Sony to cut chip spending ‘significantly’

Sony is to cut its investment in semiconductors “significantly” over the next three years in an effort to restore the unit to profitability after its large investment in the “cell” chip that drives the PlayStation 3 games console.

The move, said analysts, takes Sony a step closer to becoming a “fab-less” chip designer with research and development carried out in-house but with manufacturing capacity outsourced to partner companies. In 2005, Sony was the 13th-largest chipmaker but with 60 per cent of its production absorbed by internal demand.

Having run through nearly Y500bn ($4.1bn) in capital spending since 2004, Sony said on Tuesday it had “no intention of maintaining a pace of spending equivalent to that of dedicated chipmakers”.

Investors welcomed Sony’s announcement, sending its shares up 2.7 per cent to Y6,160 in Wednesday morning trading.

Analysts believe this is part of a wider scheme to reduce its overall exposure to the financial risks of its highly-priced PS3. Suffering from a lack of “killer application” software, early sales of the PS3 have been sluggish. The console is being outsold in Japan and the US by Nintendo’s cheaper Wii.

Yutaka Nakagawa, the executive in charge of Sony’s semiconductor operations, admitted that the company was “seriously considering” outsourcing the manufacturing of the next generation of cell chips – a move praised by one analyst as “Sony finally turning realistic about where it should sit in the semis cycle”. Its new goal, he said, was to improve the efficiency of the semiconductor division. It is forecast to remain in the red in the fiscal year ending March 31 and may not hit profitability before March 2008.

Sir Howard Stringer, Sony’s president, promised it would achieve group-wide margins of 5 per cent by that date. Costs arising from the PS3 have affected two leading Sony divisions. Losses from Sony Computer Entertainment are expected to exceed Y200bn in the current fiscal year as the company loses money on every console sold. But lower console sales also hit the cell-producing semis division.

Part of Sony’s planned cuts in semiconductor investment arise naturally from the cell cycle.

Sony invested Y200bn designing the cell and will not need to spend an equivalent amount in the coming years. But analysts said the drop in investment may point to Sony’s tacit admission that it has not, as it hoped, found applications for the cell chip beyond the PS3.