May 23, 2011 7:39 pm

Sony chief looks to secure legacy

The obscure tax charge that has forced Sony to declare a Y260bn ($3.2bn) annual net loss seems like the latest piece of bad luck to blot the tenure of Sir Howard Stringer, the Japanese group’s Welsh-born chief executive.

Despite the recent hacking attacks on two of its online gaming networks, Sony looked set until Monday’s announcement to declare its first net profit in three years for the period to March 31, in spite of a fourth quarter marred by Japan’s devastating earthquake and tsunami.

Since taking the helm at Sony in 2005, Sir Howard has had to contend with a global financial crisis and a debilitating surge in the value of the yen, on top of Sony’s daunting structural problems and one-off crises over exploding batteries and unpopular “rootkit” software on its CDs.

He has responded by trying to break down barriers between divisional “silos” and building up its software skills. But, having taken a step towards retirement by anointing a successor in Kazuo Hirai, head of Sony’s video game business, he is running short of time to secure his legacy.

Japan’s natural disaster has cost far more than the Y17bn that Sony cited in factory clean-up costs and lost sales for the final weeks of the January-to-March fourth quarter.

The tax credits it had built up during two years of losses were meant to be redeemed once its Japan-registered businesses returned to profit – but that prospect looks less certain in the wake of the catastrophe.

While the tax charge was a one-time event, Sony expects the quake’s after-effects to weigh on underlying profitability for some time: this year it said operating income would be reduced by Y150bn.

Sony’s supply chain, like that of other Japanese manufacturers, has been badly disrupted, while the destruction of the Fukushima Daiichi nuclear power plant has raised the prospect that companies in and around Tokyo will have to ration power for months, if not longer.

“There will be a significant impact on manufacturing through the first half,” Masaru Kato, chief financial officer, said on Monday.

Mr Kato was at pains to point out that the tax charge was an accounting issue that would not rob Sony of any cash, while its operations remained in the black for the second straight year.

Without the predicted losses from the quake, Sony’s projected operating margin this year would have been a whisker shy of 5 per cent – the modest target that Sir Howard set in 2005 but has never quite managed to meet.

That the jury is still out on Sir Howard’s legacy reflects what many see as his mixed performance.

He has cut costs by closing factories, shrinking Sony’s workforce by 16,000 and outsourcing production of televisions and other electronics to cheaper locations outside Japan. That has narrowed a gap in cost-competitiveness with South Korean rivals, such as Samsung.

There have also been victories in his effort to better integrate Sony’s hardware and entertainment content businesses, such as the adoption of Sony’s Blu-ray next-generation DVD standard by the film industry and the flowering – until the hacking attack – of the 77m-user PlayStation Network video game platform.

The network is crucial to Sony’s hopes of competing with Apple in digital distribution, an area where it has suffered false starts in the past.

While the company has maintained that the hackers were so sophisticated that they could have penetrated any company, members of the US Congress heard expert testimony that Sony’s vulnerabilities should have been readily apparent.

Sony is also still struggling to answer the oft-heard charge that, unlike Apple in the age of the iPad – or indeed Sony in the Walkman era – it has lost the ability to develop category-defining hit products.

“Stringer has looked to Apple as a model and competitor,” says Osamu Katayama, author of a book about Sir Howard’s tenure.

While that contrasts with predecessors who instead saw primarily digital music and video as a threat to Sony’s more traditional businesses, the change of heart may have cometoo late for Sony to catch up with its US rival.

Asked about Sony’s governance by reporters last week, Sir Howard dismissed questions about his leadership. “As the CEO, I’m responsible for the company, yes,” he said. But when Japanese journalists asked whether he would take a pay cut, he laughed it off.

“We still have a lot of investigating to how this [the hacking] happened, and in the course of that, responsibilities will be understood, will be determined,” he said. “But we’re not there yet.”

Additional reporting by Andrew Edgecliffe-Johnson and David Gelles in New York and Joseph Menn in San Francisco

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