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Japanese Industry Plagued by Hard Knocks

Jonathan Soble
Monday, 20 Aug 2012 | 12:22 AM ET

If companies could compete for Olympic hurdles medals, Japan’s track-tested, shin-bruised manufacturing sector would have fielded some of the most hardened corporate athletes in the recent Games.

A Sony Corp. store
Bloomberg | Getty Images
A Sony Corp. store

Since the global economy imploded five years ago, Toyota , Sony and the like have faced a seemingly endless line of obstacles: slumping demand, an export-wrecking surge in the yen, an earthquake and energy crisis at home and floods at major supply hubs in Thailand. And the competition — from South Korea’s Samsung and Hyundai to a resuscitated US car industry — has become stronger all the while.

Yet recently, Team Japan has been divided by a performance gap. Carmakers, one of the two pillars of the country’s manufacturing sector alongside electronics producers, are pulling ahead. In the fiscal first quarter, every Japanese carmaker turned a profit and net earnings at all but one, Nissan, improved from a year earlier.

In contrast, much of the consumer electronics industry is lying crumpled on the track. Sony, Panasonic and Sharp together lost Y1.6 trillion last fiscal year and five of the eight largest groups were in the red for the three months to the end of June. This month Sharp forecast a Y250 billion net loss for the year to next March — after a Y376 billion deficit last year — and followed other groups by cutting jobs and scaling back its targets for television sales.

“A good tech portfolio now would be short basically the whole Japanese sector,” says Atul Goyal, an analyst at CLSA, who dismisses the restructuring at Sharp and elsewhere as mere stopgap measures. “These companies haven’t shown any real management vision or ability to turn things around.”

After dominating the consumer electronics world for decades, many well-known Japanese brands are retreating in the face of a strong yen and stiffer foreign competition, writes Jonathan Soble. Here is how five familiar groups are — or aren’t — coping with a changing business environment:

Sharp is the weakest of a mostly weak lot. It gains about 60 percent of its revenues from televisions — the product category most decisively conquered by South Korean and Taiwanese producers — and much of the rest from other fiercely contested segments such as solar cells and mobile devices. Sharp recently announced 5,000 job cuts, its first workforce reduction in 60 years, and is negotiating a rescue investment from Hon Hai, the Taiwanese contract manufacturer.

Sony invented the Walkman and owns music and movie studios, yet ceded the digital entertainment era to Apple . It is also weighed down by a TV manufacturing division that has lost money for eight straight years. Last year Sony halved its medium-term sales target for flatscreen TVs to 20 million and sold its half of an LCD screen venture with Samsung. More recently it made its second round of job cuts since 2008, eliminating 10,000, or 6 percent of its global workforce.

Panasonic, another TV maker, is slashing panel production by almost half, writing off investments and eliminating 17,000 jobs, almost 5 percent of its global staff. It is coming off a Y772 billion ($9.7 billion) net loss last year, the biggest in the sector and the worst performance in the company’s 96-year history. But the restructuring helped it earn its first net profit in six quarters in April-June.

Canon has stayed profitable thanks to its focus on a narrow range of high-margin, hard-to-imitate products such as interchangeable-lens cameras and office printers. But rivals are catching up and it is vulnerable to a weak euro since it counts on Europe for about a third of its sales. Last month it cut its full-year net profit forecast by 14 percent to Y250 billion.

Hitachi, Japan’s biggest tech company by revenues, lost more than Y1 trillion between 2006 and 2010 and has been criticized for a lack of focus. But its huge range of products — from nuclear plants to power shovels to high-speed trains — has helped insulate it from Japan’s consumer electronics woes. After an aggressive restructuring Hitachi has reported two years of record earnings.

The contrast with the car industry is showing in share prices. Both car and electronics stocks have retreated, in tandem with renewed appreciation of the yen – following rallies this spring – but the Topix transport sub-index remains up about 11 percent on the year while the tech sector is down about 10 percent. The most consumer-focused electronics groups, such as Sony and Panasonic, have lost as much as 85 percent of their value since the global financial crisis began and are trading near multi-decade lows.

For electronics companies, an awkward consequence of the divergence is that it has become more difficult to pin losses on the yen. The Japanese currency has risen by 50 per cent against its major counterparts since the financial crisis began, making exports unprofitable and suppressing the value of overseas earnings.

Last year, the yen’s strength cost Sony Y32 billion of potential operating profits, according to company calculations. But it cost Toyota Y250 billion, nearly eight times more. Even after accounting for Toyota’s larger sales — about three times Sony’s — the carmaker is still carrying the heavier burden.

One alternative explanation for the diverging fortunes is timing. Worldwide car sales plunged especially sharply when the global financial crisis began — the U.S. market shrank from 16 million units in 2007 to 10 million in 2009 — forcing carmakers to cut costs and restructure their operations quickly. Now the cycle has turned and sales in big markets such as the U.S. and Japan are rebounding on a wave of pent-up demand. In June, US car sales rose by a quarter from a year earlier.

Many electronics companies, in contrast, were able to put off restructuring but are now caught in their own cyclical rough patch. Television makers, in particular, are struggling with weakening sales and accelerating declines in the price of liquid-crystal displays.

Yet timing cannot be everything. Even at the worst point for the car industry — in 2009, for instance, when Toyota reported its first net loss in 60 years — Japanese carmakers escaped the deep gloom now cloaking parts of the tech sector. At Japan’s car factories, job and production cuts were mostly temporary, in contrast to the deeper retrenchments at Sony, Panasonic and Sharp today.

Another explanation, and a more painful one, for some tech groups puts the root cause in the companies’ products themselves. “There is the medium-term structural issue of key [consumer electronics] products becoming commodities,” say analysts at Goldman Sachs.

In other words, a car is still a big, complex machine for which consumers are willing to pay a premium price, but one flatscreen TV is increasingly indistinguishable from the next. If the winners in today’s tech world are software and design innovators such as Apple and huge-scale, low-cost hardware giants like Taiwan’s Hon Hai, then Japanese groups are stuck in an unprofitable middle ground.

Can they turn things around? Paradoxically, optimism tends to be inversely correlated to brand recognition: the more dependent a company is on consumer products such as TVs and camcorders, as opposed to, say, factory robots or elevators, the worse the outlook.

Where Sharp, for instance, gets 60 percent of its revenues from TVs, Hitachi, the country’s largest tech group by revenues, gets less than 10 percent from all consumer goods combined. The rest comes from areas such as power stations, mining equipment and bullet trains, where profits have held up. After an expensive restructuring beginning in 2009, Hitachi has bucked the industry trend by turning a profit the past two years.

“Not every company has these other businesses to fall back on,” notes Mr Goyal at CLSA. For those that don’t, he says, tight focus on high-value niches is key — something only a few companies, such as Nikon in high-end interchangeable-lens cameras, have achieved. “For the rest, I can’t be optimistic. They’re fighting a losing battle.”

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