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Futurama at Sanyo


As the bullet train hurdles through scenic Gifu in central Japan, passengers gazing out the window may do a double take. Seemingly in the middle of nowhere stands a 315-meter-long black structure covered in solar panels and shaped like a boat. It is Sanyo Electric Co.'s (SANYY) Solar Ark, which houses an energy museum and supplies electricity to a nearby factory.

The Biblical symbolism is deliberate. At a time when most Japanese electronics companies are lashed by recession and crushing debt, CEO Satoshi Iue wants the world to know that Sanyo, like Noah in the Great Flood, is prepared to sail through any storm. Sanyo's strengths: leadership in core businesses such as digital cameras and rechargeable batteries; good margins; and bold bets in such areas as solar panels, fuel cells, next-generation display panels, and batteries for hybrid cars powered by gasoline and electricity. "The emphasis is on developing breakthrough technology that will lead to new businesses," Iue says.

Not that Sanyo hasn't sprung a few leaks lately. Net profits fell by 95% for the year ended Mar. 31, to $14 million, on sales of $17 billion, due to restructuring costs and declining sales of components for cell phones, displays, and other products. Sanyo is also recovering from a weak launch of its solar-panel business two years ago, when it had to recall 5,500 panels that didn't meet government standards. That gave Kyocera Corp. (KYO) and Sharp Corp. a big edge in winning government contracts and subsidies.

Iue insists his solar program, which dates to 1979, has recovered. And in its core electronics business, Sanyo is outperforming competitors. Its main rival in batteries, Matsushita Electric Industrial Co. (MC), lost $3.5 billion last year. NEC Corp. (NIPNY) and Hitachi Ltd. (HIT) also posted multibillion-dollar losses. While most rivals are strapped for cash, Sanyo has $4.4 billion in reserves. Its operating profits in consumer-electronics products, which include cell phones and digital cameras, were much higher than Sony's, and Sanyo's battery division boasted 9% margins, the best in the industry. For fiscal 2002, analysts predict earnings of at least $185 million, despite more write-offs for restructuring.

Sanyo owes its relatively advantageous position to the foresight of Iue, 70, an engineer who since 1986 has run the company founded by his father, Toshio Iue. In recent years, he has moved assembly work to China and other low-wage nations. He closed older Japanese plants and cut 6,000 workers, 10% of its total, through attrition. Iue has focused on growth areas like digital cameras, where it has a 30% global share. Since 1999, annual digital-camera sales have zoomed from $125 million to $950 million. Sanyo also makes 35% of all optical scanners used in DVD players and half of rechargeable batteries for cell phones and notebook PCs.

Sanyo can't coast on its success. Its component and digital camera businesses are threatened by a gaggle of Korean and Taiwanese companies. "Once these products become commodities, the Chinese can move in and gradually take over the market," says Merrill Lynch & Co. Japan analyst Hitoshi Kuriyama.

That's why Sanyo is spending around $1 billion a year on new technologies. One key area: photovoltaic modules that convert sunlight into power. Sanyo is one of the world's top makers of the modules. Sales are small now, but it expects them to surge by 2005 under a Japanese government program to cut dependence on imported oil. Iue also thinks Sanyo's effort since the mid-1990s to develop batteries for electric and hybrid cars is about to pay off. Ford Motor Co. plans to use only Sanyo batteries for its hybrid version of its Escape sport-utility vehicle, to be launched next year. It bested Matsushita for a similar contract from Honda. Sanyo expects the global hybrid market to grow from 60,000 vehicles now to 800,000 in 2007.

Another future source of clean energy is still in the labs. Sanyo is working with Samsung Electronics to develop fuel cells, which produce electricity by combining hydrogen and oxygen. By 2010, fuel cells could be used to power everything from handheld computers to home generators. Plus, Sanyo is ramping up production of displays using organic light-emitting diodes (OLEDs), which many industry experts believe will replace liquid-crystal displays in mobile computers, phones, and PDAs. It projects sales of $400 million next year.

It may be too much to expect all of these bets to pay off big. But Iue gets high marks for thinking ahead. Not long ago, other Japanese electronics execs looked upon Sanyo as a downmarket maker of consumer appliances. In a few years, they may all wish they had built their own Solar Arks. By Irene M. Kunii in Osaka


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