Another Sony shock?

January 13, 2009 5:42:44 AM PST
Sony's shares plunged Tuesday on reports that the iconic Japanese electronics maker is sinking into its first yearly operating loss in 14 years as sales fizzle for digital cameras, flat-panel TVs and other gadgets.

Japan's top business daily The Nikkei reported Tuesday that Sony was expected to rack up a 100 billion yen ($1.1 billion) operating loss this fiscal year ending March, its first since 1995.

Behind the dismal forecast are faltering sales of liquid crystal display TVs and other goods, especially in the key U.S. and European markets, The Nikkei said, adding that operating losses could balloon to as much as 200 billion yen ($2.2 billion).

Tokyo-based Sony Corp. declined comment.

The last - and only - time Sony racked up an operating loss, for the fiscal year ending March 1995, the red ink came from one-time losses in its movie division, marred by box office flops and lax cost controls, and its core electronics unit was booming.

Kazuharu Miura, analyst with Daiwa Institute of Research, expects Sony to tumble into a 110 billion yen ($1.2 billion) operating loss - which reflects the company's core business operations - for the fiscal year through March 31.

Past troubles in Sony's electronics business had been offset by gains in other divisions, such as financials and video games, he said, but both divisions are now beset by problems.

"In that sense, Sony is in an extremely tough situation this time," said Miura.

Drastic job cuts and reduction in research spending would be needed to wrest Sony out of its latest troubles, he said.

Other analysts echoed similar sentiments, noting the expected red ink from Sony's digital cameras and other products because of falls in both sales and prices.

Sony shares slid 8.9 percent to 2,000 yen ($22.40) on the Tokyo Stock Exchange Tuesday. The news helped drag down the Japanese stock market, where the Nikkei index tumbled 4.8 percent.

The U.S. financial crisis and accompanying consumer pullback right ahead of the critical year-end holiday shopping season have hit Sony and other exporters hard.

The strong yen hasn't helped. As the dollar has weakened to about 90 yen lately from 108 yen a year ago, that's cut into overseas income. Sony is particularly vulnerable to the strong yen because about 80 percent of its sales are overseas.

Sony has already taken some dramatic steps. Last month, Sony said it would implement major cost-cutting to ride out the slump, including slashing 8,000 jobs, or about 4 percent of its work force, lowering spending and shutting plants.

Until the U.S. financial crisis, Sony had been on a recovery track following a cost-cutting overhaul under Chief Executive Howard Stringer, a Welsh-born American, who became the first non-Japanese to head Sony in 2005.

That restructuring phase included pulling the plug on Sony's robotics division, selling off assets, ending the Qualia line of fancy gadgets and withdrawing from plasma displays.

Stringer's appointment came after a series of faltering profit reports that culminated in the "Sony shock" of 2003, when the company's shares plunged.

Since then, Japanese have returned to that term several times when worries about Sony's prospects re-emerge, including this time around.

Over the last two years, Sony stocks have again slid, losing about a third of their value.

Sony President Ryoji Chubachi expressed dismay at the U.S. slowdown, but he also expressed hopes that the global economy would start to recover later this year.

"We need to rely more on other regions, and not depend so much on the U.S.," he told reporters at a recent reception for executives.

Instead, the potential for growth in East Asia, and its appetite for Sony goods, could help reverse Sony's fate, Chubachi said.

But so far, such gains, which have come steadily, haven't been enough to stave off the damage from the bigger U.S. and European markets.

In its heyday of the 1980s and 1990s, Sony was seen as an innovator with its Walkman portable player and PlayStation video game machine. But Sony has seen its brand power gradually lose its luster in the face of rivals not only from Asia but also from the West, such as the iPod from Apple Inc.

Like other electronics makers, Sony has also had to battle plunging gadget prices.

Even products boasting costly technology have slid in prices amid intense competition, turning into mere "commodities," stripped of glamour that in the past helped boost prices - at least for Sony.

This nation's other major exporters, such as automaker Toyota Motor Corp., are also battling hard times and have announced job cuts, plant delays and reduced investments.

Miura, the analyst, said a long-term turnaround would be difficult unless Sony realizes its goals repeatedly touted - and just as repeatedly eluded - of "synergies." The term refers to extra advantages Sony is hoping to achieve by combining the strengths of its various businesses, such as electronics hardware with entertainment content, including movies and music.

"Getting out of its problems is going to be extremely difficult for Sony," he said.

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