Sony emerges into ‘difficult environment’

Judging from Sony’s unexpectedly strong performance in the third quarter, which took many analysts by surprise, the electronics-to-entertainment group appears finally to be on firmer footing.

Sales were up 10 per cent year-on-year, impressive considering the electronics sector enjoyed buoyant demand the previous Christmas. Sony did even better from a profits perspective, with operating income up 47 per cent.

At the electronics business, operating profit margins in the quarter improved from 3.3 per cent last year to 4.9 per cent.

While cost improvements and a dollar-yen rate that worked in its favour played a big role, analysts say the boost to its electronics business indicates that Sony’s LCD TV panel alliance with Samsung is beginning to bring benefits.

Bravia, Sony’s LCD TV, has taken an impressive 30 per cent of the global market in value terms.

Sony also appears to be fighting back in the digital still camera market, where it recently looked vulnerable in the face of Matsushita and Casio, its more aggressive rivals. Sony’s latest digital camera was the top-selling model in December and helped the company to push its market share in Japan up from 10 per cent to 15 per cent.

PlayStation 2 and the PSP hand-held console made a remarkably strong contribution, helping the games division achieve record sales and profits on a quarterly basis.

However, as Nobuyuki Oneda, chief financial officer warns, “the environment surrounding Sony continues to be difficult”.

In particular, the outlook for price declines in the TV market remains a concern.

According to Mr Oneda, Sony expects LCD TV prices in the 32-inch market to decline about 4 to 5 per cent, translating into a 20 per cent or so decline for the year. But, he cautions, “that is speculation”.

Although the TV business is now close to break-even and is on track to turn profitable in the latter half of fiscal 2006, Sony believes there will be “considerable price deterioration from now on so we don’t think we should be optimistic”.

Sony’s competitors have announced aggressive ex-pansion plans for theirTV manufacturing operations, which will give them greater capacity to meet strong demand and significant cost competitiveness.

Mr Oneda says Sony expects a big increase in demand and admits “capacity is tight”.

“So, we are considering some kind of capacity increase but we are not ready to announce [those plans]”, he says. The expectation is that Sony will contribute to further capacity at its joint venture with Samsung.

Meanwhile, in the games division, Sony is poised to launch the PlayStation 3 in the spring. However, no firm date has been announced and speculation is mounting that it will delay the launch.

The strong performance of PlayStation 2 is likely to discourage Sony from launching the PS3 too soon.

“The games division will definitely hurt” when they launch PS3, says one analyst. This is due to the high cost of making the console. The question is how big the loss will be.

Hiroshi Takada, analyst at JPMorgan, wrote in a recent report that consumer electronics makers would be likely to face a tougher holiday sales environment this year compared with 2005.

“We expect the 2006 year-end holiday sales season to lack strength because of a tough comparison with the strong 2005 year-end holiday sales season and declines following boosts in February and June 2006 following scheduled events [Turin Olympics and World Cup respectively],” says Mr Takada. “We think this could weigh on sector stocks this year.”

Given the pressures Sony is facing, Mr Oneda’s caution is well placed.

Additional reporting by Mariko Sanchanta

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