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Why Sony will post its first annual loss since 1995

January 22, 2009 |  3:41 pm

Sony showroom in Tokyo's Ginza shopping district

For Sony, it was the perfect storm -- a steep drop in consumer spending, a sharp rise in the value of the yen, a spike in the number of players in the already crowded consumer electronics market.

All of this led the Japanese electronics giant to announce today that it was expecting to post its first annual loss in 14 years this spring. Its 2008 fiscal year will end March 31.

"The massive economic upheaval being experienced across the globe is sparing no one in the consumer electronics world," Sony Chief Executive Howard Stringer said in a sobering statement to reporters in Tokyo. "Overall, demand has decreased. Currency exchange has become dislocated. Consumer credit has been stifled."

Sony said it expected a net loss of $1.7 billion for the year, a stark reversal of the $1.5-billion profit it had initially forecast in October. On an operating basis, Sony today forecast a $2.9-billion loss. It also projected 2008 revenue of $86 billion, 14% lower than its October forecast and down 13% from 2007.

Stringer announced that the company would embark on a significant restructuring aimed at slashing expenses, consolidating its sprawling divisions and speeding up the time it takes the company to launch new products.

"Our fixed costs are still too high," Stringer said. "Our supply chain still too slow. ... Too often we have been late going to market with our product. This practice cannot be tolerated going forward."

To save money, the company will ...

... implement a sweeping restructuring that includes "substantially reduced" executive bonuses, lower managers' salaries and the closure of five or six factories. It also plans to outsource some of its basic product-design functions so it can cut the number of design workers by 30% by March 2010. The layoffs are among the 8,000 job cuts Sony announced on Dec. 9. The company employed 180,500 workers as of last March.

Combined, the measures are expected to reduce expenses by $2.8 billion over the next fiscal year.

In addition, Stringer said Sony would be more ruthless in leaving businesses that don't do well. He did not mention specific products.

Much of the restructuring effort focuses on Sony's core consumer electronics business, which made up nearly 75% of the company's revenue in fiscal 2007. "Our playing field has changed. Samsung and LG have now broadened their product portfolios," Stringer said. "At the same time, Apple, Microsoft and even Cisco are aggressively positioning themselves to anchor the digital home."

During the last calendar year, Sony relinquished its title as the largest TV company in the U.S., a market it once dominated. Samsung took the lead, according to research firm DisplaySearch. Sony's share of TV sales fell to 17.1% in the third quarter of 2008, from 19.5% in the fourth quarter of 2007, while Samsung's grew to 26.2%, from from 18.7%, DisplaySearch analyst Paul Gagnon said.

Other Sony businesses that are expected to post losses for the current fiscal year include the financial services division and PlayStation games business.

Stringer blamed some of the losses on "the unprecedented and unnatural strength of the yen, as well as the impact of the weak Japanese stock market on the portfolio of Sony Financial." Sony estimated that the strong yen contributed to $619 million of the projected $2.9-billion operating loss.

The company plans to take a $656-million restructuring charge during the current fiscal year and an additional $1.2-billion charge in 2009.

"We can and will navigate through this," Stringer said, "but it will not be easy."

You can listen to a recording of the call here.

-- Alex Pham

Photo credit: Itsuo Inouye / Associated Press 

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