Sony Layoffs Fail to Sway Critics

Analysts gripe that the electronics giant's cost-cutting plan is short on details

Sony's latest round of spending cuts and layoffs for its electronics business didn't get the enthusiastic reception the company might have been expecting. On Dec. 9, Sony (SNE) announced plans to lay off thousands of employees, delay spending on factories, and streamline its supply chain for semiconductor chips and flat-screen TVs. All told, the company expects to eliminate more than $1 billion in expenses over the next 15 months.

But analysts have attacked the plan for being short on details. "There's nothing in the announcement about the speed at which the company will carry out the cuts or how positive they will be for earnings next fiscal year," says Mizuho Investors Securities (8607.T) analyst Nobuo Kurahashi.

Another thing that strikes critics as odd: Sony has yet to revise the ambitious three-year agenda of financial targets and product launches that it announced with much fanfare less than six months ago. So far, the company is sticking by its goals for a return on equity of 10% within three years, from 8.6% last year. (Analysts use ROE to gauge how much profit a company is making with the money it has raised from shareholders.)

Uphill Selling

Now that the global economy is facing a long recession, it's going to be harder than ever for Sony to persuade consumers to splurge on a new flat-screen TV or digital camera. "One billion [dollars] seems like a big number, but in this rapidly changing environment it might not be enough," says Standard & Poor's (MHP) analyst Osamu Kobayashi. "And what will the company do to reach consumers?"

The Japanese electronics and entertainment giant has already warned that this year's earnings won't be anywhere near the record highs it had forecast back in July. Sony's problems are similar to those of many other top tech manufacturers in Japan. The yen's sharp rise in recent months has eroded Sony's overseas business, where it makes 80% of annual revenues. The economic slowdown and falling electronics prices at home and abroad have only added to the company's woes. "The global financial crisis is hitting the U.S., Europe, and Japan as well as emerging nations' economies," says Sony Senior Vice-President Naofumi Hara.

In October, Sony said annual operating profits would probably fall by less than half, to $2.15 billion, from last year, despite a 1% sales gain to $97 billion. The company also forecast net profit of $1.6 billion (, 10/23/08) for the fiscal year through March 2009.

For now, Sony is focusing the cost-cutting on its electronics business. It plans to lay off 8,000 employees, or 4% of Sony's global workforce of 186,000, and it won't renew the contracts of a further 8,000 seasonal and temporary workers. That's the biggest job cut of any Japanese company since the U.S. financial crisis hit over the summer. (Hara wouldn't offer a breakdown of the layoffs.)

Shuttering Factories

Electronics investments will be slashed by nearly a third next fiscal year. Part of that will come from closing "five or six" of the company's 57 plants, including a videotape factory in France, says Hara. The company will also delay a production increase for liquid-crystal-display TVs at its plant in Slovakia and outsource image sensor chips for tiny cameras found inside mobile phones.

The cuts left analysts wondering what products Sony will rely on for future growth. The company's LCD TVs are a huge revenue source for the electronics division but have yet to turn a profit, and Sony officials are now downplaying expectations for a turnaround this fiscal year. "And what of the other divisions, such as video games?" says S&P's Kobayashi.

Sony says it will be hard to judge the impact of the cuts on earnings until fiscal year third-quarter earnings are in. Traditionally, the quarter is the most profitable for Sony's electronics business. During the October-December period last year, the division raked in about a third of its annual revenues and almost half of its operating earnings. "It's hard to predict how much longer the current situation will persist," says Sony's Hara.

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