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Sony Sees a Second Year of Losses

For months, Sony's (SNE) management has been taking an ax to its operations. Back in December, as the yen's unfavorable surge and a drop-off in global demand for electronics wreaked havoc on Japan's tech industry, Sony announced that it would slash costs, eliminate 16,000 jobs and close a handful of its 57 factories around the world. A month later the electronics and entertainment company was at it again, adding asset sales to boost its savings.

On May 14, CFO Nobuyuki Oneda offered a progress report on Sony's turnaround efforts. Sony's financial forecast for this year, which was announced with the latest cost-cutting measures, showed that the company has quite a way to go. In the fiscal year through March 2010, the Tokyo company expects an operating loss of $1.16 billion—its second straight year—and a 6% decline in sales, to $76.8 billion. The reasons for the gloomy outlook are similar to those behind last year's $2.32 billion loss—its first operating loss in 14 years: unprofitable TV and video-game businesses, losses on securities investments, a strong yen, and a lack of blockbuster products.

But Oneda also revealed that reforms are proceeding faster than expected. Sony has decided to close eight factories worldwide—four in Japan and four overseas—by December, three more than it had previously committed to. "In the future it's possible we'll have more layoffs," including engineers, Oneda told reporters at a conference venue in downtown Tokyo.

Sony is now aiming to save more than $3.1 billion by selling off factories, revamping its supply chain, and centralizing the procurement of components for an array of electronics products. Most divisions have been in charge of their own parts procurement, but stricter oversight and larger orders could help reduce costs, Oneda said. The effort is being led by Executive Deputy President Yutaka Nakagawa, who turned around the semiconductor unit—previously, a perennial money-loser. Nakagawa was assigned to the job when Chairman and CEO Howard Stringer reshuffled his management team in February.

More Contract Manufacturing

Sony has repeatedly said that it's working to make video games and TVs profitable soon. That's crucial because the two businesses account for more than a quarter of Sony's annual revenues, according to analysts' estimates. Both require big up-front investments on cutting-edge components or factories, so reversing those losses was never going to be a quick or simple task. But the economic downturn and stiff price competition have made success even harder to attain. "The key question is whether manufacturing, design, and development, procurement and marketing…can all be improved within a short time frame," Deutsche Securities' Yasuo Nakane wrote in a report earlier this year. But it's hard to imagine that translating into improved earnings soon, Nakane added.

Quarterly earnings offer a glimpse of what Sony is up against. In the January-March quarter, its operating loss reached nearly $3.1 billion, swinging from a $65 million profit the previous year. Sales sank 22%, to $16 billion. Sony's shares fell nearly 7%, compared with the Tokyo stock market's electrical machinery index, which fell 4.1% by the end of the day.

The world's second-largest maker of flat-screen liquid-crystal-display TVs sold 15.2 million sets last fiscal year. This year it's predicting annual sales of a slightly fewer 15 million units. Oneda said that because of tepid sales and annual double-digit retail price declines, TVs will be in the red at least through the fiscal first half. But by the second half, "we hope to break even," he added. The division is already exploring ways to outsource more of its TVs to contract manufacturers based in Asia, particularly for models sold in emerging economies such as India and China. Market researcher iSuppli estimates that just 8% of Sony-branded TVs were made by contract manufacturers last year.

On the gaming side, Sony's prospects are a bit better. Its PlayStation 3 is nearing its third year on the market, and it now costs significantly less to make than it did when it was first released. An iSuppli analysis estimates that the $599 version of the PS3 initially cost Sony more than $840 to build. By last December the production cost for the console, priced at $399, had dropped to just over $448, and Sony could reach the break-even point in 2009. The PS3 still lags behind Nintendo's Wii. But as the PS3's costs come down and the number of downloadable and DVD game titles rises, the console could seem a more attractive buy for gamers and parents. Sony expects to sell 13 million PS3 consoles this year, up from just over 10 million last year. That should also help offset the sharp drop in sales of the nine-year-old PlayStation 2, which had been selling just as many units as the PS3 until last year, when its sales drop hurt the division.

One thing Oneda didn't touch on during the hour-long news conference: newfangled gadgets that could lift Sony's fortunes once the economy starts to recover. CEO Stringer recently created a new innovation lab to work on rectifying Sony's dearth of market-leading products. The inventor of the Walkman portable music player has lagged behind Apple (AAPL), whose iPods are far more popular in most markets. Sony's flat-screen Bravia TVs have not been able to close the gap with the global industry leader, Korea's Samsung Electronics, despite a big marketing push. Sony's Cybershot digital cameras have lost ground against competitors, and its Sony-Ericsson mid-market mobile phones have been out of step with a trend toward either low-cost basic models or high-end touch-screen computer-like handsets such as the iPhone and BlackBerry. A winning product could make a huge difference.

Hall is BusinessWeek's technology correspondent in Tokyo.

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