Electronics giant Sanyo goes from profit to loss

TOKYO -- When a 6.8-magnitude earthquake jarred Sanyo Electric Co.'s chip-making plant in northern Japan last October, reversing the company's profit forecast to a massive loss, it was a crowning blow to an electronics giant already rattled by plunging prices and sinking stock.

Osaka-based Sanyo, founded in 1947 as a maker of bicycle lamps and now a world leader in digital cameras and mobile phones, has since installed new management to rekindle the company, turning heads with the rare appointment of a female chief executive.

And on July 5, the company made an equally bold move: It announced a plan to revive earnings by cutting 14,000 jobs, or 15 percent, of its global work force.

But the overhaul, which calls for factory closures and the halving of debt over three years, fell short on many details, analysts say, and some doubt whether it will be enough to save Sanyo in a market increasingly crowded by overseas rivals and more nimble domestic competitors.

"We are not convinced that the completion of the planned restructuring will lead to the restoration of competitiveness and profit growth," Lehman Brothers analyst Yuki Sugi wrote in a report after the announcement.

She rated Sanyo "underweight," meaning the company is still expected to perform worse than the industry average, and warned of a "confidence crisis" at the manufacturer.

The Oct. 23 earthquake in Niigata prefecture, which killed 40 people and injured nearly 3,000 others, caused $378 million in damage at Sanyo's semiconductor plant there. It forced Sanyo to scrap an earlier forecast for profit of $125 million in the fiscal year that ended in March, and contributed to the company's net loss of $1.53 billion.

The company's share price continued its downward spiral and has now lost half its value in the past year and a half.

Yet even before the quake, Sanyo's profits were being squeezed by falling prices for its three main products -- mobile phone handsets, digital cameras and rechargeable batteries for phones and computers.

Those businesses account for about half of Sanyo's operating profit and suffered price declines of between 5 percent and 15 percent last year, according to Koya Tabata, an analyst at Credit Suisse First Boston in Tokyo.

Surging costs in raw materials further ate into the profit margin of the company's battery business, while global competition heated up. Asian rivals such as South Korea's Samsung Electronics Co. continued churning out inexpensive components to grab global market share, while domestic electronics rival Matsushita Electric Industrial Co. returned to profit after cutting 13,000 of its own workers in 2001.

Sanyo President Toshimasa Iue, grandson of Sanyo's founder, was appointed April 8 along with chief executive Tomoyo Nonaka, a former television newscaster who joined the company's board in 2002.

The new team hasn't decided which businesses to drop, but Iue said the company will focus on compressors, solar batteries and other environmentally friendly batteries for electronics and vehicles. Just short of half Sanyo's sales are generated overseas.

"We will no longer conduct operations that don't produce profits," he said.

Sanyo will slash domestic factory space by about a fifth, discontinuing some lines, and aims to cut debt now totaling $10.7 billion by $5.36 billion by March 2008. About 8,000 of the job cuts will hit Japan, but officials did not say how they will be reduced or whether its 33,000-strong work force in China will be affected.

After the announcement, Standard & Poor's kept Sanyo's outlook "negative and downward," calling the targets a "high hurdle."

"Sanyo Electric has not disclosed the specific details on how it intends to improve its business portfolio, leaving unclear how the company will enhance profitability while addressing the challenges of its small portfolio of competitive products and weak brand recognition," Standard & Poor's credit analyst Fusako Nagao wrote.

Sanyo's camera business is an example of why it's losing out in the consumer market.

About 95 percent of Sanyo's cameras are made for other companies that, in turn, sell them under their own brand names. These days, however, electronics makers are increasingly bringing this work in-house, meaning Sanyo's sales will come under growing pressure.

Meanwhile, Sanyo's new focus on compressors and batteries could take 20 years to generate profits, according to Credit Suisse's Tabata, and the company needs a more immediate boost.

Sanyo should trim its consumer electronics businesses and form joint ventures to pool resources with other companies, as it did with Seiko-Epson to make liquid crystal display panels, he said.

Analysts and investors will be watching closely on July 27, when Sanyo reports first-quarter earnings.

The company has no first-quarter forecast but is predicting a net loss of $821 million for the fiscal year and should start seeing "positive results" after that, spokesman Ryan Watson said. A detailed comeback plan, however, remains unfinished.

"Nothing has been solidified," he said. "The analysts maybe wanted more details, but that will coming out as the year moves on."