Sony ‘shokku’: The sequel | FT Alphaville

Sony ‘shokku’: The sequel

Sony rarely does things by halves – as seen in its phenomenal growth from a tiny company in 1946 with just 20 employees and one hot product idea – magnetic recording tape – into the consumer electronics and entertainment behemoth it is today. Now it has just administered the biggest reality check Japan could receive in these troubled times, surpassing the original “Sony shock” of 2003, when it reported horrendous results for the 2002 fiscal year.

As Lex warned last month, “the sequel is as X-rated as the original”. Indeed, in its latest Sony note on Tuesday, Lex remarked:

From the people who brought you PlayStation3 comes RestructuringPlan2. But while gaming geeks were gagging for the former, investors should manage to contain their excitement for the latter.

In an announcement after market close on Tuesday, Sony outlined the largest downsizing drive of any Japanese company amid the financial turbulence of the past year – with plans to eliminate a total of 16,000 jobs and close five or six factories worldwide, in efforts to save more than Y100bn ($1.1bn) by the end of March 2010. The cuts include 8,000 full-time employees, or 5 per cent of the company’s electronics workforce, and another 8,000 part-time and seasonal workers, Sony said, reports Bloomberg. The company also said it would withdraw from unprofitable businesses and reduce investment in its electronics business by 30 per cent compared to previous plans.

Big numbers – but according to some analysts, not big enough to make the savings Sony desperately needs in response to a stubbornly rising yen, flailing consumer confidence and global financial turbulence.

The company’s share price is already down about 70 per cent so far this year, a slide that accelerated after a warning in late October that operating profits this year will be less than half the expected $4.7bn — representing a 59 per cent slide in net profits this year.

How did it come to this? Sony has been hit particularly hard by the weakness of the euro against the yen and the dollar, as it has relatively little manufacturing in Europe, while its Korean competitors have gained from the weakness of the won. In explaining its move Tuesday, the company stressed the severity of the slump in consumer spending in a period that is normally regarded as a peak shopping season.

But as noted, some analysts have been underwhelmed by the company’s cost-cutting plans, predicting that another big downgrade to Sony’s earnings forecasts for the current financial year is only a matter of time. Katushiko Mori, a fund manager at Daiwa SB Investments in Tokyo, told Reuters:

“The number sounds big, but this staff reduction won’t be enough. Sony doesn’t have any core businesses that generate stable profits.”

While in Lex’s view:

There are two problems. One is that Sony’s profit forecast, revised in late October, looks even more Pollyanna-ish now than it did then. Those numbers were based on a second-half exchange rate of Y100/$1, a level of weakness not seen since. The second is that the response, focused purely on cost-cutting in a single division, is tame.

Whittling back workers and factories will save over $1bn a year, Sony reckons, or half as much operating profit as it expects to make this year. There is no guidance on the cost of restructuring, likely to be considerable, given the inevitable redundancy payments for 8,000 targeted electronics workers. It could easily swallow up one year of savings if the first restructuring plan implemented under Sir Howard Stringer [CEO] is any guide. That plan, which resulted in 10,000 job losses (on presumably richer terms than would be available today) and 11 factory closures, cost over $2bn.

Sony is not even trying to tickle consumer demand by, for example, cutting the price of games consoles. On the contrary, it plans to hike the price of gadgets in Europe to help recoup currency losses. That will surely make the price tags on Samsung screens, flattered by the weak South Korean won, more compelling viewing for Europeans – and further dent Sony’s top-line. With white collar workers losing their jobs in droves, demand for flat screen TVs and other gadgets is already shrivelling. Add in yen appreciation, and electronics sales could easily drop 10 per cent. Roll on RestructuringPlan3.

On Tuesday, Sony said it will announce the financial impact of the cost-cutting measures in January, when reporting fiscal Q3 results.

Meanwhile Sir Howard Stringer, who in 2005 became the first foreign chief executive to run the company, must really be “wondering whether he is cursed”, as the FT noted last month. Just as the company was starting to find its feet after a painful restructuring, the global economy knocked it flat, leaving doubts about whether Sir Howard’s targets will ever be met – and about his desire to continue.

When he took the helm of the company, it was still reeling from the “Sony Shock” of 2003, when both profits and the share price collapsed. Still, as the FT realises, it looks like he was making progress:

Sir Howard’s mandate was to restore profitability and turn the core electronics business round. It looked like he was getting there. After the restructuring, Sony earned a respectable return on equity of more than 10 per cent in 2007 and did not miss the 5 per cent operating margin that Sir Howard had promised by much.

So will Sir Howard stay on? One person who knows him well, according to the FT, said last month that while “he may be a charmer, Sir Howard hates to lose” and that he most likely wants to “have a victory behind him when he retires”. If that is the case, he may be there quite a while.

As for the impact on Japan, which will no doubt bear a fair share of the job cuts and factory closures: in a society which so far seems to have escaped the feeling of panic permeating major financial centres of the world, the second “Sony shokku” will possibly – at long last – drive home the fact that the country is in recession – if not the notion that the real horror movie is just beginning.