Business | Sony’s woes

Pouring cold water

Dismal results show the need for more vigorous restructuring

Hirai under pressure
|TOKYO

THIS month the chief executive of Sony, Kazuo Hirai, gamely subjected himself to the “ice-bucket challenge”—to raise money to fight a little-known disease, amyotrophic lateral sclerosis—and was duly drenched in freezing water, following the examples of assorted technology titans and celebrities. Mr Hirai was presumably reminded of that chilling sensation this week, when he was obliged to announce that Sony would take a $1.7 billion impairment charge on the value of its mobile-phone unit, because of lowered expectations for sales of smartphones. For the first time since 1958, when Sony was first listed, the firm will not pay a dividend this year.

With its Xperia range of phones, Sony had recently begun to enjoy some success in the category. For years, smartphones have been the undisputed king of consumer gadgets, Sony’s main business. Strong sales had in turn raised hopes that the firm could at last begin to revive its ailing consumer-electronics division, which despite years of losses and mounting calls for the firm to exit parts of the business, still produces two-thirds of its sales.

Its achievements in smartphones have now proved too little, too late. It missed out on the category’s earlier boom, and Apple and Samsung swiftly came to dominate. Now, even the giants are suffering from the inroads of low-cost Chinese manufacturers, and for Sony, growth has abruptly stalled. Its share of the global smartphone market had declined to 3.1% by June, from 4% a year earlier. The shares of Huawei, Lenovo and Xiaomi, the leading Chinese brands, leapt. Sony’s feeble first-quarter sales prompted the write-down; it will now reduce the size of the division, and concentrate on the fanciest smartphones.

The firm’s bosses can fairly point out that its impairment charge, which eliminates all the goodwill accumulated from its buy-out in 2012 of a joint venture with Ericsson of Sweden, is merely an accounting adjustment. To its credit, Sony is moving swiftly, if belatedly, in recognising altered reality. Some observers hope its move signals a fresh willingness by the recently appointed finance director, Kenichiro Yoshida, to force the firm’s business heads to rein in unrealistic ambitions. The charge will mean a net loss of ¥230 billion ($2.1 billion) in the year to March 2015—five times the loss forecast by the firm back in July. Sony also now expects an operating loss of ¥40 billion, compared with an operating profit last year of ¥26.5 billion.

The news will pile on still more pressure to increase the pace of restructuring. In July Sony spun off its television unit into a separate entity, and sold its Vaio personal-computers division. Yet other than PCs, Sony still makes all the same products—and often, too many versions of them—as it did five years ago. That is despite calls, notably from Daniel Loeb, an American activist investor, for a break-up of the firm. Mr Loeb called in 2013 for Sony to spin off part of its highly profitable entertainment unit. Now it will have to rely still more on this, and its PlayStation franchise. Its finance unit, too, is highly profitable.

It is high time, says an executive at another electronics firm, for Sony’s management to begin the kind of vigorous restructuring that between 2010 and 2012 returned Japan Airlines from bankruptcy to profits under Kazuo Inamori, its saviour. He reduced staff by a third, pushed through pay cuts and slashed routes. “Everyone thinks that Sony should be in hardware, but that’s an illusion and it should follow the General Electric model of self-reinvention,” says Eiichi Katayama of Bank of America Merrill Lynch. Yet many people wonder whether Mr Hirai, a Sony lifer who joined the company in 1984, has the gumption to take an axe to its divisions. His vow to return Sony to a fat operating profit by 2016 looks ambitious, and is a promise he cannot afford to break.

This article appeared in the Business section of the print edition under the headline "Pouring cold water"

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