- Panasonic and Sharp together forecast $15.2bn of net losses for the year
- Reckoning for past strategic mistakes, in the form of billions of investment write-offs
- Investments in flatscreen TVs and solar panels have proved to be disastrous
You know that Japanese companies are worried when they stop complaining about the yen.
In earnings presentations this week by Panasonic and Sharp, which together forecast $15.2bn of net losses for the year, the profit-squeezing effects of the currency's prolonged appreciation were barely mentioned. Instead, investors were treated to a reckoning for past strategic mistakes, in the form of billions of dollars in investment write-offs. "I am truly sorry," said Takashi Okuda, Sharp's president since June.
For years, Japanese consumer electronics groups have been investing both too little and too much.
In the 1980s, when the Japanese were beating up on formerly dominant US manufacturers, Americans marvelled at how much money they devoted to research and development and building newer, better factories, taking it as an object lesson in the value of long-term thinking.
But now it is Japan that is being outspent. Since 2000, South Korea's Samsung -- now the world's biggest electronics company by sales -- has allocated an average of 12 per cent of sales to capital investment, about double the ratio at Panasonic, Sony and Sharp.
When the Japanese have invested, it has often been in the wrong areas -- products such as flatscreen TVs and solar panels, which foreign rivals can make just as well at less cost.
Sharp, a century-old company that started out making mechanical pencils, is the most troubled of Japan's big consumer electronics groups. The Y450bn ($5.6bn) net loss it projected this week would be its second record deficit in two years, and last year its ratio of net debt to earnings before interest, taxes and other deductions more than doubled, from 1.7 times to 4.4 times.
On Friday Standard & Poor's slashed its credit rating for Panasonic's long-term debt by two levels, from A- to BBB, while Fitch downgraded Sharp's credit rating to B-. Fitch said it "does not foresee any meaningful operational turnaround in [Sharp's] core business over the short- to medium-term".
Sharp is trying to turn its focus from TVs and solar panels to small LCD displays for smartphones and tablet computers
Sharp was granted temporary relief in September when it secured Y360bn in emergency loans from its Japanese banks, which analysts say should give it sufficient operating funds until at least next June, when the loans come due. Negotiations with Hon Hai of Taiwan over a Y67bn investment, tentatively agreed in March, have stalled, and the company is furiously trying to free up cash on its own -- by cutting jobs and wages, selling overseas factories and mortgaging offices in Japan.
None of this is a long-term solution, however. Sharp is trying to turn its focus from TVs and solar panels to small LCD displays for smartphones and tablet computers, but even there it has experienced production delays and is losing ground to rivals, says Toshihiro Uomoto, a credit analyst at Nomura. "Sharp's problems go beyond just temporary funding issues, and extend to doubts over the sustainability of its business."
At Panasonic, most of this week's Y765bn net-loss forecast was owed to write-offs of tax credits and past investments. Revenues are also falling, however: it cut its annual sales forecast by 10 per cent, to Y7.3tn, and its projection for operating profit by nearly half to Y140bn.
Takashi Watanabe, an analyst at Goldman Sachs, says Japan's biggest consumer electronics company has enough profitable businesses that eliminating or shrinking the dud ones could turn it round.
Kazuhiro Tsuga, Panasonic's new president, has declared that each division will be judged on its own earnings power -- a change at what has long been a collectively minded company. Sceptics, though, will note that the company, which has 320,000 workers, has been through several big restructurings before, without hitting on conclusive profit formula.
Sony bucked the trend this week by sticking with its forecast for a narrow profit for the financial year to March, in spite of a Y15bn net loss in the quarter to September, blamed on restructuring costs.
Like Panasonic and Sharp, Sony is shrinking its TV-making business, and says it will focus on imaging technology, video games and smartphones, an area it has strengthened since buying out Ericsson's share of their mobile phone joint venture last year.
Shiro Mikoshiba, an equities analyst at Nomura, says the smartphone push looks promising on its own, but could be risky for a company that makes digital cameras, game consoles, portable music players and notebook computers -- all products that multipurpose smartphones are increasingly replacing.
"We see a strong possibility of a vicious cycle in the company's product strategy," Mr Mikoshiba says.