Sony cuts costs, but not brand problems

Big layoffs may save pennies, but they won't fix what's really wrong with the Japanese consumer electronics giant.

Sony announced Tuesday it's cutting 5 percent of its full-time workforce, in addition to a sizable chunk of contractors, and delaying investment in some factories. It's all part of the Japanese electronics giant's plan to save money amid the troubled global economic environment.

The total annual savings will eventually amount to $1.1 billion by early 2010, the company says. But will it be enough? Sony's current struggles are well known, and it's not clear that cutting just 16,000 positions and a few factories is going to get the unwieldy behemoth back on track.

The company is huge, and it has had trouble finding cohesion among its brands and products. And with increased competition among all product categories, the Sony name just isn't the same as it was even five years ago.

"Years ago they were able to charge a price premium over other brands, but now, with strength of Samsung and others, it's harder for them to charge that premium," said Rick Giusto, vice president of IDC's consumer, new media, and computing analysis. "There's heightened competition within all consumer electronics segments."

Sony's size and reach into almost every category of electronics isn't its advantage anymore. It's simultaneously being forced to figure out how to compete with strong competitors in every category: mobile phones, TVs, cameras, Blu-ray players, video consoles, portable music players, laptops, and more.

Sony had always been able to charge more for its brand name because its quality surpassed that of competitors like Samsung. That's just not the case anymore, as others have proved their mettle as makers of quality products. It's Samsung, the market leader in televisions, that determines TV pricing now. So if Samsung lowers its prices, Sony is forced to respond.

And it's not going to get easier. The current economic crisis will only intensify the battle for customers among all the big names in electronics.

"There's going to be hyper competition within different (consumer electronics) segments through the Christmas holidays and into next year," said Giusto. "We're going to see price cuts because people are going to try to stimulate demand...That's just going to continue."

But the announced restructuring doesn't directly address this. Here's what Sony plans to do:

It will outsource the manufacturing of a planned increase in CMOS image sensors for mobile phones, and delay increasing its investment in a liquid crystal display TV plant in Slovakia. Overall, the plan includes eventually closing 5 or 6 more of its 57 worldwide manufacturing sites.

Delaying investment--as opposed to cutting back--likely won't hurt Sony's LCD business, according to Paul Gagnon, who monitors the TV industry for market research firm DisplaySearch.

Sony Bravia LCD TV
Sony's brand image is changing as competitors like Samsung are able to dictate TV market pricing. CNET

"Sony (already) has a lot of capacity (to build TVs)," he said. "In a down market, delaying investment is not a bad idea. Particularly because there are concerns about how much incremental growth you can get in developed regions (like North America and Europe) and how quickly new markets might grow in India and China."

Additionally, 8,000 full-time and 8,000 contract employees will be eliminated by March of 2010. The company will be shutting down an LCD TV manufacturing plant employing 560 in Westmoreland, Penn., and a video tape plant in Dax, France, which currently employees 300. Beyond that, the company is being close-lipped about which business units and regions will be most affected by the restructuring plan.

While that seems like a lot of large numbers, some say it's probably not enough. The final cost cuts aren't due until early 2010, according to Sony's statement, and that "appears too slow," according to J.P. Morgan analyst Yoshiharu Izumi. He said Sony's priorities as far as which businesses will see the cuts and when isn't clear enough. Izumi said in a research note he personally hoped to see the most attention paid to the TV business.

Though Sony has made big strides in getting its TV business back on track toward profitability, it is still falling short . The company has invested heavily in LCD panel technology, but has still had to contend with rapidly declining prices, competition with budget brands, and reduced demand as the market becomes saturated with flat-panel sets.

It found success creating a lower-end line of TVs specifically for discount chains Wal-Mart Stores and Target. It meant going away from Sony's traditional premium brand image, but it helped drive up the company's market share in TVs again, where it remains No. 2 behind Samsung. It looks like a good move now, with the U.S. in a recession, and consumers who will be more conservative with their spending on TVs, Blu-ray players, and cameras.

While Sony struggles to find the answers to its brand woes, it's far from the only electronics maker struggling right now. Fellow Japanese giant Panasonic said last month its yearly profits will take a hit, and Samsung on Monday said its profits, sales, and capital expenditures would fall. LCD panel makers in Taiwan and Korea have also announced that they plan to scale back or delay investment.

"2009 is a year when a lot of CE makers are going to scale back investments," said Giusto.

So it could be a more level playing field the company is competing on in that regard. But Giusto said it's important that Sony not scale back too much.

"As long as they don't do something like exit the low end, because that's where a lot of the volume is going to be," he said.

About the author

Erica Ogg is a CNET News reporter who covers Apple, HP, Dell, and other PC makers, as well as the consumer electronics industry. She's also one of the hosts of CNET News' Daily Podcast. In her non-work life, she's a history geek, a loyal Dodgers fan, and a mac-and-cheese connoisseur.

 

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