Chubachi, who heads the electronics unit, said last week.

Keeping Secrets

What will Stringer's outsourcing strategy look like? So far, he isn't saying, but experts predict Sony will continue to make ultra-thin high-end TVs on its own. That's where the company can command a premium and earn higher margins. Keeping cutting-edge technology in-house also prevents innovations from being leaked to rivals.

For the small and midsize sets, however, Sony might hire one or more manufacturers in Taiwan or Hong Kong. Wistron, Qisda, AmTRAN Technology, TPV Technology, and Foxconn International, a subsidiary of Taiwan's Hon Hai Precision Industry, have all made LCD TVs for Sony in the past but only in small volumes—less than 8% of Sony's overall TV production last year, according to estimates from market researcher iSuppli. "You might want to keep the premium product, but the commodity product you don't need to be manufacturing yourself," says Macquarie Securities' David Gibson. "It's a simple principle of globalization."

In practice, though, it's anything but simple. To be sure, Sony already relies on contract manufacturers to make some of its point-and-shoot Cybershot digital cameras, Vaio laptops, and PlayStation video game consoles, but Sony's TV unit has always jealously protected its secrets, and outsourcing would mark a serious departure from traditional practice. Currently the company buys the specialized sheets of glass from its joint venture with Samsung and ships them to high-security plants in Asia, North and South America, and Europe for assembly. Most of its suppliers get design specifications for specific parts but know little about the entire assembly process.

Outsourcing doesn't work that way. It involves more collaboration and information-sharing. Gartner (IT) analyst Yuko Adachi says many U.S. companies begin discussions with contract manufacturers as early as the conceptual or design phase. "It's more of an alliance," she says. Many tech giants have tried to outsource manufacturing to tech companies in Asia, only to end up repeatedly sending teams of designers and engineers to help those companies get up to speed, says iSuppli analyst Adam Pick. Still, says Pick, "If managed properly, [outsourcing products] can be a phenomenal bonus."

But outsourcing alone isn't going to help Stringer, who has other priorities as well. For instance: wedding Sony's products to its vast library of movies, TV shows, and music. Last fall, Sony streamed the Hollywood blockbuster movie Hancock to Sony TVs connected to the Internet. At this year's Consumer Electronics Show in Las Vegas, the company showed off Net-linked TVs featuring software from Yahoo! (YHOO) that lets viewers check out content from popular Web pages. The key to success there, too, lies in making TVs more efficiently. "We have to find a way to embrace network services, to provide the kind of sustainable differentiation that will give us attractive margins," Stringer said. "In order to do that, we've obviously got to bring down the cost of our televisions."

Hall is BusinessWeek's technology correspondent in Tokyo.

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