Global Economics

Sony: Remade in the USA


Sony's comeback may ride on its Yankee know-how

Sony Corp.'s design center in suburban Los Angeles is the very picture of Japanese minimalist chic. The stark white walls are imprinted with a concave eggshell pattern, and the boxy, blond-wood work spaces are inspired by masu, or sake cups made from cypress. Despite the decor, though, the Santa Monica (Calif.) facility is taking Sony (SNE) far from its Japanese roots. The center's dozen or so designers are doing work that in the past was reserved for headquarters, creating high-margin products, from Internet TV devices to stereo systems, that are helping shore up the bottom line.

Once little more than a sales and marketing arm, the U.S. consumer electronics unit has become key to Sony's worldwide turnaround efforts. At the same time, Sony's U.S. chiefs are increasingly empowered to reject products conceived in Japan that they believe won't fly stateside, including a recently introduced Walkman whose screen they deemed too small to make a dent in the U.S. against Apple Inc.'s (AAPL) dominant iPod.

Sure, Japan remains the center of Sony's creative universe. More than 80% of the company's 225 designers are based there. And many products that become hits in the U.S. are still dreamed up in Sony labs across the Pacific. Yet executives in the U.S. now enjoy an unprecedented degree of influence in shaping everything from a gadget's styling to the software that makes it tick. "What you're seeing is a fairly dramatic shift in which communication and collaboration on ideas and projects go both ways," says Stan Glasgow, Sony Electronics Inc.'s chief operating officer.

LOCAL FLAVOR

The American-made gizmos may prove critical to the hoped-for turnaround. The company appears to be pulling out of a nearly decade-long sales and profit slump. Consumer electronics either conceived or improved in the U.S. have helped stanch losses in other divisions, such as film and music. For the company as a whole, sales for the fiscal year that began on Apr. 1 could reach an all-time high of $75 billion, say analysts at JPMorgan Chase, yielding an operating profit of $3.4 billion. Similarly rosy forecasts by other analysts have helped buoy the stock by 25% since the start of the year.

Credit Chairman Howard K. Stringer. The former chief of Sony Corp. of America—and the first Westerner to lead the entire company—is two years into a push to revitalize Sony and restore its reputation as the leader of the cutthroat consumer electronics business, which still accounts for nearly 70% of the company's revenues. One big element of his strategy is tailoring products to differing tastes across the globe. "Putting regional divisions more in charge of their own destiny ensures that...local conditions are better accounted for," says analyst David Gibson at Macquarie Securities in Tokyo. "It's Management 101."

Basic, perhaps, but the change has been a long time coming. Sony has endured a string of commercial flops in recent years, from its online music store to movie disks for the PlayStation Portable handheld. And while researcher NPD Group Inc. pegs Sony as the 2006 sales leader in HDTVs, videocameras, and home audio, the company that gave the world the Walkman—and as a result owned the personal audio business for years—boasts no real category- killers today. Sony's portable digital audio and video players haven't come close to the iconic ubiquity of the iPod. And the PlayStation 3 video-game console has yet to match the buzz or sales of rival machines from Microsoft Corp. (MSFT) and Nintendo (NTDOY). Indeed, at the design center, Nintendo's Wii sat ready for play alongside a giant Sony HDTV, while Sony's own PS3 was nowhere to be seen.

Since Stringer's appointment, Sony's U.S. unit has become an important incubator for new products and services. And the early success of U.S. initiatives has prompted the company to start offering similar products elsewhere. In France and Britain, Sony is now marketing VAIO PCs with built-in cellular broadband access. That strategy, initiated in the U.S., helps boost razor-thin PC margins because Sony collects a fee from cellular carriers every time a user activates the wireless service. The Mylo, a handheld Web-browsing and text-messaging gadget aimed at teens that was designed jointly in Japan and the U.S., was recently introduced in Japan after initial American sales exceeded expectations. Now the company is mulling whether to offer the Portable Reader for digital books—a gizmo revamped extensively in the U.S.—in Europe later this year.

Big American ideas are also showing up on big TVs. Engineers in the U.S. developed a $299 box called the Bravia Internet Video Link that lets TV viewers download video clips from America Online (TWX) and Yahoo! Inc. (YHOO), as well as films and tunes from Sony Pictures and BMG Music, all with a click of their remote. The device will go on sale this summer at Best Buy Co. (BBY), Circuit City Stores Inc. (CC), and other U.S. outlets. Sony TV executives in Japan were so enthusiastic about it that they're planning to build the technology into TVs they sell there as well.

In the old days, instead of embracing an innovative product such as the Bravia Link, Sony's warring factions might have deep-sixed it. That's because the technology could easily be adapted to deliver games and other content, which might cannibalize sales of Sony PCs, audio receivers, and even the PlayStation 3. But in Stringer's eyes, the Bravia could become a potent weapon against Apple, Microsoft, and other rivals seeking to dominate Web-connected homes. "If we don't do it, someone else will," Stringer said in January.

A BETTER BOOK

The U.S. center is also tweaking designs to boost the appeal of Sony products to American buyers. For retailer Target Corp. (TGT), the Santa Monica design center created the $99 Liv music system whose wood-like trim and environment-friendly packaging is a nod to American design trends. Tim Schaaf, a 15-year Apple veteran who defected to Sony in late 2005, replaced the clunky keyboard on the $350 Portable Reader for digital books with easy-to-understand buttons and added an MP3 player. And when rivals last year began introducing sleek new high-definition TVs that made the entry-level Bravia look dated after just five months on the market, Sony's U.S. team worked with Japan to spiff up the design. They quickly introduced the new model, boosting sales by 10% in just a few weeks. "In Japan they have a lot of innovative ideas," says the center's director, Alex Arie. "But that doesn't mean every idea fits into the U.S. market and consumer lifestyle."


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