Sony Cuts Back On Chip Spending

Kenji Hall

Is Sony giving its semiconductor strategy a rethink? That's what Yutaka Nakagawa, who heads Sony's semiconductor division, suggested to reporters on Feb. 13. The exec said Sony's investment in its chip-making operations would fall significantly over the next three years through the fiscal year ending March 2010. Though he didn't offer any concrete figures, the Nikkei financial daily estimated that the company would spend $2.5 billion--40% less than the $4 billion it will have spent in the three years through March.

The reason: Sony is considering farming out production of the Cell chip to others. The superfast microprocessor got its long-awaited debut in Sony's next-generation PlayStation 3 video game console, and Sony has been working with its Cell development partners IBM and Toshiba to find other uses for the chip. But while Sony execs have repeatedly stated their hopes of embedding the Cell in TVs, DVD players, and practically any other consumer electronics product (not to mention radar and sonar systems for the military and an array medical devices) there are few signs of that happening just yet.

Should investors worry? Analysts say no. Nakagawa--who rose to his post in a management reshuffle last October--has been reassessing Sony's spending on chips. That's a good sign, and it's in line with chief exec Howard Stringer's plan of selling off assets and making sure Sony isn't stretched too thin. "It's the right decision," says Yuji Fujimori, analyst at Goldman Sachs in Tokyo. "It's not just about semiconductors. Sony's management has put greater emphasis on asset efficiency by selling off part of the land its headquarters occupies and taking Sony Financial Holdings public."

Sony shares edged up 0.2% in Tokyo before the announcement was made. So far this year, the shares have risen 18% vs. just over 2% for the benchmark Nikkei 225 Stock Average.

Whether a consumer electronics maker should make its own chips is a hotly debated topic. Sony has its share of critics, who think the company shouldn't be pouring so much money into new chip fabs. Plenty of other chip specialists, such as Broadcom and PMC-Sierra, keep control of design but outsource the manufacturing work to low-cost chip fabs in Asia. In other words, no factories of their own. That frees up money for research into next-gen chips. If they can do it, why can't Sony?

Sony has deflected the criticism by saying that owning its own fabs gave it greater control over the supply of chips and keep tech secrets in-house. (Remember that a shortage of chips hobbled its early rollout of the PlayStation 2, the PS3's predecessor.) IDC semiconductor analyst IdaRose Sylvester agrees with that notion. "If you're a Sony or Sharp you have no way to keep your product differentiated if you go to the market for chips," she says. "You need to develop your own chips in-house so you can fine-tune them to have that Sony Bravia look or the Sharp Aquos feel. That's all created in the silicon and to some degree in the software that rides on top of that. If you're the company making it, you control it."

Another reason: Nearly 10% of Sony's $70 billion in annual revenues come from semiconductors.

The Cell has loads of potential. It's expected to deliver several times the processing power of a standard PC chip, thanks to its its nine "cores" and its 3.2 gigahertz-per-core speed. Nobody thinks Sony would dare scrap the Cell after spending five years and an estimated $1.7 billion on its development.

But all that computing power doesn't come cheap. According to an iSuppli estimate, Sony is spending $89 to make each chip. (Goldman Sachs estimates that chips comprise nearly half of the cost of the gaming machine.) That's part of the reason Sony is losing as much as $300 on every PS3 console it sells.

It's a mystery whether Sony has improved yields, expanded output and lowered the cost per chip at its Cell-making facility in Kumamoto, in southern Japan. Nakagawa will likely disclose more to analysts on Thursday when he is scheduled to give them a rundown of the company's semiconductor operations.

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