Panasonic Posts Losses But Boosts Sales Overseas

Like many of Japan's tech giants, Panasonic (PC) is taking its lumps. The latest evidence came on Aug. 3, when the electronics company reported it had posted back-to-back quarterly losses. Panasonic blamed the usual suspects for its April-June performance: the strong yen, anemic global demand for consumer electronics, and the falling prices of TVs, digital cameras, and other gadgets.

But the news wasn't all grim. One bright spot: household appliances. Panasonic, based in the western Japanese city of Osaka, is best known for its Viera brand of flat-screen TVs and Lumix line of digital cameras. But along with TVs, cameras, chips, and factory equipment, the sprawling tech conglomerate is also a major manufacturer of air conditioners and washing machines.

The appliance business accounted for just over 18% of Panasonic's sales in the quarter, but it was the only sector where the company made money. That suggests a strategy of expansion abroad is working despite the downturn. With Japan's graying population weighing on the country's growth prospects, Panasonic has been looking to boost overseas sales. The company began selling its refrigerators and washing machines in Europe in March, and officials say early results have surpassed expectations.

The sales growth overseas and drastic cutbacks were enough to help Panasonic post better-than-expected quarterly results. For the April-June period, the company reported an operating loss of $213 million, vs. a $1.16 billion profit in the same quarter a year ago. Sales fell 26%, to $16.8 billion, for the April-June quarter. The loss was smaller than analysts' projections. Perhaps more important: Panasonic raised its first-half forecasts, saying it now expects to post an operating loss of $210 million, instead of the $1.11 billion loss it had expected. It predicted April-September sales would be $34.7 billion, up from the earlier forecast of $34.3 billion.

Targeting Emerging Markets An improving global economy will be key to hitting those new targets. Panasonic President Fumio Ohtsubo told shareholders in June that he's gunning for double-digit growth overseas this fiscal year. His plan: marketing products to the growing middle class in Brazil, India, China, Russia, and Vietnam. Last fiscal year the company's sales to those emerging markets grew despite an overall drop in sales. Panasonic is also looking to launch more products in what its executives are calling the MINTs—Mexico, Indonesia, Nigeria, and Turkey—as well as the Balkan countries. "We won't make money by sticking to Japanese standards for high quality and high costs," Panasonic Chief Financial Officer Makoto Uenoyama told reporters today. "Basically we are attempting to do everything locally—product planning, design, development, production, and parts procurement—in those markets."

Japan's tech sector earnings stand in contrast to the upbeat results from Apple (AAPL), Intel (INTC), and other U.S. tech companies that have buoyed sentiment on Wall Street. Panasonic's announcement follows dismal financial results from Sharp and Sony (SNE) last week.

The Japanese tech sector's Achilles' heel: TVs. Researcher DisplaySearch predicts global unit sales of TVs will dip nearly 3% this year, falling for the first time in several years. It's not just falling demand that's hurting Japanese tech firms, among the world's top TV makers. Competition from Korea, low-cost producers in China, and U.S. brands such as Vizio, which outsources all of its manufacturing, have sparked a price war that has put Japanese firms at a disadvantage. "This year, Japanese TV brands' first priority is to be healthy and fix their financial problems," says DisplaySearch analyst Hisakazu Torii.

Gains Seen in Greentech Batteries There are reasons for Panasonic shareholders to be optimistic. The company pointed out that while quarterly sales were lower than a year ago, they were up from the previous quarter. In the home appliances unit, revenues from the three main products—air conditioners, refrigerators, and washing machines—fell 14% compared with same quarter last year but were up 60% from the January-March quarter. More improvement is expected. The company now predicts April-September sales will be $34.7 billion, up from the earlier forecast of $34.3 billion. Longer term, Panasonic's acquisition of Sanyo Electric, which hinges on regulators' approval, will make it a strong contender in batteries for hybrid and electric cars and photovoltaic cells for solar panels—where analysts predict big gains.

Still, analysts say that Panasonic and other Japanese tech firms need to raise their game if they are to keep up with Asian rivals. Nomura Securities' analyst Eiichi Katayama points out that the Korean won's weakness against major currencies isn't the only reason tech firms from that country are healthier than their Japanese counterparts. Korean manufacturers buy equipment and materials from Japan and sell their products in the same countries that Japanese tech firms do. Yet Samsung Electronics' TV operating margins are above 10%, while the TV units of Panasonic and Sony are hemorrhaging. "We think that Korean companies' strategic moves and speedy management decisions are a key reason," Katayama wrote in a report this week.

Branding is also a hurdle for Panasonic. The company is the world's largest maker of flat-screen plasma TVs, with 34% market share. But in other products, such as mobile phones, its global presence is small, and the company's lack of an iconic product, such as Apple's iPod, has hampered its brand marketing efforts. "Panasonic needs to have some major hit product that is strongly identified with the company," Deutsche Securities analyst Yasuo Nakane wrote in a report in June.

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