Sunday, January 25, 2009

Sony Ramps Up Its Reform Efforts

Hard times are forcing Sony (SNE) CEO Howard Stringer to give up his Mr. Nice Guy act. The Welsh-born American executive, who has used charm and wit to sell the rank and file on a modest reform agenda, is suddenly ramming through more drastic measures. That's because evaporating consumer demand and a sharp surge in the yen have left the Japanese tech giant no better off than it was when Stringer started three and a half years ago.

The company's future depends on whether Stringer can deliver. On Jan. 22, Sony issued its second profit warning in three months, saying it now forecasts a $2.9 billion annual operating loss—its first in 14 years—instead of $2.2 billion in profits. Sales are predicted to fall 13%, to $86 billion, rather than gain 1.4%, as had been projected.

Stringer blamed a "significant portion" of the expected losses on factors beyond Sony's control. The yen's rise has sharply eroded overseas earnings for many of Japan's top exporters, such as Toyota (TM), Honda, Panasonic (PC), and Sharp. It's especially painful for Sony because the company earns 80% of revenues in overseas markets. Plunging stocks also have hammered the company's insurance and banking unit, which has billions invested worldwide.

Sony's Software Weakness

Stringer admitted that the reforms he has pushed through since mid-2005 hadn't gone far enough. The company still suffers from bloated costs, an inefficient supply chain, and poisonous rivalries among divisions, he said. And while Sony had an "unbeatable" combination of top-notch consumer electronics, blockbuster movies, and TV programs and music, it hasn't fused them all into a winning whole. The reason: Sony's weakness in creating software to deliver online services. "There is still too much old Sony and not enough new, which at times means we are fighting our competitive wars at a disadvantage," he told journalists at the company's global headquarters in Tokyo. "We have to find a way to embrace network services."

Stringer had never before appeared at an earnings news conference, and his presence onstage, along with CFO Nobuyuki Oneda and President Ryoji Chubachi, underscored the seriousness of the problems Sony faces. Just last month the company announced cost cuts, thousands of layoffs, and plans to close five or six of its 57 factories worldwide. This time, Stringer stressed a need to move away from a traditional consensus-building to speedier, top-down decision-making. "Too often we have been late to market with new products," he said. "This practice cannot be tolerated going forward."

Stringer ordered his management team to conduct a top-to-bottom review of every business, which runs the gamut from flat-screen TVs to blockbuster movies. The goal is to slash administrative expenses, make product planning, design, and manufacturing more efficient, and improve supply-chain management. The company also will sharpen the focus on innovation and encourage managers to think about how consumers will use a product before concentrating on its technical capabilities. It is also raising its cost-cutting target through March 2010 to $2.8 billion, double the level from a month ago.

But a major obstacle continues to hamper Stringer's reform efforts: the core electronics division's money-losing TV business. Selling TVs has been a huge boost to Sony's brand in the past. But TV losses have reached $2.3 billion over the past four years, and earlier this month, Goldman Sachs predicted that Sony would lose an additional $1.1 billion on TVs this fiscal year through March. Electronics account for about 70% of overall revenues. Credit Suisse, meanwhile, forecasts an operating loss for Sony through next fiscal year ending March 2010.

Scaling Back Japan Production

To whip the TV unit into shape, Sony will scale back production in Japan, consolidating assembly at one of two domestic flat-panel TV factories. As a result, the company expects to sell 15 million liquid-crystal-display sets this fiscal year, from an earlier estimate for 16 million.

Of course, revamping TVs won't help Sony snatch the lead in portable music, where it trails Apple (AAPL), or in video games, where its PlayStation 3 is losing to Nintendo's Wii and Microsoft's (MSFT) Xbox 360. So why not stop trying to manufacture so many things and focus on development and design as Apple and Nintendo, which are raking in profits despite the downturn, have done? That's exactly what Stringer has in mind. Sony's manufacturing sites globally make everything from tiny image-sensor chips for cameras to DVD players to giant-screen TVs. The company already relies on contract manufacturers to make its low-end digital cameras and video game consoles. But Sony now will "aggressively evaluate significant outsourcing opportunities for basic manufacturing and assembly logistics and back-office operations," adopting as its template the semiconductor division's strategy of selling factories and shifting the work to contract manufacturers, Stringer said.

There's no shortage of companies willing to take on the work in the U.S. and Asia. Making the adjustment won't be easy, though. Many tech giants have tried to outsource manufacturing to tech companies in Asia, only to end up sending teams of designers and engineers to help those companies get up to speed. Still, said iSuppli analyst Adam Pick, "If managed properly, [the outsourcing shift] can be a phenomenal bonus."

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