Young-Sam Cho and Tomoko Yamazaki: East looks West to get out of 'Sony shock'

Ten months after Nobuyuki Idei was named chief executive officer of Sony in June 1999, shares in the world's second-largest consumer electronics company climbed to a record high.

Five years later, the stock had lost almost three-quarters of its value, prompting Sony's board into a move regarded radical in Japanese terms - appointing a foreigner as its chief.

The head of Sony's American operations, Welshman Sir Howard Stringer, 63, was shoulder-tapped to replace Idei, 67.

Price cuts, competition and shrinking profit margins conspired to undermine Idei's vow to build a company that would use the internet to pipe its films and music to gadgets commanding higher prices.

"It's hard to imagine anyone delivering less on promises," said Paul Chesson, a Japanese equity manager at Perpetual Investment Management in Henley-on-Thames, Britain. "I visited them on my last trip and I thought them very complacent."

The company that invented the Sony Walkman, a legacy from founder Akio Morita, now has a market value worth less than half of South Korea's Samsung Electronics, whose stock soared 72 per cent from March 2000 to March 2005.

The shares of iPod maker Apple Computer are up 36 per cent in the same period.

Idei, a graduate of Waseda University in Tokyo, was the architect of Sony's effort to use internet connections to differentiate his company's products from those of competitors.

The strategy was behind Tokyo-based Sony's US$2.9 billion purchase of Metro-Goldwyn-Mayer last year. Products such as the PSX, which combined a video-game player with a DVD recorder, were also designed to fit Idei's vision.

"We pushed through structural reforms to create an environment where the company can be more aggressive and pump out profits starting next fiscal year," Idei said this week. "Now is the best time to pass the baton."

Investors cheered Idei's strategy at first, driving Sony's shares to a record in March 2000. The optimism didn't last.

Earnings at the Japanese company's consumer-electronics business plummeted as rivals began producing similar products, such as cellphones and DVD players, that they could sell at lower prices.

Sony's market capitalisation declined, too. In dollar terms, Sony's market value is now on a par with Apple Computer and Osaka-based Matsushita Electric Industrial. Sony's market value in 2000 was more than twice Matsushita Electric's and more than four times Apple's. The shares closed yesterday at 4070 ($52), up 1.5 per cent and the highest in eight months.

In April 2003, Sony's shares plunged by 27 per cent in a two-day period after the company reported a 111 billion net loss in its fourth quarter. Japanese newspapers dubbed the event the "Sony Shock".

Sony's slump is emblematic of changes sweeping the consumer electronics industry. Products such as flat-panel TVs from Sony are being replicated by lower-cost producers in a fraction of the time they once took.

Standardised components, too, make it easier to produce gadgets with the same features as Sony's. Competition has also intensified, pressuring prices and profit margins.

A Samsung spokesman said his company was willing to lose money on its appliances and consumer electronics, such as computers and televisions, because they drove sales of the components from which the Korean company made most of its profit.

Samsung's profit last year surged 81 per cent to a record 11 trillion won ($1.48 billion), more than Sony has earned in the past 10 years. Apple's first-quarter profit more than quadrupled, aided by sales of its iPod digital music players and iMac personal computers.

Sony had an operating profit margin of 1.3 per cent for the business year ended March 2004, compared with 2.6 per cent at Matsushita Electric. Samsung Electronics had a margin of 21 per cent for the year ended December 2004.

Idei had promised to raise operating profit margins at Sony to 10 per cent by 2006, when Sony marks its 60th anniversary.

"We won't achieve it this year," Stringer said yesterday. "It's worth leaving out there to fight for and improve management. We have to make Sony executives hungry."

Stringer plans changes at the company founded in 1946. "Sony has built a tremendous legacy for 60 years, but we can't let that trap us or inhibit us," said Stringer, who will take over as on June 22. "We need to take that legacy and reinvent it."

During his career at CBS, Stringer, who was knighted in 1999, earned nine Emmy Awards for writing, directing and producing.

He moved to the US in 1965 at 22 after studying modern history at Oxford University and served in Vietnam from 1965 to 1967, winning the US Army Commendation Medal.

Idei's replacement as Sony's chief executive is the latest example of an executive departing after failing to reach his or her goals - this includes Hewlett Packard's Carly Fiorina and Vivendi Universal's Jean-Marie Messier.

Underscoring the scope of the changes at Sony, president Kunitake Ando and executive vice-president Ken Kutaragi also stepped down.

Ryoji Chubachi, 57, an executive deputy president, will take over from Ando as Sony's president.

Idei, who will serve as an adviser at Sony after Stringer takes over, is a career employee of Sony. He joined the company in 1960, became president in 1995 and has served as chief executive since June 1999.

"Sony isn't a small company where a management change will simply fix the problem," said Hideaki Kurimoto, of Meiji Dresdner Asset Management.

"Its problems are a lot bigger than that."

Tied up

Welshman Sir Howard Stringer had a 30-year career as a journalist, producer and executive at CBS, winning nine Emmy awards.

He joined Sony in 1997.

He is known for his skills as a deal-maker, overseeing the takeover of MGM last year.

He became a US citizen in 1985.

- BLOOMBERG