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Japan-Update

Sony's new CEO looks to close market cap gap with Netflix

Yoshida says balance sheet key to improving corporate value

Kenichiro Yoshida, Sony's chief financial officer and incoming CEO speaks at a news conference on Feb. 2 in Tokyo. (Photo by Ken Kobayashi)

TOKYO -- Sony's management is about to enter a new stage. Under CEO Kazuo Hirai, the Tokyo-based multinational conglomerate succeeded in trimming its loss-making divisions and is set to post its first record profit in 20 years in the fiscal year ending in March.

Starting April, Hirai will hand the reins over to his right-hand man, Kenichiro Yoshida, 58, the company's current chief financial officer. Yet, the transition will be more than just continuing down Hirai's path. The company needs to make a leap into the future, and Yoshida hinted at how he intends to do that in his comments at a news conference announcing the move on Feb 2.

"Companies with the largest market capitalization in the world used to be those in resources," Yoshida said. "Today, they are all tech players. And in that sense, Sony, as a tech company, has a sense of urgency."

Long in charge of investor relations, Yoshida knows how to communicate. He sticks to the essentials and is direct. His comments touch on a topic that is often discussed at Sony headquarters these days: the difference in market Sony's market capitalization compared with Netflix.

The U.S. streaming service's operating profit is just $800 million, but its market capitalization of around $116 billion is nearly double Sony's $63 billion.

"Investors do not judge Sony's corporate value as they should," complains a company executive.

In its gaming and online content business, which is comparable to Netflix, Sony subsidiary Sony Interactive Entertainment forecasts an operating profit of 180 billion yen ($1.64 billion) in the year ending March. While it holds the popular PlayStation franchise, SIE cannot match Netflix in corporate value.

The handover to Yoshida is part of a plan to make Sony as valuable as Netflix. Yoshida will announce the company's new midterm plan for fiscal 2018-2020 in the spring. An underlying theme will be consolidating and optimizing the company's global resources to create new value.

The competition intensifies   © Reuters

"Our balance sheet needs to be improved further," Yoshida said at the Feb. 2 news conference.

The current midterm business plan, which runs through March, emphasizes profitability, prioritizing shareholder interests and putting the most weight on return on equity.

To reach these goals, Hirai turned Sony's business units into independent subsidiaries and introduced return on invested capital as a gauge for assessing the efficiency of their operations.

ROE has three components: profit margin, asset turnover and financial leverage. As CFO, Yoshida has worked hard at improving the company's net profit margin and asset turnover through structural reforms -- focusing on those businesses where Sony excels. These efforts have paid off, returning Sony to record profits.

Yoshida is now ready to take the next step, consolidating and optimizing Sony's resources. The idea is to enhance the company's ability to generate profit by cutting not only costs but also excess assets. A company's asset turnover ratio measures the efficiency of its assets in generating sales. Yoshida sees room for improvement in this area.

As he looks to make Sony leaner, Yoshida could learn from  fellow Japanese company that is highly profitable: camera and optical equipment maker Canon, led by Chairman and CEO Fujio Mitarai.

"Management is an art, and the balance sheet is the stage," Mitarai often says. The 82-year old former head of the Japan Business Federation, or Keidanren, denounces corporate managers who only look at sales, profits and margins. "The balance sheet is a report card. It tells everything about a company, from assets to loans to cash holdings. I can tell whether a company is good or bad just by reading the balance sheet for, say, five minutes or so," Mitarai says.

Mitarai frequently reviews Canon's balance sheet, focusing on specific points, such as whether assets are performing adequately and whether inventories are not mostly old products. "For receivables," Mitarai says, "I would check the length of the turnover cycle and changes in total receivables."

When the Canon chief executive spots an unusual figure, he goes directly to the department responsible to find out why. This has enabled Canon to maintain its profitability.

Yoshida could take a page from Mitarai's book in tackling the challenges facing Sony.

One side-effect of Hirai's reforms was that given greater freedom, each subsidiary began to voice their demands more strongly. While that is not necessarily a bad thing, it became harder for headquarters to allocate resources freely within the group. Introducing a balance-sheet-led management, Yoshida believes he can reduce duplicate assets and unite the group toward generating maximum profit with minimum resources.

The tech area is especially important, and Sony's management shuffle reflects this. In addition to choosing Yoshida as the next CEO, Sony also appointed Toru Katsumoto executive vice president in charge of research and development, in effect making him Sony's chief technology officer.

Katsumoto hails from Sony's camera business and contributed significantly to integrating Konica Minolta's camera operations into the group when Sony bought it in 2006. In 2013, he was selected to head Sony Olympus Medical Solutions, a joint venture in endoscopes between Sony and Olympus.

Yoshida appears to value Katsumoto's experience inside and outside Sony. Yoshida himself spent 14 years outside of Sony when he worked at So-net, a Sony subsidiary and internet provider.

As Sony turns to partnerships with outside parties to foster innovation, the soft-spoken and popular Katsumoto will be the best fit to lead Sony's army of talented but proud engineers.

And Hirai is far from done. While the 57-year-old CEO will become a nonexecutive chairman starting in April, he is considering helping Yoshida by advising his successor in areas such as entertainment, gaming and network services. The competition here is with big U.S. players such as Netflix, Amazon.com, Disney and Facebook. The handover to Yoshida, and his emphasis on raising the company's corporate value, is aimed at preparing Sony for this next battle.

Sony co-founder Masaru Ibuka used to define the company's culture as a willingness to take new paths. Sony grew by adapting to its surroundings, Ibuka said. Sony's next generation of leaders will soon have a chance to display their own evolutionary talents.

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