2013 'turning point' for ailing Japanese tech giants

Japanese tech giants have been gradually losing ground to their global counterparts, most recently seeing their stock prices plunge to 30-year lows in 2012 after sinking deeper into the red. To have any chance of reviving their fortunes, a drastic course of action is needed, such as selling off traditional core assets and consolidating their resources.

In recent years, it has almost become a perfect storm of sorts against electronic firms in Japan, said Pradeep Singh, analyst at Itim Research, pointing out the companies that have been engaging in a series of job cuts and downsizing over the past year.

"They faced a stronger domestic currency, which put pressure on their costs and made their exports less competitive, tougher competition from overseas players not just aboard but at home as well, and uncertainty over the global economy," Singh said.

Long-term uncertainty

Ratings agencies have been among those losing further confidence in the Japanese electronics firms, with Fitch in November 2012 cutting the credit rating of Sony and Panasonic to "junk" status--adding potential obstacles for them to raise capital
In the short term, the impact will be limited, given the support Panasonic and Sony are receiving from local banks in terms of funding and the availability of options. Panasonic, which expects to lose US$10 billion in its current fiscal year ending March 2013, has secured US$7.6 billion of loan commitments from its banks.
Sony, which previously forecast a full-year profit of US$223 million in its fiscal year ending March 2013, has also announced plans to raise US$1.9 billion through convertible bonds.
Sharp, which has warned of "material doubt" over its own survival, has already secured a 30 billion yen (US$329.7 million) bailout from banks.

2013 the 'turning point'

Japanese firms will also now suffer additional pressure from a possible boycott from consumers in China--one of their key markets--following the recent bilateral territorial dispute over the Senkaku islands.

Panasonic, for one, has warned of further loss of sales due to a Chinese boycott to the tune of 100 billion yen (US$1 billion) during its October earnings announcement.

With international competitors such as South Korea's LG Electronics and Samsung Electronics getting a foothold into emerging product categories such as "phablets"--smartphone and tablet hybrids--and convertibles, it will be hard, if not impossible, for Japanese firms to regain their former glory, said Singh.

"This year may be the turning point which decides whether there may be a final nail in the coffin for some of these [ailing] Japanese firms," he added.

Obstacles from macro, individual factors

Japanese companies have generally fallen behind in terms of innovation and competitiveness to more nimble rivals, said Ben Cavender, associate principal at China Market Research Group.

The poor performances have been partly due to their failure to adapt to international markets, such as ineffective marketing, distribution, and production planning, he added.

According to Singh, the companies have also been suffering from the legacy of their individual missteps.

He pointed out that for Sharp, one of the big factors behind its downfall had been its decades-long strategy of manufacturing both LCD displays and televisions internally instead of just focusing on one of the product lines.

The company eventually faced a "conflict," as panel production requires economies of scale with maximizing production to maximize margins. However, this meant the excess capacity was sold to other competitors, which indirectly eroded its differentiating factor, Singh noted.

For Sony, some observers believe a key factor behind the company's dip in fortunes was the loss of talent when then-CEO Nobuyuki Idei initiated a restructuring exercise during his reign from 1999 to 2005 to streamline operations, he said.

"An early retirement plan was put together in the hope of encouraging innovation and bringing in young talent, but that may have backfired," pointed out Singh. The analyst noted this may have led some of the experienced talent to flock to rivals in Taiwan and South Korea.

Bite the bullet and restructure

However, plans are already underway by the former tech titans to revive their fortunes.

For example, Panasonic has set a target for all business units to achieve an operating profit of at least 5 percent by 2015, or they would be closed or sold off. The company is also banking on green products to drive it back into the black.

Sony is eyeing the consumer business to drive growth by banking on segments such as its mobile-phone business. However, it is still trying to turn around its unprofitable TV business, which has been a drag on its bottom line.

It could learn from the successful transition by Hitachi, which started its shift away from the consumer business in 2007, and along the way shed its loss-making TV business. Since its record loss of 787 billion yen (US$9.2 billion) in 2009, Hitachi has bounced back to book a 347 billion yen (US$4 billion) net profit in the year through March 2012.

In order for any chance to revive their fortunes, companies will have to reconsider their core competencies, bite the bullet, and perhaps even cut loss-making units to consolidate their resources, noted Cavender.