Thursday, 26 April 2012

The King is Dead - Long Live the King

Your Neighbourhood Economist fondly remembers his first Walkman.  It was red.  And it was a Sony.  Like the Walkman in question, Sony was the pick of the bunch at the time but its best days seem to be well behind it.  Like other Japanese electronics manufacturers, the qualities that propelled it to global dominance have also prompted Sony’s fall from the top.  Sony recently announced that it expects to post a bigger loss, a record net loss of 520 billion yen (US$6.4 billion), for the financial year than ended in March 2012.  And it is not just the one year - Sony has lost money in each of the past four years.

The immediate cause of Sony’s malaise is its television manufacturing division.  Numerous firms churning out flat screen TVs has resulted in a rapid decline in prices for TVs and Sony (and other Japanese firms) has been unable to cut costs faster enough (but we as consumers benefit from cheaper TVs).  Japanese firms such as Sony are suffering the same fate that they inflicted on their US rivals in the 1980s when the small upstarts with lower wage costs managed to snap up a growing proportion of the market.  Now it is the turn of the rise of South Korean and Chinese firms to rise to dominance. 

Life at Sony was easy to begin with.  There was a clear goal – to copy and improve on the products of US firms.   It had a motivated and loyal workforce stemming from a consensus style of management and the group orientated nature of Japanese society.  Sony also benefitted from the government providing an environment which was good for exporters and with less of the rigours of competition which meant that Sony could apply itself to a different range of products.  So Sony pushed into a wide range of products and sacrificed profits while it built up a growing share of the market.  

But once Sony had risen to the top, it lost its way.  Japanese firms are good at playing follow the leader but struggle to innovate on their own.  This is because betting on new technologies at the cutting edge of electronics is difficult with a system of consensus management.  Its prior diversification proved to be a distraction to management who should have been focusing their and the firm’s efforts on core areas.  And discarding of unprofitable areas is not easy when you have amassed a large corporate family that had worked to the bone previously.  Sony still remains a scattered group of businesses with 6.4% of its 2011 sales coming from its music business, 8.3% from movies, and 11.1% from financial services. 

So Sony ended up losing its focus and has lost out to rivals in mobile phones and tablets (Apple and Samsung) and in game consoles (Nintendo – a much smaller firm which has shown that a few Japanese firms can innovate).  Further damage has been inflicted by a strong yen (which hurts Sony as an exporter from Japan) and weaker demand due to the global recession and the electronics giant is on the ropes.  A recent announcement by a new president that the firm would cut 10,000 or 6% of its global workforce will probably only help a bit considering the firm requires a major overhaul.

But as much as Your Neighbourhood Economist laments the decline of Sony, the rise and fall of different companies is a fundamental part of how the system of capitalism provides consumers with what they want.  Sony had its time as the favourite of consumers but firms like Samsung have managed to do a “Sony” on Sony and provide more attractive electronics at better prices.  And it means we can look forward with anticipation of what comes next after Apple and Samsung!

1 comment:

  1. It is interesting to hear the in depth background behind the headlines of Sony's poor performance. For myself I find it unbelievable that the company has managed not to perceive the importance of the iPod and now the iPhone in opening lucrative markets.
    I think you my be oversimplifying things to say that as Sony is a Japanese company it can't innovate. I am of the opinion that Japanese companies are good at R&D and come up with many products I think that is also true of Sony, it is just they don't have the commercial instincts of say Apple. Talking of Apple, the iPod, iPhone, iPad are no different from the famous Sony transistor radio in that they refined a product rather than invented it. The biggest strength of Apple is their packaging and marketing. The most impressive thing is the Apple profit margins. To me Samsung is more of a direct rival, but you could argue that a lot of Asian firms diversify into a multitude of different divisions. Just look at Samsung who produce a mirad of products including cars. Do you think Samsung have overextended themselves?
    Regarding Sony's various divisions, I would agree that a lot of restructuring and refocusing are necessary, but there is obviously a lot of synergy with TVs, movies, video games etc which was demonstrated best by Blu ray where Sony used the playstation brand to spread the use of Blu ray. It would be interesting to know how that revenue affects Sony's financial figures.

    Finally I would like to say it is perhaps a little premature to be signaling the demise of Japanese companies, you only need to look at Toyota for evidence of a counter argument. It might be the turn of Japanese firms to face stiff competition from over rivals. But then again in a globalized market Sony and any other company for that matter will still have access to the same labour markets.

    It might be the demise of Japanese dominance but it won't be the demise of Japanese firms as a whole.