If you’re looking for a microcosm of how poorly positioned Japan is to weather the Covid-19 crisis, Sony may be a great place to start.
The electronics-to-entertainment behemoth figured all was well back in February, despite early coronavirus disruptions. Sony was betting that heady sales from its image-sensor businesses would save the day.
Hardly. The pandemic forced CEO Kenichiro Yoshida to halt China-based production.
On Wednesday, Sony disclosed a 57% year on year drop in first-quarter operating profit as coronavirus fallout slammed demand for the image sensors for smartphones as well as for cameras and televisions.
Sony pulled in about US$331 million in the January-March quarter, compared with $772 million in Q1 2019.
Things look set to get much worse, if Sony’s refusal to offer an outlook for the year ahead is any indication. Management now has to work out how to overcome supply chains snafus and bring PlayStation 5 to market, while delaying Hollywood film releases.
Here comes trouble
That does not leave much time to invent game-changing new products. Nor, for that matter, bringing financial order to a conglomerate with tentacles reaching in every which direction.
And that is an issue because – to Yoshida’s dismay – Sony’s bloat has won the attention of a market rabble-rouser.
In January, Daniel Loeb, having failed to rein in the sprawl over at South Korea’s Samsung Group, Loeb’s Third Point hedge fund upped pressure on Sony. Though New York-based Loeb had been sniffing around Sony for years, his latest demands are making headlines in Asia’s No 2 economy.
Loeb wants Sony to sell off non-core assets. The media and entertainment units, Loeb claims, can “stand alone” as profit centers. His push for “portfolio optimization” to enrich his stake reckons that Sony’s semiconductor and media franchise could “create more value independently than together.”
As Loeb puts it: “Hidden behind the media empire was an underappreciated, best-in-class semiconductor business.”
The trouble with Sony’s latest earnings news is that it’s hard not to wonder if Loeb has a point. In recent decades, it diversified into so many sectors that it’s hard to explain, in simple terms, what exactly Sony does 74 years after it was founded.
Before becoming CEO in 2018, Yoshida spent years with scalpel in hand as Sony’s chief financial officer. His success in streamlining a bulbous giant made Yoshida the toast of Tokyo.
Yoshida booted staff, sold the money-losing personal computer business, pruned the troubled television unit and engineered a $1.7 billion write-down on smartphones. That was a rough call as Apple and Samsung grew market share, but one that brought Sony back from the brink.
Yet Sony’s cut-your-way to profitability strategy is running into a coronavirus reckoning – and perhaps making Loeb’s job convincing other shareholders to demand change easier.
Rather than wowing and disrupting the tech world, Sony is increasingly happy to sell goods to others leading the industry, including China’s Huawei.
Fair enough – so long as Sony’s developers are dreaming up new game-changing products. But it’s been years since Sony surprised and delighted techdom.
From Sony to Son
And Sony is hardly the only dysfunctional tech name hitting the Covid-19 wall in 2020.
On Monday, the telecommunications unit of Masayoshi Son’s SoftBank empire forecast a $8.6 billion operating profit for the current fiscal year, which ended March 31.
But the good news at the telco arms is a brief respite, at best.
Next week, Son’s overall conglomerate is expected to report a record loss as his disparate investments – from WeWork to Uber – blow up on SoftBank’s Vision Fund.
Here’s where Sony’s role as a Japan Inc microcosm comes into play. Arguably, no corporate giant better traces Japan’s meteoric rise from the ashes of war to innovative powerhouse than the one Masaru Ibuka and Akio Morita founded in 1946.
Sony opened its doors eight months after Japan’s surrender, and never looked back. Though it has since been overshadowed by Japan Inc standard-bearer Toyota, the electronics juggernaut heralded Japan’s re-emergence as an economic force.
By the 1980s, it effectively owned the tech world with its Trinitron television, Walkman and hand-held video cameras.
Yet Sony also came to symbolize Japan losing its innovative mojo in the 1990s – just like the national economy.
Heroes to zeros
The collapse of the 1980s “bubble economy” highlighted the bloat, over-expansion, non-productivity and inflexibility of a development model that had thrived for decades.
Throughout the 1990s and into the 2000s, a succession of governments treated the symptoms of Japan’s funk, not the underlying causes. Over time, that enabled China to motor past Japan in terms of influence, while South Korea forged big inroads as a tech player.
The analogy extends to a Sony now fending off challengers from Silicon Valley to Seoul to Shanghai. Japan, after all, has created half as many tech “unicorns” as Indonesia in recent years – never mind a neighbor investing trillions of dollars in “Made in China 2025.”
Add in a rigid and aging business culture and it’s not hard to understand why Japan’s analog economy has trouble competing in a digital world.
It’s that digital world that Son’s own juggernaut is trying to harness to move SoftBank beyond its telecom roots. His $100 billion Vision Fund, though, stumbled into 2020 well before the coronavirus infected the global economy.
Son’s $10 billion bet on office-hive startup WeWork went sideways well before a pandemic upended many of the bets on gig-economy startups. As Son looks to raise $41 billion through asset sales to steady SoftBank’s balance sheet, the cash-rich telco unit is firmly on the table.
Sony’s Yoshida has his own decisions to make about rightsizing a behemoth with tentacles in all too many businesses that are coming up short at once.
And with acerbic hedge fund hard men like Loeb looking over Yoshida’s shoulder as the economy ploughs into its own wall, 2020 is going to be a rough ride.