Bad times are prompting Japan to reboot

Japan’s hard-hit electronics companies have been firing contract workers and overseas staff by the thousand as the current round of restructuring claims the most vulnerable victims.

But now nervous permanent staff in Japan are asking whether this recession is so bad that some of them will have to go as well.

The answer is likely to depend both on their employers’ motivation – some groups such as Sony are using the downturn to push through change – and the degree of the company’s financial difficulties.

The extent of the suffering in Japan’s electronics industry, caused by the slump in demand and simultaneous rise in the yen, was highlighted on Tuesday by Sanyo Electric’s second profits warning of 2009. Sanyo, which is being acquired by Panasonic, now expects to break even at the operating level in the year to March 2009 but to make a Y90bn ($919m) net loss because of higher restructuring costs.

The first imperative for Japanese consumer electronics companies is to stem their operating losses – Toshiba expects to lose Y280bn through its operations, compared to Y200bn at Sony, and Y100bn at Hitachi.

Net losses, which include asset writedowns, are even worse. Hitachi expects to lose Y700bn in total.

Companies such as Panasonic, which has already restructured heavily in recent years, are cutting capacity in line with reduced demand. Others, however, are trying to go further.

Masaharu Sato, an analyst at the Daiwa Institute of Research, says that some companies are using the bad times to push through restructuring that would otherwise be unpalatable.

Sony is the most obvious example. Its TV business was making losses even before the current downturn, and Sir Howard Stringer, Sony’s chairman and chief executive, has been frank about the need for change.

“We have a weak supply chain, we don’t have common procurement, and we need to get that done. The factory organisations need to be rationalised,” Sir Howard said in a recent interview with the Financial Times.

Analysts say that if Sony’s promise of more than $3bn in fixed cost savings next year is met by actually rationalising the company’s operations, it will have a long-term effect on profitability.

“Restructuring is not just about cutting staff, it is about changing the structure of the company,” says Kazuharu Miura, an analyst at Daiwa.

Not all companies are tackling their structural problems as effectively, however.

“Hitachi has a production problem in that, when selling the same product at the same price as other companies, it is unable to make a profit,” says one analyst.

The conglomerate, which makes everything from TVs to trains, made net losses even when the economy was strong in 2006 and 2007 and its promise of Y200bn in cuts to fixed costs next year is small relative to its Y10,000bn of sales.

“I think Hitachi still needs to accelerate cost-cutting in the automotive area because they have not done enough in the past when the market was good,” says Yoshiharu Izumi, an analyst at JPMorgan.

Hitachi benefits from a number of stable businesses – such as its powerstation construction unit – which have resilient earnings. Companies that depend on consumer electronics, such as Sony and Sharp, are less able to ride out the downturn.

Toshiba can also fall back on businesses that make infrastructure, such as nuclear powerstations. But the company’s weak balance sheet means that it can ill afford further losses.

This may have had the perverse effect of limiting Toshiba’s restructuring so far, because the exceptional costs of closing factories or offering early retirement would further hit shareholders’ equity, which is likely to fall below 10 per cent of total capital at the end of March.

While Toshiba has promised Y300bn in cuts to fixed costs next year, almost all of that is lower capital expenditure and research costs, with no cuts to permanent staff.

“After raising more equity they may need to do more [restructuring],” says Mr Sato of the Daiwa Institute of Research.

Beyond the immediate pressures, however, lies the question of what the world will look like once it emerges from recession.

If Japan’s electronics industry ends up with a more expensive yen and smaller foreign markets, then the restructuring has only just begun.