History Comes Back to Haunt Japan Electronics Makers
History is repeating itself in the global consumer electronics space, with newer players threatening the dominance of older established brands - that is Japanese electronics makers.
Once the strongest in the industry, Japan's manufacturers are battling to stay profitable as competitors in neighboring South Korea and China fast encroach on their market share – a similar scenario faced by American electronics makers in the 1980s, when the likes of Sony, Sharp and Panasonic rose to prominence.
On Thursday, Sharp reported a loss of $936 million in the July-September period, compared with a profit of $376 million a year ago. While, Sony posted an operating profit of $379 million, for the same period, helped by the sale of its chemical business.
"History has repeated itself as the former market leaders in the space are punished by new entrants who have combined lower costs with tremendous attention to detail on customer needs," Ed Rogers, CEO, Rogers Investment Advisors told CNBC.
Panasonic, which warned of a $9.6 billion loss in the fiscal year ending March 2013, embodies the critical state of the industry in Japan that is reeling under fierce competition, and a strong yen , which makes their products more expensive in the global market. And, analysts see little scope for a turnaround in the ailing sector in the near-term.
"Their cost base is too high, they are being killed by competition in China and Korea, and they don't have the wherewithal to innovate. Whatever strategies they try to employ tend to fail," Ben Collette, head of Japanese equities at Louis Capital Markets, said.
He added that while their products are of high quality, they don't have the brand cache of competitors like Samsung and are trying to live off their old legacy.
Time to Get Smart
In addition to the lack of product innovation and attractive pricing, Wee Teck Loo, global head of consumer electronics research at Euromonitor, said what companies such as Sony, Sharp and Panasonic lack is a strong focus on smartphones – a major force behind the success of Samsung. In the third quarter, 50 percent of Samsung's revenue came from their high-margin smartphone sales.
"Lack of a strong smartphone strategy is negative. It's a high growth category, but they don't have a good product line-up. Smartphone sales in emerging markets are expected to see double-digit growth, they are missing out big time," Loo said.
While phone sales in their domestic market have been decent, Japanese electronics firms haven't achieved much success with their mobile phone businesses outside of their home country, he said.
Panasonic, for example, is expected to close its mobile phone operations in Europe by March 2013 - less than a year after it returned to the market - due to weak demand.
TV Demand Worrying
According to Shiro Mikoshiba, analyst at Nomura, one of the biggest risks for the country's top electronics makers is the lack of demand for their latest TV offerings.
"3D displays and internet connectivity have not stimulated replacement demand for TVs and we have not seen any compelling technological innovations since the switch to digital," Mikoshiba wrote in a report.
The market share of Japanese companies in the television space has been declining in the recent years, as competitors introduce cheaper or more attractive products.
In 2011, the worldwide market share of digital TVs for Sony, Sharp and Panasonic stood at 10.6 percent, 7 percent and 4.8 percent, respectively, falling from 14 percent, 6.3 percent and 4.3 percent in 2008. South Korea's LG, in contrast, saw its market share rise from 11.3 percent to 13.4 percent over the same time period.
Yen Depreciation Is Critical
ccording to Collette, a reversal in the fortune of these companies will ultimately depend on a reversal in yen strength.
"They have been managing strength in yen for a long time, so their production operates on razor thin margins. A consistent weakening of the yen would provide so much positive cash flow for these companies," Collette said.
However, if this doesn't occur, companies in the sector will continue to offload assets or undergo consolidation in order to survive, he added.
Sony, for example, recently completed the sale of its chemical business to state-backed Development Bank of Japan for 58 billion yen ($625 million). This sale helped offset weak demand for its TVs and other devices, allowing the company to post a profit in the July-September period.