More Cutbacks at Sony

Each month Sony Corporation announces what seems to be an even more drastic cure for its lingering financial malaise. On Tuesday, October 28, the Japanese industrial giant announced that it would reduce its workforce by approximately 13% over the next three years, cutting some 20,000 workers from its payroll, 7000 of them in Japan.

Sony will also seek to improve administrative efficiency by combining redundant or overlapping jobs, according to an announcement from Tokyo headquarters. The corporation employs about 154,500 people worldwide. In mid-October, Sony posted a 25% drop in net income for its most recent quarter, attributed primarily to a falloff in its video game business. Until recently, the PlayStation II was one of Sony's strongest product lines. Sony Pictures Entertainment, the company's movie unit, has been hammered by lackluster performance, and Sony Music is suffering from the long sales decline affecting the entire music industry.

Sony has had discussions with Bertelsmann AG about merging their music divisions. Several such deals are now underway in the music industry, with DreamWorks close to selling its music division to Universal Music Group and Time Warner in talks with EMI Group PLC. Many analysts believe consolidation is inevitable in a music industry, entering its fourth year of diminishing sales. Previous merger attempts have been blocked by regulators concerned about the possible creation of monopolies in the distribution of recorded music.

Uncharacteristically, Sony has fallen behind its electronic industry rivals in some key hardware niches. With little presence in the mobile phone market, the company has lost ground to Sharp, Matsushita, and Samsung in the flat-panel television market, one of the hottest arenas in the electronics industry. Profits from cathode-ray televisions, traditionally one of Sony's strong revenue streams, are evaporating as the market embraces flat-panel displays. Sony recently announced an unusual joint venture with Samsung to produce LCD panels in a new plant in South Korea, with construction to begin in early 2004. The x236 billion (US$2.17 billion) investment should yield its first harvest by summer 2005.

The news of job cutbacks follows announcements of the restructuring of Sony's American sales and marketing organization and of a plan to reduce the company's massive parts inventory from its present almost 900,000 to about 100,000, a move that will also cut parts suppliers from 4700 to about 1000. The parts-and-suppliers streamlining could save Sony as much as 15% annually, according to some analysts. Further savings will come from plans to drop 16 unprofitable product categories from the current total of 137. By March 2006, Sony hopes to have reduced its factory space by 30%.

The overall restructuring will take approximately three years and cost about x335 billion (US$3.08 billion). The move will include integrating Sony's financial services—banking and insurance—as a single company. "It may look like Sony is being sucked into a black hole," PlayStation guru Ken Kutaragi told reporters, "but we'll exit that black hole into the next generation, with a big bang." The company's restructuring includes putting Kutaragi in charge of a new division that will integrate software and semiconductor development for the next generation of "smart products."

In other industry news, Toshiba is also having a rough time, with a net loss of x32.18 billion (US$302.2 million) reported for the six months ended September 30. On October 26, the company reported an operating loss of x12 billion (US$110.5 million), compared with a profit of x2.87 billion (US$26.4 million) a year earlier. Toshiba senior vice president Sadazumi Ryu attributed the loss to heavy tax payments and a drop in demand for the company's line of "Satellite" personal computers, where Toshiba has given ground to competitors such as Hewlett-Packard. To cope with the situation, Toshiba will also cut its workforce, eliminating 500 jobs, and will increase production in China and the Philippines, where labor costs are much lower than in Japan.

Matsushita is currently one of the brightest stars in the Japanese industrial firmament. On October 29, the company posted an astounding 45% increase in profits for its second fiscal quarter, ended September 30. Citing strong sales of DVD recorders and flat-panel televisions, Panasonic's parent company reported that profits surged from x14.1 billion (US $130 million) for the second quarter last year to x20.4 billion ($187.9 million) this year. Business is up all around for Matsushita, with strong demand for video products, mobile phone equipment, batteries, and raw semiconductors, president Kunio Nakamura told reporters. Matsushita is benefiting from its own massive reorganization begun a couple of years ago. Year-to-date total sales were up 3%, Nakamura noted, despite the generally slow global economy. Matsushita projects net profits of x30 billion (US$27.6 million) for the year ending March 31, on sales of x7.45 trillion (US$68.6 billion).