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August 25, 2006 7:39 pm

Battery glitch hinders Sony bid for supremacy

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For as long as most people can remember, the name Sony has been identified with high quality – encapsulated in its advertising slogan: “It’s a Sony”.

So the latest problems with the Japanese group’s batteries, used in notebook PCs manufactured by Dell and Apple, come as a big blow.

Last week, Dell recalled 4.1m notebook computer batteries in the largest consumer electronics recall involving the US Consumer Product Safety Commission. That was quickly followed by Apple’s recall this week of 1.8m Sony-made batteries used in its notebooks.

The embarrassing recall comes at a particularly sensitive time for the group and its chairman, Sir Howard Stringer, who is under pressure to turn round Sony’s loss-making consumer electronics division and reclaim its position as a pre-eminent brand.

Sony’s most-cited problem, openly admitted by insiders, was that it had become bureaucratic and slow-moving and had lost touch with the market.

Sir Howard’s stated mission was to break down the silos, which prevented the various parts of the Sony group from co-operating with each other, and coming up with innovative new products that could bring back the shine to the Sony brand.

But just as things appeared to be looking somewhat better – with television sales growing steadily on the back of its new Bravia LCD TV series and sales of other products also strengthening – the battery issue has raised questions about quality control.

The latest recall is not the only time Sony has had problems with its batteries.

In 1997, Sony recalled alkaline batteries sold at stores, due to leakage and, in 1999, it recalled lithium-ion batteries used in broadcasting equipment for similar reasons. The following year, in 2000, it also recalled batteries used in its popular Handycam video camcorder, due to leakage, as well as batteries used in Compaq PCs, after a battery pack overheated and started emitting smoke.

Japan’s industry regulator said this week that it had asked Sony and Dell to report on the causes of battery problems and improvements after two incidents in which Sony batteries in Dell notebook PCs had emitted flames.

Sony says the problem was caused by microscopic metal particles in the battery cells on rare occasions coming into contact with other parts of the battery cell and creating a short circuit.

Normally, Sony says, this would simply cause the power to die but, under certain rare conditions, could lead to overheating and flames.

The group says it has introduced additional safeguards into its battery manufacturing process to address the problem. But the fact remains that the impact on Sony’s battery business could be substantial.

In the short-term, Sony says the cost to it of recalling the batteries would be between Y20bn ($170m) and Y30bn. But the bigger question is whether there will be a longer-term impact on Sony’s battery business.

Yuji Fujimori, electronics analyst at Goldman Sachs in Tokyo, says: “It is difficult to take an optimistic view of the medium-term impact on Sony’s battery business.” PC batteries are an area of particular expertise for Sony, with PCs accounting for 50 per cent of lithium-ion battery sales on a value basis, Mr Fujimori notes.

Japanese manufacturers dominate the market, with Sony the number three name in the market behind Sanyo and Matsushita.

But Mr Fujimori points out that capacity constraints at other manufacturers mean that it will be difficult for them to take advantage of Sony’s plight to gain market share. Nonetheless, the scale of its recall, and the damage to the company’s previously solid reputation in lithium-ion batteries, could prompt customers to switch away from Sony over time.

More broadly, the battery recall highlights a failure of quality control that has affected not just Sony but many other Japanese companies.

In July this year, Japanese police filed a criminal case against Toyota, on suspicion that officials delayed a recall for eight years despite knowing about a faulty steering wheel.

Matsushita has been embarrassed by a scandal involving a type of kerosene heater, which caused several cases of carbon monoxide poisoning. The group has put out ads notifying consumers that they are recalling the heaters.

Back at Sony, the crisis of quality issue is especially sensitive. Barely two months ago, Sir Howard was being grilled by shareholders irritated by the group’s stagnant performance.

They were unconvinced by his reiteration of a pledge to achieve a 5 per cent operating profit margin in the next fiscal year. And analysts began describing this as the key test year for Sony.

With the latest battery embarrassment, Sir Howard’s promise to reclaim Sony’s status as the world’s leading consumer electronics group looks a more distant hope.

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