Sony, once the world's biggest consumer electronics firm has been in a sorry state for over a decade, along with other crippled giants that grew with Japan in the decades after its military defeat in 1945.
Last month Moody’s Investors Services cut the credit rating of Sony to junk status saying that the Japanese group’s profitability is likely to remain “weak and volatile” until the turnround of its television and personal computer businesses translates into better earnings.
On Thursday, Sony, which is also in the entertainment (it acquired Columbia Records and Columbia Pictures in the US in the 1980s) and financial services business, expects to lose ¥110bn, or about $1.1bn, in its current fiscal year ending March 31, and it said it would sell its unprofitable personal computer unit. It also announced plans to spinout its television manufacturing business into a separate, wholly owned subsidiary.
Sony had about 146,000 employees in 2013 with less than 40% in Japan, down from 162,000 in 2004 and 170,000 in 1999.
Global PC shipments fell 10% last year, to 316m, according to Gartner, a US research firm, as demand grows for tablet computers such as Apple's iPad or smartphones to connect to the Internet. Sony’s share of that total slipped to 1.9% worldwide in 2013 from 2.1% in 2012, Gartner said, making it the ninth-largest maker of PCs worldwide. Profit levels are dire.
Sony had reported a near doubling of operating profit from a year earlier in the quarter ended December 31, largely due to the weaker yen and last May reported its first full-year net profit in five years.
For the full year, Sony now expects to record losses from the TV business totalling ¥25bn - - its 10th straight year in the red.
Electronics products remain at Sony's core, generating about 70% of its revenue.
Corporate Japan rampant
In 1989, Mitsubishi Estate Company of Tokyo, then one of the world's biggest real estate developers, purchased an 80% stake in the Rockefeller Center in New York, in a deal presided over by David Rockefeller, grandson of John D. Rockefeller, the king of the famous or infamous 'robber barons.'
The centre which consisted of 19 buildings covering 22 acres, had been completed in 1939 and The New York Times commented that the deal "is only the latest instance of the Japanese buying a vital piece of the American landscape, from Hollywood to Wall Street. In September, the Sony Corporation bought Columbia Pictures for $3.4bn."
A year later, the Times reported that, "If all goes as planned in the next few weeks, ET, the cuddly extra-terrestrial (the movie directed by the then young Steven Spielberg), will have a new parent. Matsushita, the giant consumer electronics maker known in the United States as Panasonic, is negotiating what may be a $7bn takeover of MCA, the owner of Universal Studios and one of the recording industry's biggest labels."
On Sept 12, 1995, The New York Times reported: "The Mitsubishi Estate Company of Japan plans to walk away from its almost $2bn investment in Rockefeller Center, the Hope diamond of world real estate.
Mitsubishi proposed yesterday afternoon that it pass ownership of the Manhattan property to Rockefeller Center Properties Inc., the publicly traded real estate investment trust that holds the $1.3bn mortgage on the center, according to advisers involved in the negotiations to bring Rockefeller Center out of bankruptcy protection."
Japan's biggest companies on slide
McKinsey, the management consultants, asks: Why are General Motors and Volkswagen more successful in China than Honda and Toyota? Why are LG and Samsung bigger in India than Panasonic and Sony? Why is IBM larger in Japan than Fujitsu is in the United States?
McKinsey says in future, building a globalized company will require many Japanese executives to think in new and unfamiliar ways about organization, marketing, and strategy. The approaches that proved successful in the past - - for example, replicating practices from the Japanese market in foreign operations - - have outlived their usefulness.
Japan’s biggest companies have been losing relative market share over the past ten years: their proportion of the Fortune Global 500’s total revenues decreased to 13%, from 35%, between 1995 and 2009. One of Japan’s longtime strengths is electronics, for example, but its share of the world’s export value of electronic goods has fallen from 30% in 1990 to less than 15% today, according to the Japanese Ministry of Economy, Trade, and Industry. Many Japanese companies have no alternative to globalization if they hope to continue growing.
Japanese companies have a global presence and reputation, but most remain surprisingly dependent on Japan’s domestic market for revenue, while struggling to capture a reasonable share of dynamically growing emerging markets. The analysis shows that Japanese high-tech companies, as a group, still generate more than 50% of their sales in the home market, growing by a mere 1% annually, compared with growth of 5 to 10% in the developing world and 2 to 3% in other developed markets.
In the past decade, Japanese technology groups have lost almost a third of their overall market share to Taiwanese and South Korean rivals, according to a survey by CLSA, a Hong Kong headquartered brokerage. In televisions the decline has been sharper: Japanese companies make less than 10% of the LCD panels that are the core of modern flatscreen sets, down from half a decade ago and virtually 100% when the technology was first commercialised in the 1990s.
The television business has become commoditised and the Financial Times says that even in Japan, where consumers have mostly stayed loyal to homegrown brands, price competition has been fierce amid a persistent glut of panels.
The Economist wrote in 2009 that the “supermarket” strategy, in which each company has a hand in every area, worked well during Japan’s incredible economic boom between 1960 and 1990. “Made in Japan” gadgets, once cheap and flaky, ended up as world leaders in quality, humiliating America’s electronics industry along the way. Consumers at home and abroad snapped them up, generating vast trade surpluses and bitter trade tensions.
"But the companies got bigger and bigger, priding themselves on their girth rather than their profits. Many now have over 500 affiliates, from travel agencies to restaurants. Old practices linger."
A shrinking consumer base and lagging productivity
McKinsey says for the past 40 years, Japanese companies achieved global leadership by dominating their home market, but no longer. Japan’s population is expected to fall from 127m today to less than 100m between 2040 and 2050. A declining population will almost certainly reduce the absolute level of private consumption, along with tax revenues and, potentially, overall GDP. Private consumption in Japan, at the end of 2008, stood at ¥220trn ($2.7trn), 59% of GDP. It is (optimistically) forecast to reach ¥293trn in 2040, with an underlying assumption of an absolute increase in GDP per capita of more than 50% - - something that is difficult to fathom unless the Bank of Japan can comprehensively end the deflationary environment.
In March 2011, the month of the earthquake and tsunami, new car sales fell to the lowest level since 1968. That in itself may not be a surprise but in recent years car sales have been at oscillating between 30 and 40-year lows.
McKinsey says another economic issue is lagging productivity at home. Despite a handful of world-leading industries and companies, Japan has among the lowest labour productivity rates of any major developed country. Japanese companies are therefore generally less competitive and more vulnerable to foreign attackers at home. Japanese workers tend to be among the world’s most diligent, but they are both collectively and individually inefficient - - particularly those who do not toil in factories. "Our conversations with senior executives suggest that Japanese managers are acutely aware that their headquarters are overstaffed, that employees focus more on work effort than on impact or outcomes, and that Japanese companies have hobbled efficiency by limiting outsourcing and offshoring to a handful of IT-related functions," McKinsey said.
Temporary work also nearly doubled, rising from 20% in 1990 to as high as 38% today. Temps have poor work conditions, they generally earn less than the Irish minimum wage of $12 and companies haven't the incentive to train them.
A tired innovation model
McKinsey says Japanese companies once were leaders in providing innovative products appealing to consumers in developed markets. But consumers in fast-growing emerging markets have different needs. Japan has found that trying to identify them in R&D labs at home - - the typical approach - - is a challenge. That issue is not relevant only to emerging markets; Japanese companies must get closer to their customers everywhere. The current, made-in-Japan model is insufficient.
A report (pdf) in 2011 by Deutsche Bank Research said companies in the US are distinguished by a strong startup culture. Over 50% of all US firms in the current top 1,000 R&D spenders were founded after 1975, in Europe the figure is just 18% and in Japan a mere 2%. US firms thus invest more in R&D than their competitors in Europe and Japan also on account of their youth and their smaller size. The startup culture also explains why US firms call the shots in advanced technology sectors. Biotechnology, software and IT are business areas that did not even exist until very recently. Long-standing companies find it difficult, however, to tap into these new business areas. That is why it is mainly the relatively young (former) start-ups that are successful in these areas. The potent start-up culture in the US consequently ensures the major presence of US firms in the young high-tech industries.
McKinsey says the emerging corporate-innovation model is globally collaborative, with product ideas, customer insights, money, and talent coming from all over. Procter & Gamble, for instance, reports that more than 50% of its innovation initiatives involve collaboration with outsiders. Shiseido executives say they can’t assume that all of the company’s innovations, both in beauty care products and in channels, will come from Japan; hence the 2010 acquisition of US-based Bare Escentuals, for $1.7bn. What makes traditional Japanese lab-based R&D less effective today? In short, increased competition from China, South Korea, and Taiwan; the wide availability of component parts; and an increasingly fast speed to market.
Investment in research and development is often seen as a proxy for innovation, and it is true that Japan is a leader in R&D, spending 3.8% of GDP on it. But this view misses a crucial point: innovation across many categories once dominated by Japan now comes from outside the country. A 2009 report (pdf) by the Boston Consulting Group and US-based National Association of Manufacturers listed Singapore and South Korea as the world’s top two countries for innovation - - far ahead of Japan and even ahead of the eighth-ranked United States.
A tired company model and a new one
Typically in western multinationals, the worldwide company language is English, overseas experience is essential for career progression and there is a unified global structure.
In 2009 Japan had the lowest score of any of the International Monetary Fund’s advanced economies on the Test of English as a Foreign Language, administered to foreign students who want to study in the United States. It had the second-lowest score among Asian nations, outperforming only Laos.
The Economist wrote in 2011 that "around two-thirds of all Japanese firms do not earn a profit (at least for tax purposes). More than a quarter of companies on the Tokyo Stock Exchange had operating margins below 2% over the past decade. Bosses complain that younger executives lack assertiveness; the media grouse about unambitious 'grass-eating men.' Even the governor of the Bank of Japan, Masaaki Shirakawa, acknowledges that the country's near-zero interest rates undermine corporate performance."
However, there is a more optimistic facet of corporate Japan - - a large cohort of super-performers. These well-managed companies with excellent technology have impressive returns.
Ulrike Schaede, a professor of Japanese business at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego, says that in the old days, what it took to win was size, as companies were rewarded for diversifying into many different business segments so that they could scale the value-added strategy. This is how companies like Hitachi or Panasonic ended up with several hundred subsidiaries, many in unrelated businesses. "Today, what it takes to win is specialization and excellence in a few clearly defined core strengths, to build a competitive advantage over global competitors. Companies have responded to this realization in different ways, and this has resulted in a new variety of strategic approaches."
She says: "Sony’s engineering talent went largely to waste, as the company was first to develop yet last to market in one cool gadget after another, from the e-reader to the tablet."
In the paper, 'Japan's Most Profitable Companies in the 2000s,' [pdf], Schaede says that most of Japan's new high-performance companies make “intermediate goods”, such as electrical components, specialist chemicals and precision-machinery parts, rather than final products.
These young companies are not run on the basis of seniority and they play a substantial role in the economy: a quarter of firms account for almost half of all manufacturing profits.
Japan's export/GDP ratio is as low as 15%.
Akio Morita and Steve Jobs
Akio Morita (1921-1999) co-founded the company that became known as Sony, in 1946. The name combined the Latin word for sound, sonus, with the English expression “sonny-boy” to give an impression of a company that was full of energy and youthful exuberance.
In 1953 Morita paid Western Electric of the US $25,000 for transistor technology licenses and the company launched one of the first transistor radios in 1955, followed by the first Sony-trademarked product, a pocket-sized radio, in 1957.
The company's name was changed to Sony in 1958 and the first transistor TV (1959) and the first solid- state videotape recorder (1961) were launched.
Sony's launched the Trinitron colour TV tube in 1968 that merited the tag 'state of the art.'
"We used to go visit Akio Morita and he had really the same kind of high-end standards that Steve did and respect for beautiful products," John Sculley, former Apple CEO said in 2010, "I remember Akio Morita gave Steve and me each one of the first Sony Walkmans. None of us had ever seen anything like that before because there had never been a product like that. This is 25 years ago and Steve was fascinated by it. The first thing he did with his was take it apart and he looked at every single part. How the fit and finish was done, how it was built."
The Macintosh factories were modelled after Sony's factories. "Steve's point of reference was Sony at the time. He really wanted to be Sony. He didn't want to be IBM. He didn't want to be Microsoft. He wanted to be Sony," Sculley adds.
See also Finfacts articles:
Nokia, Europe and Japan's old companies versus US young champions
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