Sony has been struggling for years to maintain market share in some of its core business segments. What prevents Sony from recapturing its flame?
Sony has been successful in the gaming industry, but in streaming, smartphones and laptops among others, it was forced to retreat. What is behind the company’s inability to reclaim its Renaissance era where it brought the world groundbreaking technologies such as the Walkman and the Playstation?
Sony’s Boredom Room
Sony has long been characterized by having a high number of employees. Due to strict labor laws and cultural conversion in its country of origin, Japan, the company experienced many difficulties readjusting its business to new domestic and global dynamics. In 2008, Sony’s global workforce peaked at 180.500 employees. The total workforce has since then fallen dramatically. In 2012, the number of employees at the Sony Group had fallen 162.700 and in 2013, decreasing further to 146.300. The downscaling of its workforce hasn’t been an easy road.
In August 2013, the New York Times made a special report about Sony’s manufacturing plant in Sendai. Shusaku Tani had been working for the electronics giant for 32 years, but in the last two years he was relieved of his position at the Sony Sendai Technology Center and placed in an empty room at the facility. Sony saw production decline for its magnetic tapes used in videos and cassettes and was looking for ways to reduce staff. In 2010, at 51 years, Tani refused an early retirement scheme, a privileged opportunity under Japanese labor law, the news outlet noted.
Tani’s situation is not unique to Sony, but emblematic of the rigid working culture present in a country where lifetime employment has always been regarded as guaranteed by the employer. Through his refusal of an early retirement offer, Sony placed Tani in a room in the hopes he himself would announce his resignation. Sony, just like many other larger organizations, are unable to reduce staff when the economic tides turn, which is regarded as taboo for the country’s largest employers.
There were calls for reform to add flexibility to the Japanese labor market. On the side of the employee however, relentless loyalty to the company is very much expected in return for job stability. But even in this relationship, a more progressive wind has started to blow. In 2019, Japanese television drama “I Will Not Work Overtime, Period!”, dared to question this attitude, where the main heroine wants to safeguard her work-life balance only to discard it to complete a project.
Inflexible workplaces
Reducing the workforce however is one of the quickest ways to stabilize a company’s cash position and in Sony’s case, this was crucial for its survival. Later in this piece we will learn that executives at the electronics company had to drastically reduce their operational costs as many of its business segments saw revenue plummeting due to strong competition and poor economic circumstances. The workforce is one of the largest costs at most companies. In 2017, Deloitte found that at a typical fortune 500 company, labor costs account for about 50 to 60 percent of all company spending.
In November 2022, Professor of Human Resource Management at Hitotsubashi University Business School in Chiyoda, Hiroshi Ono, argued that Japan must reform its inflexible working culture to better compete in a digitized competitive global market. Efforts launched by the Prime Minister’s Office in 2016 under the Work Style Reform Action Plan have brought some improvements to the Japanese workplace, such as remote work and increased worker flexibility, however, the firm collectivist culture remained strong. Societies that have collectivism firmly rooted in their society oftentimes have many subtle rules running their course.
Ono cites observations from researchers at the Hokkaido University, Duke University and University of California that found intricate norms that dictate how society at large should function. Habits such as micromanagement were far more prevalent in societies with strict norms. In a work culture with fixed hours at the office, having flexible hours or working remotely, can be viewed as straying away from the norm, Ono pointed out. Flexible work disrupts the intricate harmony that has been agreed upon and acts as a signal for non-conformity.
Sony leaving PC market
In February 2014, Sony announced it would retreat from the PC business, selling its Vaio PC segment to Japan Industrial Partners Inc. In the press release, the company explained it had been aggressively reforming its electronics business. A strategy announced back in 2012. Through this new vision of the future, the company identified several strategic growth areas, deeming its imaging, gaming and mobile business units as part of its core business. Sony had developed a strong product offering in those segments that would allow for growth opportunities.
Meanwhile, the company acknowledged that its PC and Television segments were required to develop better profitability. The television business was able to recover through various restructuring efforts. However, its PC business was unable to reform and build a solid growth trajectory, the company said. Sony was not ready to sell off its television segment just yet. Executives allowed more time for cost reduction schemes to gain greater cost efficiency. New products, such as 4K, allowed the company to gain a 75 percent market share in that segment domestically.
The PC business however had a less positive outlook, with Sony being unable to compete in a rapidly changing global PC market. Adjusting to the changing PC landscape, would require vast investments, including providing support to customers and delivering employment opportunities to its workforce. With the outlook being poor, Sony deemed it would be more valuable to focus on its mobile business, including smartphones and tablets.
In hindsight, we learned that Sony was unable to maintain its position in the smartphone business, delivering either subpar products or bringing new handheld devices to market too late. Jared Newman at Time Magazine was sad to see Sony leave with its Vaio line-up, which was known for its high-end line-up. However, the products eventually entered a race to the bottom in order to compete. Sony’s decision to back out from the PC business won’t come as a surprise to industry observers.
Smartphone disruption
Several years before the announcement, the PC market was showing signs of a major cooldown. In February 2011, CNN reported that smartphone shipments had surpassed global PC shipments, citing figures from IDC. Global smartphone shipments reached 100,9 million, with PC flatlining at 92.1 million. Part of the reason for slowing demand is market saturation. CNN cites figures from Forrester Research that revealed that 80 percent of Americans owned a PC, with only 17 percent having a smartphone.
Smartphones were becoming more powerful, CNN noted, being able to replace more tasks before reserved solely to PCs. These handheld devices can be personalized to one’s tastes, expanding functionalities to monitoring health or remote control for vehicles. In April 2011, The Guardian reported that the PC market had reached its peak, with demand for PCs slowing down as consumers were switching to tablets. The changing face of media consumption and productivity had a ripple effect for all players in the industry, with titans such as Microsoft seeing profits shrink.
The entry of Apple into the PC market has caused major disruptions, with consumers anticipating the second generation iPad and entries from other electronics giants such as Motorola and Samsung, The Guardian observed. Principal Analyst at Gartner, Mikako Kitagawa, explained that the PC market in the United States was severely impacted by the hype around media tablets, with mobile PC shipments deceling for the third consecutive quarter. The professional PC market meanwhile saw steady growth. The consumer and public sector however, saw a slowdown in demand.
Television sales fall
As 2012 rolled around, the Japanese conglomerate found itself in even deeper trouble. In August 2012, Sony’s fortunes decreased at an unprecedented rate with the company reporting a loss of $315 million for the first fiscal quarter, despite sales increasing for its camera, mobile phone and professional broadcasting products. The strong yes dampened overseas earnings, a topic discussed further in this article. Sony saw strong revenue decline in its television business unit and video games. The losses at some were yet another setback, after experiencing a financial loss of $5.84 billion the previous year.
The New York Times commented that the once mighty Sony had lost significant market share to upcoming industrial giants such as Samsung Electronics and Apple through its iPhone and iPod, a modern replacement for the once popular Sony Walkman. Despite strong investments in restructuring efforts, business units like its television product line have been turning a loss for eight years in a row, with losses running into 2012. The attempts to resuscitate its smartphone and tablet computer business are in their beginning phase and cannot compensate for the losses made elsewhere across the company. In hindsight we know that Sony was unable to reorganize its mobile devices and PC business unit.
In November 2013, the rating agency Moody’s warned that Sony’s credit rating could be downgraded below its current Baa3 rating. The Baa3 rating already signals to investors that high risks are involved. Obligations issued by these companies are classified as posing a substantial credit risk. The Guardian noted that Moody’s Baa3 rating is the lowest investment grade issued by the company. The warning comes after Sony revealed an earning forecast set 40 percent lower than expected as demand for its television, camera’s among others are decreasing.
Sony also experienced flops at the box office, further dampening its financial results. However, unlike its competitor Panasonic, who shifted away from consumer electronics to industrial and enterprise products, Sony remained committed to expanding its gaming, imaging technology and mobile devices segment, according to the company’s chief executive Kazuo Hirai.
Domestic woes
It’s tempting to look at Sony’s problems solely at its inability to reduce its workforce or that the smartphone has significantly reduced growth opportunities for its PC business. The answer however is more complicated and outside Sony’s sphere of influence, namely the Japanese economy. Over one-thirds (32.9 percent) of Sony’s net sales come from Japan alone. Sony has exposure in the United States (23.9 percent) and Europe (20.2 percent), but its domestic market remains one of the most important revenue drivers for the electronics giant.
Having a strong position at home is an important feat, however it also acts as the company’s Achilles Heel as Japan’s economy has been notoriously sluggish for several decades. Japan’s economy has seen ups and downs, experienced strong growth, but also falling down the global ranks as one of the world’s top economies. Japan saw its position drop due to China’s rapid growth. Meanwhile, the Japanese stock market was soaring to new heights, growing beyond its 1989 peak, Zhihai Xe commented for The Diplomat back in March 2024. Japan’s economy is influenced by its exchange rate as its currency has been depreciating against the dollar by an eye watering 30 percent in the past decade.
This growth masks the poor performance of the economy overall. Overall GDP might have grown past that of Germany in 2023, the growth rate has been dangling on 0.7 percent between 2000 and 2022, compared to Germany’s 1.2 percent over the same period, Xe noted. Placed against the labor output, productivity was ranked at 30th among all OECD countries, the lowest of the G7 economies. This translates to an average GDP per capita in 2022 of $34,064, placing Japan at 21 of all 38 OECD members. The lowest figure for this economic giant.
These wages have remained fairly stagnant in the last three decades, Xe pointed out. This poor wage development leads to poor domestic spending, which in turn, prevents the Japanese economy from breaking through the escape velocity of its sluggish domestic market. This period is also better known as The Lost Decade. A period with deep societal implications for many Japanese citizens.
The lost decade
Since the early 1990s, the International Monetary Fund (IMF) noted back in 2003, the growth of the Japanese economy has been disappointing, growing only an average of 1 percent. A far cry from the 4 percent recorded in the 1980s. Economic recovery has been further dampened by three recessions over the course of the 1990s. Competing economies have seen less downturns after the postwar period. Few advanced economies have been in such slump over such a long period of time.
Policymakers from the Bank of Japan have tried multiple interventions to curb deflation. This has resulted in prices for commodities soaring sharply, whilst wages remain static, leading to economic stagnation. Editors Tim Callen and Jonathan Ostray pointed out that the poor economic recovery shows the inability of policy makers to introduce and implement the necessary monetary programs that could’ve prevented a further collapse of the Japanese economy during the early 1990s.
Through the bursting of the Japanese stock exchange, equity prices had fallen by 60 percent, with land prices, once valued at the world’s most valuable, entered a free fall. This continued over the course of the 1990s and into the early 2000s. The report was created several years before the next economic recession that would cause further economic cooling during the 2010s. Consumer confidence started to drop sharply over this period. In January 1990, consumer confidence according to OECD Consumer Confidence Index (CCI) survey set a comfortable 102.31, above the long term average set at 100. The CCI is an important measurement of how positive or pessimistic consumers are about their expected financial situation.
Positive financial outlooks show that consumers are confident about their financial future, therefore more willing to spend. Meanwhile a pessimistic view will lead to consumers being reluctant to spend, holding on to their wallets in hopes of better financial prospects. Quickly after the economic collapse ushering in the 90s, consumer confidence among Japanese consumers fell dramatically. Just three years later in January 1993, the CCI had fallen to 99.39, falling further to 98.72 by October 1993. While more times were ahead, confidence in the Japanese economy by its citizens would never reach the level of January 1990. In August 2001, consumer confidence had fallen to 97.89, the lost figure in over a decade.
Economic recession
The poor economic prospects of the nation, combined with Sony’s strong presence in the market, make it very difficult for the electronics giant to compensate for falling demand elsewhere. In essence, its domestic market weighs heavily on the overall financial performance. However, Sony’s problems weren’t excluded to its domestic market. Problems started to compound as The Great Recession introduced the world to one of the worst economic slowdowns since the 1930s. Germany, roughly equal in size to Japan, has followed a somewhat similar trajectory in terms of consumer confidence.
However, Japanese consumers were far less optimistic about economic prospects, despite seeing economies recover over the course of 2010s. At the peak, or lowest low of the economic recession, in December 2008, consumer confidence in Japan fell to 96.14, compared to Germany’s 97.74. Japanese consumers remained negative over their economic outlooks, whilst the German population regained confidence faster and experienced more optimism as the global economy recovered. In the closing hours of 2008, CNBC reported that Japanese electronics companies had experienced strong declines in sales due to contracting consumer demands, as large portions of their products were sold overseas.
Japanese companies felt the strain of currency exchanges as the yen kept growing out of pace compared to the U.S. dollar. In December 2008, Sony announced it would cut 8,000 jobs across its global workforce in a bid to save up $1 billion in operating costs. The announcement came as figures showed that the Japanese economy was entering a deeper recession than initially feared, The Guardian commented. The electronics company had found itself in a deep crisis as demand for its televisions, audio players and digital cameras waned.
Sony’s smartphone division was experiencing stiff competition from Apple with its recently introduced iPhone. The Guardian pointed out that experts doubted whether the reduction across the workforce would lead to any significant improvements for the electronics company. Katsuhiko Mori at Daiwa SB Investments commented that the job cuts sound large, but despite the number, it won’t be enough to stabilize the business. Sony’s core businesses struggled to turn a profit. Hence, Sony has to show that it can turnaround its business unit before anything else.
This will prove quite the challenge as profits had decreased by 90 percent in the second quarter of 2008, with net income down by 60 percent compared to the previous year. The prospects for Sony looked bleak, as the Japanese economic downturn had intensified. For a country heavily reliant on exports, a global economic recession would only amplify its problems and delay any recovery. Policymakers warned that shift action was necessary to prevent the country’s economy from fully collapsing.
Restructuring
Sony, along with many Japanese electronics giants, has been struggling to find its footing. The electronics conglomerate rose to fame with its walkman. Saw major success in the mobile phone industry through its joint venture with Ericsson. However, none of its successes were enough to compensate for the decades long uphill battle to return to its glory days. The story of Sony is complex. In part Sony was unable to adapt to the rapidly changing digital global landscape, with its smartphone division serving as the precursor for the fallout that would befall the Japanese electronics behemoth.
A lot of Sony’s problems can be traced back to its domestic market. Despite heavily relying on exports, it also had a stable customer base in its home country. But, its domestic market, Japan, never fully recovered from its economic glory days, which peaked during the 1980s. A time of abundance, where the financial limit reached the sky. Until it all came crashing down, spiraling the Japanese economy in an economic downturn it would never recover from. Since then, Japanese citizens held on to their wallets, knowing that prices would come down through deflation.
The issues for Sony compounded as its operations are firmly rooted in Japanese society, where conservatism reigns supreme. This brings much stability to companies, its employees and citizens. But, where it provides predictability, it goes hand in hand with rigidity. Sony kept true to these values until it became overburdened by a bloated workforce, having thousands upon thousands of employees in loss making business units. Over the last 15 years it has been able to shed some of this weight to stabilize its revenue. However, more needs to be for Sony to see durable growth.
