TOKYO -- The red ink had been spilling thick and fast in Japan's consumer electronics sector, but big names such as Panasonic and Sharp have returned to profitability. That leaves one former icon as the sole loser: Sony. Can the company that gave the world the Walkman and other innovative gadgetry return to glory?
Sony's recently revamped management team certainly hopes so. But even if the company stages a comeback, it may no longer be the Sony we all know.
The company on May 14 announced its consolidated forecast for the current fiscal year through March 2015. It expects a net loss of 50 billion yen ($492 million), based on U.S. accounting standards. That would be an improvement from the previous year's 128.3 billion yen loss, but it still looks bad compared with Panasonic and other domestic peers. Disappointed investors rushed to unload Sony shares.
The following day, top Sony executives met with representatives of Third Point, a major U.S. hedge fund that holds a stake in the electronics maker.
Third Point believes Sony's movie and other entertainment segments are the group's most valuable assets. Under Kazuo Hirai, who took over as president and CEO from Howard Stringer in 2012, Sony has lately sought to scale back its loss-making electronics segment by selling the Vaio personal computer operation and spinning off the TV division. These are the kinds of moves Third Point wants to see, but there is clearly more work to do.
The meeting took place on the 20th floor of Sony's head office in central Tokyo. Hirai was accompanied by Executive Vice President Kenichiro Yoshida, who recently became chief financial officer. Hiroki Totoki, a senior vice president who has drawn up a structural reform plan, was also there. The Third Point contingent included Munib Islam, a partner at the fund and the right-hand man of founder Daniel Loeb.
"Though we failed before, we will definitely follow through with structural reforms this time," Hirai insisted.
The rise of Yoshida and Totoki gives Sony a different look. At the earnings briefing May 14, Yoshida had harsh words for executives who were already on the board during the Stringer era, as well as Executive Vice President Tadashi Saito, who had been responsible for corporate strategy the past two years.
Spoken like an outsider
"While sales from the electronics businesses have plunged to half of the level six years earlier," Yoshida said, "sales costs have not fallen sufficiently and headquarters' costs have increased. Structural reforms have been delayed."
Yoshida has a financial background and once managed the office of former CEO Nobuyuki Idei, the man behind Sony's strategy of integrating consumer electronics and the Internet. But Yoshida left the parent company in 2000 and moved to So-net, Sony's Internet service provider subsidiary. He took the ISP public and oversaw investments in startups such as M3, a medical information website operator, and DeNA, a mobile gaming and e-commerce company. Latent capital gains on these holdings have helped in financing Sony's restructuring.
Yoshida returned to the parent last December at the request of Hirai, who appointed him chief strategy officer. Last month, Yoshida was promoted to CFO and representative corporate executive officer, officially making him the company's No. 2. Having been away from the head office for more than a decade, it seems he feels free to blast the decisions of past executives.
Totoki, who was also brought into the parent's upper management fold in December, took a circuitous route to get there. He started out in finance at the company in 1987 and, 10 years later, became a leading member of a task force for establishing a bank. His efforts to obtain approval from financial authorities led to the creation of the online-focused Sony Bank in 2001. Totoki was installed as the bank's representative director.
In 2005, Totoki also moved to So-net, where he became a close aide to Yoshida. Said one So-net executive: "Totoki devised management strategies while Yoshida convinced other officials and implemented the plans."
The Philips way?
Where will the Hirai-Yoshida-Totoki trio take Sony? Will they try to become like Apple of the U.S., whose iPod and iPhone displaced the Walkman? Or perhaps Samsung Electronics of South Korea, which overwhelms the competition with sheer quantity?
Sony, it turns out, seems to want to emulate Philips, a Dutch company founded in 1891 as a maker of electric bulbs.
Sources say Sony is closely analyzing Philips' management reforms. The European company was once a rival in audiovisual products such as TVs, but it has almost entirely pulled out of that business over the past decade or so. In 2013, Philips removed the word "Electronics" from its name; it also cut its workforce by more than half.
Today, Philips' main source of profit is medical equipment. Thanks to a series of restructuring steps, the company posted a net profit of 1.2 billion euros ($1.64 billion) for the fiscal year through December, up from a 3.2 billion euro loss in 2002.
Given that Philips divested its TV business, a senior official at one financial institution thinks Sony's TV spinoff is but a step toward a future sale.
Eiichi Katayama, an analyst at Merrill Lynch Japan Securities, argues Sony should "lock in" lifetime customers by selling game consoles, movies and music to young people and offering insurance and banking services through adulthood.
While Sony's TV business has suffered 10 straight years of operating losses -- and the overall electronics business has been in the red for three -- Sony's financial and entertainment arms have been reliably profitable. At the earnings announcement May 14, Yoshida tellingly referred to Sony's three core businesses in this order: financial, entertainment and electronics.
But not everyone believes that order is appropriate. "Without the TV business, it's no longer Sony," said Tamotsu Iba, the company's still-influential former vice chairman.
Shizuo Takashino, the producer of the Walkman and a former executive deputy president, struck a similar note. "Sony's DNA used to center on creating the world's first or best products," he said. "But as eccentrics have been ousted from the company, today's Sony can only create bland products."
Another former official piled on. "None of the present executives invented hit products. A Sony that has lost its spirit has no reason to exist."
Something has to give. Moody's Japan in January lowered Sony's credit rating to speculative status. Hirai cannot allow the company, which has more than 100,000 employees, to keep sinking. The trio at the top is aiming for a rational reordering of priorities in pursuit of corporate value, following the example of Philips.
Yet rationality alone will not inspire the troops. Probably conscious of the criticism that Sony has lost its "Sonyness," Hirai has been making a point of emphasizing the company's tradition of innovation.
A recent TV commercial ( http://www.sony.net/SonyInfo/bemoved/ ), which aired mainly in the U.S., highlights that tradition and features two actors who resemble the company's revered founders, Masaru Ibuka and Akio Morita.
Speaking to new employees who joined the company in April, Hirai said that since day one, "Sony has passed down a free and open-minded corporate culture and a spirit of doing what others do not."
One senior Sony official expressed confidence that the "true Hirai team" will pull off a turnaround. Saito, the former chief strategy officer, and Masaru Kato, the former CFO, were both part of Stringer's circle.
Sony's lineup of outside directors will also change June 19, with new members to include John Roos, the former U.S. ambassador to Japan. Roos has a lot of connections in Silicon Valley.
While Sony may be getting an infusion of fresh thinking, the management changes increase the pressure on Hirai. Now in his third year at the helm, he will finally be surrounded by executives he selected himself. This will make it harder for Hirai to dodge criticism if he fails to engineer a swift recovery.