February 7, 2014 7:00 pm JST

For Sony, there will be pain before it can match Panasonic's health

SHUNSUKE TABETA, TERUAKI HIRASAWA, Nikkei staff writers

Sony CEO Kazuo Hirai announces his company's latest restructuring plans on Thursday.

TOKYO -- Sony on Thursday unveiled another round of plans to stanch the red ink flowing out of its long-ailing electronics business. But this time those plans appear to take the assorted problems seriously. Sony is saying goodbye to Vaio personal computers, apparently allowing its troubled TV unit to wither on the vine and shedding 5,000 jobs around the world, 1,500 in Japan.

     The company has been tardier than Panasonic in restructuring its core consumer electronics business, which has been in a dismal state for more than a decade.

     By nodding to reality much earlier, Panasonic over the past year has been able to sharply improve its earnings and double its market value to over 3 trillion yen ($29.2 billion).

     Alarmed by the growing gap with Panasonic in both earnings and stock prices, Sony is finally performing some radical surgery on itself. The recovery period will be painful, but investors are already poised to pounce should the operation cure the patient.

     In a press conference to explain his company's latest financial results, Sony CEO Kazuo Hirai on Thursday said he agonized over the decision to sell the Vaio computer business. In the end, Hirai decided it best to get Sony's digital engineers to focus on smartphones and tablets.

     Vaio computers have been at the core of Sony's digital gadget strategy since its launch in 1996. At the time, then CEO Nobuyuki Idei received accolades from former Intel CEO Andy Grove and former Microsoft CEO Bill Gates.

     In that light, Hirai said, "it was difficult to make the decision to sell the business."

     According to Sony insiders, China's Lenovo Group had made several offers to buy the Vaio unit, but Sony declined each time.

     Sony has never divested a major component of its mainstay electronics business even though it has shed some 10,000 jobs, mainly in electronics, since 1999. Sony's previous turnaround efforts have been focused on cost-cutting measures, like closing and selling factories. Neither has the once-proud brand pulled the plug on any major component of its electronics business portfolio.

     "This is probably the first time Sony has taken a fresh, hard look at its electronics businesses," a senior executive at a financial institution said.

     Eiichi Katayama, a senior analyst at Merrill Lynch Japan Securities, said Sony still has a steep climb in front of it due to the short lifespans that high-development-cost products like smartphones have these days.

     In contrast, Panasonic has been pouring resources into automobile- and housing-related products, which have longer lifespans.

     The biggest strategic headache for Sony has been how to fix its money-losing TV division. 

     TVs were once Sony's cash cow. The Trinitron enjoyed decades of popularity, and the Wega series of flat-screen TVs was a big hit in the late 1990s.

     But Sony's TV operations started bleeding red ink when consumers began gravitating toward inexpensive but high-quality liquid crystal display sets, which Sony could never figure out how to make profitably.

     Sony's TV unit has posted operating losses for 10 years in a row.

     Sony has decided to spin off the TV business as a wholly owned subsidiary, possibly in July. The step, Chief Financial Officer Masaru Kato said, is intended to show how much of Sony's poor earnings performances have been due to TVs "and to ensure quicker decision making."

     The latest plan also leans heavily on cost-cutting. By the end of March 2015, Sony will shed 5,000 more jobs. It will also slim down its product lines in the hope of slashing 20% of its sales costs by fiscal 2015.

     Headquarters and back-office operations will also be put on a diet in a hoped-for 30% cost reduction.

TV conundrum

Hirai claims that a revival of the TV business is in the works. With the formidable Samsung Electronics of South Korea and some Chinese makers stepping up their efforts to develop competitive 4K TVs, however, Sony is likely to come under even fiercer price-cutting battles in the future.

     The mobile device sector is also a battlefield. In an ominous sign for Sony's earnings prospects, the company has downwardly revised its global smartphone sales forecast for the current fiscal year to around 40 million units from the previous 42 million range.

     As for its video game business, its new PlayStation 4 home console has sold well, but its handheld game device has not been a hit.

     Panasonic, meanwhile, appears strong and healthy, judging by its share price and earnings.

     Panasonic's shares soared 19% on Wednesday, delivering what Merrill Lynch's Katayama described as "a positive surprise" to investors. The rise lifted the company's market value by some 490 billion yen in that one day.

     Investors reacted enthusiastically to Panasonic's announcement that its operating profit for the April-December period posted a 2.1-fold jump on the year to 63.1 billion yen.

     Panasonic has relentlessly squeezed costs. The company even sold off its long-held shares in Toyota Motor, something it badly wanted to keep from doing so as not to rub a big customer the wrong way, a senior Panasonic executive said.

     Panasonic CEO Kazuhiro Tsuga has delivered on his promise to do whatever is necessary to stop the company from losing money.

     But it is not clear whether Panasonic's sales and profits will continue growing. The company has slashed labor costs by 60 billion yen via massive pay cuts but has no plans for additional reductions.

     And sales of its automobile- and housing-related products -- Panasonic's main profit spinners -- could decline significantly after the scheduled consumption tax hike in April.

     One more thing: As is the case with Sony, Panasonic's digital gadget business faces gloomy prospects.

     "It will be a tough challenge for us to achieve growth in both sales and profits in the next fiscal year," a senior executive said.

     Investors who have piled into Panasonic shares might now be wondering if it is time to sell high and buy Sony low.