Two of Japan’s best-known television makers raised white flags of defeat this week in their battle with Taiwanese and South Korean rivals.
Sony and Panasonic, whose TVs dominated the world’s living rooms for much of the analogue era, are shrinking their operations dramatically in an acknowledgment that they have failed to compete in the age of digital flatscreens.
Sony announced on Wednesday that it will halve its medium-term sales target for liquid crystal display TVs to 20m a year, giving up on an ambitious goal it had set only in 2009. That followed Panasonic’s decision on Monday to cut flatscreen panel output by nearly half, to 7.2m a year, and merge or scrap production lines in Japan.
For cathode ray-era consumers who loved their Sony Trinitrons, the retreat may prompt a certain nostalgic regret. Investors, though, are more likely to ask why it didn’t come sooner and whether it will be enough to make Sony and Panasonic profitable in consumer electronics again.
“Investor interest is starting to switch away from whether [Sony] is going to be able to regain past glories to whether even this becomes academic,” said Pelham Smithers, an analyst and director at Pelham Smithers Associates.
Japanese companies pioneered thin plasma and LCD displays more than a decade ago. But their high production costs – compounded by the recent record-breaking strength of the yen – mean they have fallen behind as flatscreens have evolved from luxury items into relatively cheap, mainstream commodities. Today the biggest sellers of TVs worldwide are Samsung and LG of South Korea.
Sony and Panasonic poured new money into their businesses long after many analysts warned it was futile. They will now pay a price for their over-investment: Panasonic is to take a Y265bn restructuring charge on its TV business this year, including write-offs of plant and equipment. That, combined with a separate reorganisation of its semiconductor business, will drive it into a forecast Y420bn net loss.
Sony, whose TV operation has been in the red for eight years, is to book a Y50bn restructuring charge this year. It had already began edging away from in-house production, for instance by selling factories in Slovakia and Mexico to the Taiwanese contract manufacturer Hon Hai. Of the 40m TVs it had hoped to sell in the year to March 2014, only about half were to have been built by Sony itself.
Other Japanese companies are also reconsidering their commitment to TVs. Hitachi said in July it was looking at outsourcing all its production to foreign contract manufacturers. Even Sharp, the leading seller of LCD sets in the Japanese market, is converting some of its domestic production capacity to making smaller screens for smartphones and tablet computers.
Japanese groups’ TV problems have built to a crisis this year because a slowing global economy has reduced demand even as supplies have continued to soar. Many had pinned their hopes for profitability on ever-growing sales volumes, which they counted on to make production cheaper. But retail prices have plummeted faster than their costs.
Indeed, the effect of falling prices now exceeds that of the strong yen. Panasonic says it lost six times more operating profit because of price declines in the six months to September than it did to exchange rate swings. Sony’s consumer electronics division actually made money from currency differences in the latest quarter, thanks to lower dollar-based procurement costs.
With the drive for volume now effectively abandoned, Sony and Panasonic will arguably have a more difficult time making their remaining operations profitable, particularly given their commitment to building at least some hardware themselves in Japan. Many analysts and investors would prefer them to outsource production altogether and focus on marketing and design, as Apple does with its iPhones and computers. That would allow them to shift resources to less commoditised products with higher profit margins.
Shares in both Sony and Panasonic have fallen 11 per cent this week.
What is certain is that the TV drama has come at a difficult time for the Japanese technology sector. The yen remains a burden on exports and many manufacturers are still shaking off the effects of the country’s earthquake and tsunami in March, which damaged factories and disrupted supply chains.
Manufacturers are also facing new problems in flood-ravaged Thailand, home to hundreds of Japanese parts and assembly plants, resulting in shortages of everything from computer hard-disk drives and semiconductors to household appliances. Toshiba, for instance, has been forced to close 10 factories in the country. Sony, which has delayed the introduction of new camera models due to a lack of parts from Thailand, said on Wednesday it expects repairs and lost sales to cost it Y25bn.