Global Markets

Can Japanese electronic giants adapt to the software era?

19 February, 2014 | Posted By: Oren Laurent

By Oren Laurent
President, Banc De Binary

A decade ago the Japanese electronic giants were huge household names. Sony, Panasonic and Sharp built their global empires on making complex appliances, from televisions and radios to refrigerators and washing machines. Yet recent years have seen these companies overtaken by the digital revolution and struggling to profit. Even on their home turf, commuters in Tokyo spend their journeys on an Apple or Samsung device rather than a Sony Walkman.
In the last year, Panasonic has made attempts to restructure its business. It has invested in automobile and housing products with longer lifespans, and doubled its market value to over $29.2 bln. On February 5, Panasonic shares jumped 19% delivering a welcome surprise to investors. However, it is unclear whether profits will continue steadily, and sales of automobile products could face a decline after the scheduled consumption tax hike in April.
Meanwhile, Sony has been slower to implement reform but is now finally turning its strategy around. It has recently made more money selling life insurance than electronics. Following Panasonic’s reported success, in a press conference on February 6, Sony CEO Hirai announced his decision to sell Vaio personal computers which have been at the heart of the company’s digital gadget strategy. This marks the first time that the brand has said goodbye to a major component in its business portfolio; the move will allow engineers to focus more on smartphones and tablets.
The digital era has revolutionised the way in which devices work and are made. To date Japanese firms have largely neglected software, but if they can correct this, they are still in a position to survive and compete in the market. They will however need to be cost effective when it comes to manufacturing. Currently they are battling with far smaller profit margins than rival companies who are developing software in Silicon Valley while manufacturing products in low-cost countries like China and South Korea. Apple for example makes a profit margin of around 50% on its iPhones but only 3% of the value of an iPhone stays in China where it is made.
Yet, not every firm needs to be Apple to generate revenue. And not every firm needs to continue selling what its brand became known for in order for it to remain a household name.
The next year will be a testing time as new business plans are implemented and it may be that stocks fall in the short term. However, investors should not write these firms off. Japan has talent, intelligence and creativity which it can capitalise on. The more signs I see that these firms are adapting to the market, the more confident I will be to invest with longer-term expiries. I don’t need to tell you why buying when the share price is low has its benefits.