The conversation took place at the Paris headquarters of a large French electronics and defence group, some twelve years ago. "how's business doing in that segment?" I asked. My counterpart, a former bank colleague who had taken the position of Treasurer in this big concern, replied "Indeed, doubled in volumes, brought a tiny 10% increase in income, thanks to price collapse." We were talking about the then flourishing FAX industry. Twelve years after, is history repeating itself in the Consumer Electronics business? Might well be the case...
Sanyo Electric Co (TSE:6764) talking with Goldman Sachs about the transfer of 33.2pct of the group's ailing key financial arm, Sanyo Electric Finance, for Yen23.2bln ($110m). The Japanese concern's stake in the debt-ridden financial arm would be reduced to 19.2pct after the deal is closed.
Meanwhile, Sony Corp. (NYSE:SNE -TSE:6758) is multiplying announcements to the market; Sales of 70,000 shares of Sony Communication Network Corp. (TSE:3789) coinciding with its listing on the Tokyo Stock Exchange, and a new revenue forecast every other week. Since this sale of SCN's stock is not accounted for into the group's loss estimate of 10 billion yen for the period, Sony's results will be better than expected. But there's more: Moody's rating agency has announced that it degraded Sony's long-term ratings from A1 to A2, on the basis that the group might be unable to recover profitability as anticipated. "Sony's TV business, its major cash cow in the past, is now suffering from heavy losses because of the delay in developing its own flat panel displays" Moody's said. Odd?
JVC has also announced losses on the same grounds: price dumping, competition from lower cost based China and Taiwan manufacturers. Last in the series, Pioneer Corp. (TSE:6773) sent bad signals to the market when announcing a greater than expected loss forecast for next March fiscal year to Yen87bn (£412m), and that's nearly four times its... October estimates of YEN24bn (£113m). More, this announcement comes only one year after the Japanese giant's purchase of NEC's loss-making plasma screen business: the group will throw the towel in the low-end DVD production, coming along with 2000 layoffs, including 600 local jobs and accelerated restructuring program. Finally, Pioneer will delist from the New York, Osaka and Amsterdam Stock Exchanges. Gasp!
Sharp Corp. (TSE:6753), which has gained a significant market share in the LCD TV business, and Matsushita Electronics (Panasonic) seem to be the only winners in this deadly game. So, what now?
Is this a nightmare scenario, which would be rapidly spreading within the sector, at what seems to be an increasing pace...?
Nightmare scenario?
It consists in setting (moderate, if not modest) earning forecasts, then not reaching them, then announcing a restructuring, or the purchase of one of the competitors' ailing division (with, obviously, the usual synergy-cost effectiveness and economies of scale blah-blah), then again not reaching the target and either dispose of the entire chain, or restructure again with lower estimates, and so on...
The Financial Time's highly regarded Lex is right to analyse that "this misses the point". The consolidation in the sector seems to be the only way to get out of this vicious circle, but even the Japanese government couldn't succeed at organising this -unlike its US counterpart about the defence industry a decade ago. Likewise, newly appointed management staffs do not look ready to take the bull by the horns. The problem is, and it is much similar to the banking problematics of the nineties, that those concerns heavily subsidise their crumbling businesses through the most successful ones. Until... Disaster?
A relief could probably come from the surge of new formats and technologies, like HD-TVs and DVDs. But then again, all these concerns gathered friends and made alliances to propose two new standards for the next generation DVD format (Blu-ray and HD-DVD) instead of issuing a single one, which would obviously have attracted the end-consumer, who is simply puzzled, with the risk that the implementation of such new devices is slowed down until there's a winner. And the risk, in addition, is that all this will postpone the , and so much needed drastic consolidation of the sector.
A deal like the one announced by Sanyo and Goldman Sachs should, however, shake the industry, since the financiers and other investors might well enter the game with other purposes than market shares. As, again, the FT Lex column analyses, "valuations are depressed", in a land where "money is virtually free"...