'Short Circuit' - Last In A Series
From the U.S. edition of The Wall Street Journal, August 17, 2012
By DAISUKE WAKABAYASHI
TOKYO—Endoscopes, car batteries, and light bulbs just don't have the same appeal as ultrathin televisions, sleek tablet computers and videogame systems.
Japan's consumer electronics manufacturers want to remain electronics firms—just with a little less "consumer."
Spurred by recent struggles that have culminated in record annual losses and management reshuffles, Sony Corp., 6758.TO +1.94% Panasonic Corp., 6752.TO +2.62% and Sharp Corp. 6753.TO +5.14% are striving to reinvent themselves. Panasonic and Sharp are pushing into green energy. Sony has jumped into medical devices.
Japan's electronics sector became a pillar of the country's postwar expansion by manufacturing televisions, stereos, and other technological hardware for the mass market. But the long-term survival of Japanese firms will depend on escaping the margin-killing rat race of the consumer electronics market.
Japanese companies have beaten rivals to the market with hardware breakthroughs. But in each case, foreign rivals have cashed in by delivering faster improvements, integrating the products with easy-to-use software and online services, and delivering a smarter marketing message.
The transition from analog to digital technology—a shift that replaced the Walkman with the iPod, the VCR with the TiVo, and bubble-tube TV sets with flat-panel displays—made it easier to produce goods in a uniform way with off-the-shelf parts, discounting the manufacturing skill that once made Japan an industry force. As a result, hardware became a commodity that needed to be enhanced by elegant software or engaging services, areas where the Japanese have been weak.
"No one is making money from televisions so Panasonic is trying to shift from an audiovisual, home-appliance oriented business to a B-to-B business," Panasonic Chairman Fumio Ohtsubo told reporters in January. He was the company's president at that time, and was replaced and became chairman in June.
Health care and energy are a natural fit for these companies given Japan's limited natural resources and an increasingly aging population.
As their losses piled up in the past several years, the companies pursued deals in these sectors to help lessen their reliance on the consumer electronics segment.
Despite the promise, these new markets could create the same old problems: A crowd of Japanese companies jump into a promising sector. The abundance of competitors drives down prices, pressuring profitability, while making it difficult for any company to stand out globally.
In Japan alone, no fewer than seven companies including Sharp and Panasonic are selling solar panels; at least five major companies are developing rechargeable batteries for electric vehicles; and most Japanese camera or electronics makers are targeting some part of the health-care market.
Japanese manufacturers are also piling into the market for replacing incandescent and fluorescent lights with light-emitting diodes, or LEDs, which last longer and use less energy.
"Japanese companies are notorious for one competitor raising their hand to do something new," said Melissa Otto, a director at TIAA-CREF Investment Management who oversees a portfolio of Japanese stocks. "And then, they all follow suit."
Sony acquired Illinois-based life-science technology company iCyt Mission Technology Inc. in 2010 and medical diagnostic device firm Micronics Inc. of Redmond, Wash., last year for undisclosed amounts.
Sony is also in talks with Olympus Corp. 7733.TO +0.41% —the troubled Japanese medical equipment maker that admitted to an accounting scandal —to take as much as a $633 million capital stake, according to people with knowledge of the discussions.
Panasonic also considered taking a stake in Olympus although it decided against making an offer, these people said. Olympus has said it is still weighing its options.
The deal is appealing to Sony because of Olympus's 70% share in endoscopes, medical instruments used to peer into the body.
Olympus already uses Sony's image sensors, and Sony aims to place more of its components into other Olympus medical devices while also tapping Olympus's sales channels, according to a Sony executive not permitted to speak publicly on the matter.
In April, Sony Chief Executive Kazuo Hirai called the medical devices business a "future pillar" of the company, saying he expects annual sales from its health-care operations to eventually generate more than $1.2 billion.
In the year ending in March 2015, Sony expects sales of its medical monitors, printers, and other equipment to reach about $630 million, or less than 1% of its total revenue in the past fiscal year.
"It's something that they have to do," said Yuji Fujimori, a Tokyo-based analyst for Barclays Capital. "The medical world is getting closer to the electronics world. There is a lot of electronics technology that can be used in medical equipment."
The global market for medical equipment is large and growing, and expected to rise 28% over the next five years to $348.6 billion in 2016, according to health-care research provider Espicom Business Intelligence.
Toshiba Corp., one of Japan's leading television and computer manufacturers, expanded its atomic energy business when it acquired a majority stake of nuclear energy firm Westinghouse in 2006.
Seeking a way to ease the burden of earnings volatility from memory chips and consumer electronics, Toshiba is also active in rechargeable car batteries, LED light bulbs, and renewable energy systems.
Panasonic has made the most pronounced—and costly—move to change the composition of its businesses.
Over the span of two years ending in late 2010, Panasonic spent $10.4 billion to acquire Sanyo Electric Co., targeting its small rival's solar panel operation and rechargeable car batteries for electric vehicles.
In addition, it spent more than $3 billion to make majority-owned subsidiary Panasonic Electric Works Co. into a wholly owned unit to accelerate its push into building systems.
Panasonic's strategy is to avoid getting dragged down by low-cost Chinese makers of solar panels—that is, to avoid having solar panels turned into commodities like TVs or memory chips—by selling the cells as part of a broader renewable energy system for homes and offices.
It expects its battery business to expand on orders from five different auto makers using Panasonic batteries for electric or hybrid vehicles.
That strategy hasn't paid off yet. Panasonic's energy business, which includes the battery and solar units and accounts for about 6% of the company's total revenue, lost $263 million in the past fiscal year, as the company struggled with a sharp decline in prices for photovoltaic cells and low-end batteries in consumer electronics.
But company executives remain optimistic. Panasonic says it can increase revenue in that sector by at least 60% over four years, to more than $12.6 billion, in the year ending March 2016.
That compares with overall expected revenue growth of about 10% over the same period, according to analyst forecasts. The company expects profit margins for the unit to exceed 10%—well above the low-single-digit margins expected for the company as a whole.
Sharp acquired Recurrent Energy LLC, a San Francisco developer of solar power generation projects, for $305 million, in November 2010.
Sharp was profitable at the time, but its finances have since collapsed, and rather than acquire more companies, it was forced earlier this year to agree to sell a stake in itself to Taiwan's Hon Hai Precision Industry Co. 2317.TW +0.48%
Amid its struggles, Sharp still sees a ray of hope for its renewable energy business. When Sharp this month announced its first round of job cuts since 1950 and a forecast for a $3.2 billion annual loss, President Takashi Okuda singled out the solar business, lifted by new laws forcing utilities to buy from more renewable sources.
Demand from the domestic residential market, said Mr. Okuda, is "in extremely good shape." The solar business accounted for about 8% of Sharp's total revenue in the last year.
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com