Sony: Losing the Magic Touch?

Despite efforts to trim down, it still looks like an unwieldy conglomerate

For years, Nobuyuki Idei seemed to have the golden touch. Since his appointment as Sony Corp. president in 1995, Idei has fixed sagging U.S. operations and doubled group sales to $60 billion. He devised an enticing long-term strategy to transform Sony from an audio-visual electronics manufacturer into an information technology and entertainment giant. When profits began to flag two years ago, Idei moved far more aggressively than other Japanese corporate chieftains to create a leaner organization, merging company divisions and selling off or closing more than a dozen factories worldwide.

Unfortunately, it's becoming clear that Idei didn't do nearly enough. Although the company still projects a net profit this year of $83 million on sales of $62.5 billion, analysts say it will be lucky to break even. Masahiro Ono of UBS Warburg expects a razor-edge profit of just $1.7 million. Investors are fleeing: Over the past month, Sony's stock has plunged 25%, to $33.

Much of what afflicts Sony, of course, is beyond Idei's control. The global technology crash has eroded demand for its computer-related components and certain types of chips--and the September 11 terrorist attack on the U.S. is bound to hit sales of movies, video-game consoles, and other consumer-electronics products in Sony's biggest overseas market. But that doesn't take Sony executives off the hook. For all Idei's efforts, Sony still looks like many other unwieldy Japanese conglomerates. The company's costs are out of line. It makes too many low-margin products, such as PC monitors and hard-disk drives, that it should have long ago spun off to contract manufacturers. And its operations are far too diverse, ranging from semiconductors to insurance to online banking. Indeed, Idei, now Sony's chairman and CEO, readily admits the company was slow to respond to the tech slowdown that began last year. "When we realized we had to do more restructuring, it was already too late," he says.

True to form, Idei has a new plan: Sony will spend an additional $250 million to streamline operations this year, on top of the $420 million already budgeted. The money will be used to eliminate or revamp 48 unprofitable business areas. Idei hopes to cut Sony's material costs 15% by purchasing more computer components from outside suppliers, rather than from its own subsidiaries.

One of the first businesses to come under scrutiny will be PC monitors using cathode-ray tubes (CRTs). With the decline in prices of flat liquid crystal display screens, Sony has been left with a large inventory of unsold CRT monitors. "We knew three years ago that the CRT displays were on their way out," says Sony President Kunitake Ando. "But we didn't hit the brakes on production until late last year." Sony estimates it will lose up to $330 million in that business this year.

Meanwhile, Idei still hopes for a big payoff from a push into online retailing of its music, movies, and games. "I firmly believe this is the right direction," he asserts. "In coming years, everyone will be connected to the Net."

RECALLS. Investors are holding the applause and anticipating more bad news. For starters, 40% of Sony's sales of video-game products in the U.S. come between Thanksgiving and New Year's Day--and consumer spending is plunging. Sony only started turning a profit on consoles and game content for PlayStation 2, launched in March, 1999, in the last few months. It was banking on selling several million consoles in the U.S. by yearend. As a result, "any decline in demand will hurt Sony more than its rivals Nintendo or Microsoft," says ING Barings game-industry analyst Lisa Spicer. The rivals are preparing to launch their new game platforms in limited quantities in November.

Sony's mobile-phone business also is vulnerable. Earlier this year, Sony recalled three batches of Net-ready cell phones, built for two Japanese wireless operators, because of software glitches. As a result, it wrote off $110 million for the quarter ended in June. Analysts say Sony's plan to deliver entertainment online is behind schedule.

More fundamentally, there is growing skepticism about whether Sony is transforming itself under Idei into the lean rival he promised. True, Sony has shut 13 factories since 1999. But critics note that at a time when it should be shedding subsidiaries, Sony recently boosted its stake in money-losing Aiwa, a maker of low-end consumer electronics, from 50% to 61%. Sony has long prided itself on being a cut above any other Japanese electronics conglomerates. But in rocky times like these, it's beginning to look like just another dinosaur.

By Irene M. Kunii in Tokyo

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