Western hedge fund managers don’t tend to be altruists. Naturally, when they target Asian companies, they are looking to make money. Sometimes, though, their interests align not just with a specific company, but the entire economy underpinning it.
Such may be the case with New York hedge fund guru Daniel Loeb, Japanese corporate star Sony, and the deflationary pressures with which Tokyo is grappling.
Sony is actually a timely focal point. The 73-year-old icon is a corporate “Forrest Gump” of sorts for Japan’s postwar rise, fall and rather incomplete attempt to stand tall anew. Founded in 1946, its creation almost perfectly traces Japan’s phoenix-like rise from the ashes of war. By the 1980s, it was shaking the tech world with its Trinitron television, Walkman and the hand-held video cameras.
Then came the 1990s. Sony’s innovative mojo – just like Japan’s – virtually vanished.
In recent years, Sony has been the site of one of corporate Japan’s most intriguing turnaround attempts. Beginning in 2012, Kazuo Hirai, then president and CEO, worked to streamline a bloated, unfocused behemoth skirting irrelevance in the Apple era. His chief financial officer Kenichiro Yoshida, who’s since replaced Hirai in the top job, took a scalpel to the operation.
Yoshida trimmed staff, cut away the troubled TV unit, sold the money-losing personal computer business and took a $1.7 billion write-down on smartphones, a bitter pill to swallow as Apple and Samsung grew market share.
Now, Sony is largely back from the brink.
Rather than disrupting the tech world, it would sell goods to others leading the charge, including China’s Huawei. It posted a record operating profit in the April-June quarter, driven by sales of large-size image sensors used in smartphones competitors are making. Sony’s shares have rallied 22% this year as the strategy bears fruit.
Hedge funds arrive
But this is not a long-term answer to Sony’s malaise. Enter hedge fund guru Loeb. His Third Point LLC has been demanding Sony spin off its chip business. Loeb’s Team believes breaking up the electronics and entertainment units into separate businesses would address the “portfolio complexity” that reduces Sony’s overall value.
Spinning off the semiconductors business into a separate, publicly-traded company, Third Point argues, could be just the thing for a company that is chronically “undervalued and underestimated by the market.”
Sony told Loeb’s team to get lost. Yet in its rejection statement, Sony inadvertently admitted why Loeb is right.
The company Yoshida now runs called the imaging and sensor division is a “Japanese crown jewel and technology champion” that would continue to be an integral part of the Sony group. “The division,” Sony boasted, provides “products to smartphones, including the iPhone, and is the global leader in the sector.”
Sony, in other words, used to be what Apple and the iPhone are today – and much more. Now it’s just fine being a mere supplier of components – a support player – for the real stars calling the shots. Once the “one and only” – the fabled game-changer that Masaru Ibuka and Akio Morita founded 1946 – Sony is now a mere link in the global tech supply chain it helped invent.
Japan runs this risk, too, as China dwarfs its gross domestic product: Beijing’s in now 2.8 times bigger than Tokyo’s. Yes, Japan tops China handily on per capita income tables. But as Japan battles the effects of an aging and shrinking population, China is investing hundreds of billions of dollars to raise its semiconductor game. It’s making great inroads in the renewable energy and electric vehicle spaces.
The trade war will surely slow Xi Jinping’s “Made in China 2025” extravaganza. But Japan has no competing strategy to maintain a global status that names like Sony built decades ago.
The last 36 months have been rough on the Japan brand. The headlines were filled with accounting scandals from Olympus to Toshiba, quality controversies from Kobe Steel to Mitsubishi Materials to Suzuki Motor, and governance failures from Suruga Bank to Nissan Motor.
And Rugby World Cup fans in Japan right now are learning firsthand how hard it’s been for Airbnb, Lyft and Uber to enter this change-averse nation.
Show me the innovation
That might be fine if Japan Inc. was devising responses to rapidly changing service industries. Or to the “app economy” disrupting the hotel, transportation and travel games. More often than not, Japan Inc. circles the wagons to protect the local market, a tendency that stymies innovation and productivity. This makes it hard for companies even with the most celebrated of pedigrees to reinvent themselves.
Does Loeb have all the answers for Sony?
No one knows. Yet the argument that timidity and complacency continue to hold Sony back has merit. On the one hand, shaking things up and heeding shareholder ideas is, supposedly, part of the corporate reformist zeitgeist Prime Minister Shinzo Abe unleashed in recent years.
Loeb isn’t going away empty-handed. After reports began circulating in April that he was building a big Sony stake, Yoshida’s team announced a $1.9 billion share buyback. Last month, Sony sold its 5% stake in Olympus, a noncore investment that Loeb found indulgent. That netted Sony $746 million.
Sony, though, has yet to recapture the popular imagination with new game-changing ideas. At a moment when investors are scouring the globe for new tech “unicorns,” Sony is playing it safe. That concerns investors, including Loeb, who think Sony has the potential for renewed greatness.
Unfortunately, Sony seems resigned to accepting also-ran status. Hedge funds like Loeb’s think Sony, and really Japan Inc., in general, can do much better. If only it took some chances to regain its innovative mojo.