Bloomberg News

Sony’s Hirai Vows to Deliver Stringer Vision With Cost Cuts

February 05, 2012

(Updates with share gains in 10th paragraph.)

Feb. 3 (Bloomberg) -- When Sony Corp.’s 2006 release of PlayStation 3 flopped because features installed by the engineer who founded the business made the games console too expensive, Chief Executive Officer Howard Stringer tapped Kazuo Hirai to turn the division around.

Hirai, a liberal arts graduate who joined Sony’s music venture fresh from college in 1984, set about jettisoning parts and outsourcing the manufacture of components, rolling out a slimline version of the console in 2009 and cutting its price by 25 percent. As Stringer’s newly announced successor, Hirai yesterday vowed to do the same streamlining for the whole group.

He needs to work fast to win over skeptical investors waiting for Stringer to deliver on his promise that by forcing once-clashing parts of Sony’s Japanese and U.S. empire to mesh, he would reverse ground lost to Samsung Electronics Co. televisions and Apple Inc. phones and tablets. Shares in Japan’s biggest consumer-electronics company have fallen more than 60 percent under Stringer’s seven-year tenure.

“Hirai must walk away from the strategy of selling more than others or winning a bigger market share than others,” said Koji Toda, who oversees about $68 billion as chief fund manager at Resona Bank Ltd. in Tokyo. “When I was young, I had to have a Sony product, but for the younger generation today it’s Apple.”

Sony yesterday said it expects to make a loss of 220 billion yen ($2.9 billion) in the year ending March 31, more than double its previous estimate. The Tokyo-based company cut revenue forecasts on cameras, game consoles and personal computers, and said mobile phone sales were worse than expected. Television shipments would likely be 20 million units, down from the 27 million projected at the beginning of the year, it said.

Yen, Apple

Hirai, 51, takes over from Stringer as Japanese companies are struggling to cope with a yen trading near a post-war high. They’re being undercut by lower-cost rivals, such as Vizio Inc., a closely held TV-maker based in Irvine, California, that uses cheap screens from Taiwanese contract manufacturers.

Stringer also lost out to Apple’s late founder Steve Jobs in the race to deliver high-margin portable devices on which to sell the group’s films, music and games content.

Hirai promised to review Sony’s more than 2,000 products, and may exit those that are uncompetitive. Hirai in April also will take the title of company president. Stringer, 69, will stay on as chairman of the board.

“Sony cannot continue walking on the same path,” Hirai, called Kaz by associates, said at the earnings briefing in Tokyo. “Sony needs to find new business areas, such as medical. We also need to select and narrow our business portfolio.”

Stock Jump

Sony’s shares rose as much as 8.9 percent in Tokyo trading, the biggest intraday gain since April 2009. The stock was 6.9 percent higher at 10:36 a.m., while the benchmark Topix index was little changed.

“All the bad factors have already been reflected,” said Makoto Sengoku, a market analyst at Tokai Tokyo Securities Co., “The shares are rising on expectations that the company will be on track for rebuilding.”

Hirai’s task may be made easier by Stringer’s work in tearing down silos between Sony’s divisions that had prevented the company marrying content from the acquisitions of Columbia Pictures and CBS Records to its hardware, according to Sony Entertainment Network President Tim Schaaff.

“Kaz is in a position today to insist on an approach category by category which is consistent with the high-level global strategy,” Schaaff said in a November interview.

Culture Gap

Hirai has another advantage over Stringer: an upbringing that allows him to move effortlessly between Sony’s U.S. and Japanese operations.

Stringer took over with a mandate to shake up Sony, which had lost its mantle as the world’s most valuable electronics company to Suwon, South Korea-based Samsung in 2002. As a foreigner, the Welshman would be less reluctant to take tough decisions on axing jobs and unprofitable businesses.

Or so the theory went. Stringer, who can’t speak Japanese, spent years not realizing many of his directives as CEO were being ignored by operating units run as fiefdoms, he said in an interview last year.

In contrast, Hirai’s childhood following his banker father between the U.S. and Japan left him fluent in both languages though finding it difficult to blend in to either society, according to a 2009 interview he gave to the alumni magazine of International Christian University in Tokyo.

‘Rosetta Stone’

After moving to New York, Hirai turned up to first grade with three signs written in English hanging around his neck: “I feel unwell,” “I need the bathroom” and “please contact my mother/father,” he said in the interview. Now, the father of two flits between Tokyo and California, where his family lives. Tall, thin and beginning to gray, Hirai speaks in unaccented American English.

Michael Lynton, chairman of Sony Pictures Entertainment, recalls Hirai breaking a logjam in an October 2010 meeting in Japan where U.S. and Japanese managers debated adopting a new strategy.

“He really served well as a Rosetta stone in that moment to bridge the gap,” Lynton said in a November interview. “This is an individual who understands two sides of the coin, not just the content side and the electronics side. It’s also the Japanese piece and the American piece.”

Hirai’s ascent wasn’t smooth. One of “Four Musketeers” chosen by Stringer as possible successors, his nomination to take over as president wasn’t cleared by the board. Instead they announced his appointment as executive deputy president in March, putting him on trial for the top job.

Tsunami, Riots

A day later, Japan was hit by the biggest earthquake on record, unleashing a tsunami that inundated the country’s northeast coast, shutting down factories and supply chains.

Two months into the job, Hirai was bowing in apology over a hacking attack that invaded the company’s Internet entertainment services in the second-largest online data breach in U.S. history. A fire caused by London rioters at a Blu-ray warehouse and disruptions from floods in Thailand crowned out the year for Sony.

Hirai focused on ensuring the company’s units stuck to their task of delivering content to his so-called four-screen strategy -- computers, televisions, mobile phones and tablets.

Software, Hardware

“I’d like to think that I have the understanding of how hardware and software need to be in lockstep,” Hirai said in November, noting that only recently has hardware become powerful enough to deliver Sony content across the four platforms.

After his stint in the music arm, Hirai moved to Sony Computer Entertainment America in 1995 and became president of the U.S. unit in 1999. As lieutenant to Ken Kutaragi, Hirai cut his teeth in the division that epitomized Stringer’s vision of convergence for Sony.

Four years after taking over from Kutaragi, Sony’s game business returned to profit, earning 46.5 billion yen in the year ended March 2011. Losses totaled 448.8 billion yen during the four years. Sales of the slimline PlayStation console jumped to records in the U.S. and Japan after it was introduced.

Sony last year also began offering games playable on smartphones and tablets equipped with Google Inc.’s Android operating system, reaching out beyond its PlayStation machines.

Still, for some analysts and investors Hirai’s vows to trim costs and focus on new businesses have a familiar ring. Stringer axed 30,000 jobs, shut factories and outsourced manufacturing. He also announced $8.4 billion in acquisitions last year.

“What Sony needs is a strong hit product,” said Masahiko Ishino, an analyst at Mitsubishi UFJ Morgan Stanley Securities. “The company has carried out a lot of asset sales and streamlining. A hit product can save it.”

--Editors: Ben Richardson, Dave McCombs

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net


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