Sony's Woes: Japan's Iconic Brands Strained

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Howard Stringer, Sony chairman and CEO, at a press conference in Tokyo

When Sony ends production at its Ichinomiya plant sometime during the next five months, the company will be closing the book on a symbol of its golden age. For 40 years, the assembly lines at Ichinomiya, located southwest of Tokyo, have churned out products like Trinitron TVs that have helped make the Sony brand synonymous with quality and innovation in the minds of consumers worldwide. (See pictures of the history of Japan's interaction with the world.)

But Sony, inventor of the portable music player and now known for digital cameras, LCD TVs and the PlayStation game machine, has stumbled in recent years. With demand for electronics collapsing as the world sinks into recession, the company finds itself increasingly adrift from its glory days, notwithstanding the Ichinomiya closure. Last week, Sony reported that it fell into the red in its latest quarter and repeated its forecast for an operating loss of $2.9 billion in the year ending March 31, its first such loss in 14 years.

Sony isn't the only iconic Japanese brand that is taking a beating. Beset by a domestic economy in recession, a yen that is gaining strength, and evaporating sales, manufacturers that have long been considered best-in-class by consumers are reeling. Toyota, the world's No. 1 carmaker by sales and profitability, recently announced that it expects to post its first operating loss in seven decades for the fiscal year ending March 31.

Indeed, quarterly results emanating from Japan Inc. last week sounded like a dirge: Honda lowered its profit forecast for the fourth time this year; Panasonic, the world's largest maker of consumer electronics, is slated to post a loss of at least $1 billion in its current fiscal year, its largest ever; and Toshiba, one of the world's largest producers of memory chips, and computer maker NEC Electronics also forecast big losses.

Throughout Japan, managers are slashing production and restructuring to try to weather the economic downturn, which economists say could continue for the next two or three years. "Demand has been falling off a cliff since the collapse of Lehman Brothers," says Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. Shiraishi says exports declined a "massive" 15% in real terms last quarter.

Meanwhile, the government on Friday reported that industrial production plunged 9.6% in November, the largest month-to-month drop since Tokyo began measuring such data in 1953. "The problem is very serious," said Economy Minister Kaoru Yosano during a news conference. "It's impossible now to predict when the economy will hit the bottom."

Plunging industrial output is reflected by the radical steps manufacturers are taking to try to adapt to the sharp slowdown. NEC Electronics said last week that it would eliminate 20,000 jobs at home and abroad, and cut costs by $890 million overall in the coming 24 months. Sony will close up to six factories and cut 16,000 jobs from its electronics divisions, to address what JPMorgan Securities analyst Yoshiharu Izumi called the company's "emergency situation." Panasonic, which recently bought a majority stake in Sanyo, is closing three plants.

But greater reductions may be needed as the global economic slump deepens. Toyota's plight illustrates the challenges faced by Japan Inc. The company recently achieved its long-standing goal of surpassing GM as the world's top automaker — only to run head-on into a recession far more severe than anyone anticipated. With its global sales down 4% last year, Toyota has already announced a management shakeup as well as plans to temporarily close factories for an additional 11 days over the next two months. The goal is to slash output to less than half the number of vehicles Toyota was producing at this time last year.

Analysts say Toyota may need to reduce output even more as sales in the U.S. market, where the company generates half its earnings, continue to plummet. In the last three months of 2008, the U.S. economy shrank at its fastest rate in 26 years; consumer spending fell 3.5% after dropping 3.8% in the third quarter.

About 40% of the cars Toyota sells in the U.S. are made in Japanese factories, and "due to significant yen appreciation, those exports are not profitable anymore," says Tatsuya Mizuno, an analyst at FitchRatings. It will take Toyota time to adjust its fixed costs, since it has spent the past several years investing aggressively to increase production capacity by about 500,000 vehicles per year in the U.S. "It's increasingly clear that the driving force [behind Toyota's recent growth] was really excess consumption in the U.S.," says Izumi of JPMorgan Securities, "and that's now unwinding."

Looking at Japan Inc. as a whole, BNP Paribas' Shiraishi expects production levels to hit bottom in the second quarter of this year, and says some recovery might be seen in the second half of this year. Shiraishi adds that manufacturers could start growing again around 2012, when a wave of Japan's baby boomers will reach age 65 and begin to spend their nest eggs. "They've been saving a lot to prepare for their retirement," says Shiraishi. "That could be a stabilizing factor for Japan." One catch, he says: they probably won't buy more cars and TVs.

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