Sony Using Chips in Market Fighting Disease
Rising rates of cancer, obesity and heart disease may offer a path back to health for Sony Corp. (6758), as the ailing Japanese maker of televisions, cameras and game consoles turns to semiconductors to end unprecedented losses.
Japan’s largest consumer-electronics exporter will speed up a move into health equipment by using the edge its new image- sensors have over rivals, said incoming Chief Executive Officer Kazuo Hirai. Medical has the potential to be one of the main sources of profit, Hirai said, even as Sony cut targets on PlayStation 3 units, Blu-ray disc players and Vaio computers.
“We can leverage our technology base in image-capturing sensors, lenses, 3-D technology, image processing, to mention just a few areas,” Hirai said in an interview in Tokyo yesterday. “Those are areas where we already have in-house technologies that really allow us to differentiate ourselves.”
Sony won a boost after its smaller and more efficient CMOS chips were used in Apple Inc. (AAPL)’s iPhone 4S, and the company is now targeting endoscopes used to look inside body cavities and other applications. Medical devices mark a further retreat from consumer products, where Sony has struggled against lower-cost South Korean and Chinese rivals and Apple’s hit releases.
“They are looking for new markets that can support their strengths in making high-quality goods,” said Nobuo Kurahashi, an analyst at Mizuho Financial Group Inc. in Tokyo. “Medical comes to mind,” he said. “It’s a market where people are prepared to pay for quality.”
Sales of audio-visual goods such as Trinitron televisions and Walkman music players accounted for 89 percent of Sony’s 1.05 trillion yen ($13.6 billion) revenue in 1981. Thirty years later, the share from consumer products that now include Bravia TVs and Cybershot cameras had fallen to 52 percent.
The trend is likely to accelerate. Hirai said that while Sony is committed to the TV division that by the end of March will have lost about 700 billion yen over eight years, it will cut the range of sets. Sony will also review more than 2,000 consumer products it makes, and may exit unprofitable businesses. Announcing third-quarter earnings on Feb. 2, Sony forecast a 220 billion yen loss in the year ending March 31, the longest line of red ink since it went public in 1958.
Hirai takes over in April from Howard Stringer, who spent seven years restructuring the company, trying to marry Sony’s engineering capabilities to gaming software, music and film content. In the end, Cupertino, California-based Apple did a better job of delivering the integration of design and software across a platform of products. Suwon, South Korea-based Samsung Electronics Co. (005930) undercut Japanese manufacturers on cost.
Sony’s market value of $20 billion is one-sixth its 2000 peak. Samsung overtook Sony in 2002, and plans capital expenditure next year that’s greater than its rival’s entire stock valuation. Apple, worth less than $20 billion in 2000, is the world’s most valuable company at about $460 billion.
To halt the descent, Sony will “speed up” development of its technology and seek new products in which CMOS, or complementary metal-oxide semiconductors, can be used, Hirai said. Executive Vice President Hiroshi Yoshioka will head the medical business, and Tadashi Saito, who leads Sony’s chip operations, takes on the new role of chief strategy officer.
Sony shares fell 0.5 percent in Tokyo trading today, snapping a 16 percent, five-day advance that was the biggest in more than two years. The Topix (TPX) Electric Appliances Index rose 4.3 percent in the same period.
A breakthrough in Sony’s CMOS technology that can deliver crisper images in dark conditions, such as those inside a patient’s colon or esophagus, has helped the company gain sales.
“Sony is way ahead of its rivals,” said Yuji Fujimori, a Tokyo-based analyst at Barclays Plc., who expects the chip unit to overtake financial services as the company’s most profitable division. “It’s got good margin, too.”
Fujimori predicts operating margins on semiconductors will jump to 17 percent by March 2014 from 10 percent this year. CMOS may help lift operating profit at Sony’s semiconductor division to 90 billion yen in the year ending March 2014, from 40 billion yen in the 12 months to March 2012, he said.
Sony is spending 140 billion yen to boost CMOS production, aiming to win a 30 percent share of shipments in the market for image sensors used in mobile phones, compared with 11 percent for the year ended March 2011. Sony’s monthly capacity for chip wafers used to make the sensors will be lifted to 50,000 units by March 2012 and 75,000 units in the following three years, from 25,000 in Dec. 2010.
“It is imperative that the company move aggressively into new end-use applications, beyond camera phones and consumer products,” Rob Lineback, an analyst at Scottsdale, Arizona- based market research company IC Insights, said in an email. “Sony will need to partner with leading equipment suppliers in new markets.”
Longer, more sedentary lives and richer diets are driving an increase in heart disease, cancers and diabetes, spurring demand for faster and more portable equipment to treat them. Sales in the world’s 10 biggest markets for medical devices are estimated to grow 6.8 percent a year between 2010 and 2015 to reach $228 billion, according to MarketsandMarkets, a marketing research firm based in Dallas, Texas.
Global sales of CMOS chips for medical and scientific equipment are forecast to grow at an annual compound rate of 21 percent between 2010 and 2015, Lineback said. The market for camera phone sensor sales is projected to grow about 8 percent a year over the same period, he said. Mobile phones will account for 49 percent of CMOS demand in 2015, from 62 percent now, IC Insights said.
Sony is considering an investment in Olympus Corp. (7733), the world’s biggest endoscope maker, after the Tokyo-based company admitted to a $1.7 billion accounting fraud, according to the Nikkei newspaper. Olympus needs to shore up its balance sheet, and Sony would gain access to the seller of seven in every 10 endoscopes in the world.
Hirai declined to comment on Olympus.
“Marketing medical products is very different to consumer electronics, where volume is massive,” said Mizuho’s Kurahashi. “It may take a while for Sony to grow the business, but it will certainly help earnings.”
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