No easy recovery for Japanese electronics firms

Non-traditional business segments helping some tide over tough times, but fixes for structural issues needed for long-term survival, market watchers say.
Written by Ryan Huang, Contributor

The Japanese electronics industry has been struggling in recent years, leading to worsening losses in their core businesses. Although some of them have found support in non-traditional segments, these sources are unlikely sustainable and focus needs to be on identify fixes for fundamental issues.

Rick Munarriz, senior analyst at financial research firm The Motley Fool, said Japanese companies are experiencing a series of bad breaks, having to deal with a slowing global economy and supply chains that were disrupted by natural disasters. A buoyant yen has also hurt their export competitiveness, he added.

In fact, Munarriz noted that their core businesses deteriorated so badly that they have been outshone by some of their non-traditional segments.

For instance, the bulk of Sony's profit currently comes from selling insurance services. Its financial business arm, Sony Life, raked in operating income of US$418 million for the quarter ended Dec. 31. This was in stark contrast to its core business selling consumer electronics, which lost US$1.1 billion over the same period. The company is bracing itself for rougher times, having forecasted a historic loss for the financial year ended Mar. 31.

Munarriz said in the warnings have long been on the wall.

"Sony's TV division hasn't been profitable in years. Its consumer electronics, while still perceived as generally great in terms of quality, just can't compete with the premium panache of Apple.

"Everywhere Sony turns, it's facing Apple. Sony cameras? Boom. Apple's iPhone has a pretty snazzy camera for casual use. Sony PlayStation? Boom. Apple's killing the video game industry with the hundreds of thousands of free and nearly-free App Store diversions," he explained. "One can only imagine what will happen when Apple finally introduces its own TV later this year, as many expect."

Flagging innovation, competitiveness
Observers point to how the deterioration of Sony, which once dominated the consumer electronics space with devices such as its Walkman and Discman, reflects how the wider industry in Japan has fallen behind in innovation and competitiveness to more nimble rivals.

According to Bloomberg estimates, Japanese vendors including Sony, Panasonic and Sharp are set to lose about US$17 billion in 2012. Their combined losses contrast with the US$22 billion that South Korean rival, Samsung, has set aside to invest in capital expenditure in the same year.

"There are a couple of factors leading to [their] poor performance," explained Ben Cavender, associate principal at China Market Research Group. "One is that the parts they are producing in Japan are expensive due to labor costs, and that leads to either reduced margins or higher prices to the consumer compared to what some of their competitors can offer."

Cavender added that another reason was their failure to adapt to international markets. "Often, these firms have the leading products and the leading technology but lack effective marketing, distribution, and production planning. Panasonic is a good example of this.

"They effectively created a niche for themselves with micro 4/3 digital cameras, but have extremely poor marketing and distribution in North America which has prevented them from taking advantage of excellent products," he said.

Double whammy from global uncertainty
These Japanese vendors were also dealt an extra blow when the global economic landscape grew volatile, further tapering market demand. And due to the economic uncertainty, investors have been pouring money into the yen--as investment in the currency provides a safe haven asset in risk-adverse times. This caused the yen to appreciate further.

"The stronger yen is clearly a negative for Japanese companies that are producing in Japan, as it makes their product more expensive abroad," said Alvin Liew, senior economist at UOB Bank. "In 2012, with the currency likely to continue to at least hold on to its current levels, this will continue to be a drag on Japanese companies' profitability."

Liew expects some pressure to be alleviated eventually when the yen depreciates due to the country's structural challenges such as its trade deficit, but said it would be hard to predict when exactly this would happen.

On the flipside, the strength of the yen could open up opportunities for them to invest or make overseas acquisitions, he noted.

Long-term sustainability needed
To look for new sources of growth, Japan's big electronics players have started to look at non-core segments more closely. Companies such as Panasonic and Sony plan to focus on other sectors such as medical devices and solar panels to turn their fortunes around.

However, Cavender warned that they would need to examine their business fundamentals or risk making the same mistakes. "These companies will likely continue to look for cash flow from non-traditional business segments as a means of creating business stability. However, long-term, they need to address problems with their core business areas in order to have continued success.

"Their various business lines need to think about their core competencies and need to stay focused on those. They need to realize that marketing and product differentiation techniques that work in Japan do not necessarily work in other markets, and need to adapt to make sure their brand message and product marketing messages are clear to the consumer and fit with what end users want," he added.

Munnariz gave a more pessimistic outlook for the industry, drawing reference to Sony's products.

"It won't be easy to turn this around," he said. "Consumer expectations have changed. They no longer need a Sony Vaio laptop because their smartphone or tablet can help them surf on the go. A lot of Sony's home entertainment hardware simply feels out of date to consumers."

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