Sony battles for credibility after recall warning

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Sony was battling on Tuesday night to restore investor credibility after a US government agency signalled there could be further recalls of its lithium ion batteries.

The Japanese group’s shares slumped 2.7 per cent to a 10-month low, compounded by the release of a Goldman Sachs research note, which downgraded the stock from “buy” to “neutral” on concerns about the delays to its new PS3 games console.

Consumer Reports, a consumer watchdog, quoted Julie Vallese, a spokesperson for the US Consumer Product Safety Commission (CPSC) as saying: “The upcoming Sony recall could very well expand beyond notebook computers and could include DVD players and portable gaming devices. The risk of a battery fire is low, but real.”

The spokesperson later told the FT there had been a “miscommunication”.

“The scope of any extension of the recall is still being decided, but it will be limited to notebook computers as far as we know. It will not include batteries that power any other devices,” she said.

More than 7m of Sony’s lithium ion batteries used in laptops have been recalled after batches of cells were contaminated on a production line with metal particles that could cause short circuits and fires.

The company said on Tuesday it was still trying to confirm whether the CPSC was calling for a recall of other products. It noted that the batteries used in its DVD players and portable games consoles were not the same as those used in the notebook PCs, which are being replaced.

Sony was also rounded on Tuesday by fellow Japanese battery makers, concerned that the group’s problems were damaging the reputation of the country’s output.

The Battery Association of Japan, an industry group, called for industry-wide quality standards as a step towards recovering public trust. But it also complained that “a big problem is that Sony has not provided sufficient information” to allow the industry association to determine whether the problem is specific to Sony or whether it has broader implications.

The Ministry of Economy, Trade and Industry, echoed concerns. “We are asking Sony what happened, but we have not received a satisfactory explanation from Sony,” an official in the Information and Communications Electronics Division said.

Sony’s problems are likely to lead to tighter transportation restrictions on all lithium ion batteries, thereby raising costs on manufacturers, a spokesman for the industry body said.

Analysts warned that the repercussions on the industry could be much worse, depending on how the current situation is handled. Lithium ion batteries are used in a wide range of popular products ranging from PDAs and some mobile phones to portable gaming devices popular with children.

“Depending on how this is handled, lithium ion batteries themselves could come to be seen as flawed,” said Yoshiharu Izumi, electronics analyst at JPMorgan in Tokyo. “So, it is not a question of [other companies] increasing market share at the expense of Sony but [that] the lithium ion battery market itself will disappear.”

Goldman Sachs cut its rating of Sony’s shares, after halving its full-year operating profit estimate for the group to Y100bn ($848m), compared with the Sony’s own forecast of Y130bn.

Beginning with Dell Computer, the move to replace Sony-made batteries in certain notebook PCs has spread to a growing number of manufacturers, and could even affect makers of other portable products, ranging from portable games consoles to mobile phones.

Fujitsu and Toshiba announced on Friday they were recalling Sony batteries used in their computers, while Dell said it was widening an existing recall by 100,000 units. A day earlier, Lenovo and IBM said more than half a million batteries used in Thinkpad notebook PCs were being recalled. The likelihood of an expanded recall of Sony’s batteries will reheat the debate about the safety of the technology.

The Portable Rechargeable Battery Association insisted in a statement last week: “Lithium ion batteries that power the consumer electronics revolution are a fundamentally safe technology. The recent recalls of certain lithium ion batteries address a very rare problem. The vast majority of batteries being recalled are safe.”

However, since lithium ion batteries are extremely volatile and can explode when subject to high temperatures, they require extreme caution during the manufacturing process and are subject to transportation restrictions.

One executive at a major battery maker said that when Japanese companies were trying to commercialise lithium ion batteries, they often exploded in production factories “It is amazing that the industry has actually succeeded in commercialising such an unstable product,” he said.

Sony emphasises that its problems have been identified and that they occur only “under certain rare conditions”.

Given the inherently unstable nature of lithium ion batteries, the crucial question is whether Sony’s problems are a result of a specific manufacturing defect or a more general problem that has implications for the entire industry.

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