Worldly Wise: Sony has gone from fame to zombie status

Five years of shaking up the Japanese bellwether are beginning to pay off for Chief Executive Officer Howard Stringer. And not a moment too soon, considering how Apple Incorporated and Samsung Electronics Company now dominate an industry Sony owned before it flirted with zombie status.

Sony's return to profit in the first quarter would seem to have broader significance. Many in Tokyo say that as Sony goes, so goes Japan Incorporated. That's where things get dicey. There are three reasons not to get too excited here: a weakening global economy, a strong yen, and Sony's reluctance to change.

The global slump is a big challenge for a company that generates more than 70 per cent of revenue outside Japan. It's a concern, too, for a highly developed economy that still puts manufacturing ahead of everything else. Some economists, such as Paul Krugman, are even predicting a depression.

Something is afoot in Japan that explains why the central bank is getting so little traction with near-zero interest rates. This so-called liquidity trap that plagues Japan, Krugman wrote in a July 29 blog posting, is becoming a global phenomenon.

The latest sign that Japan's monetary wheels are stuck in the mud comes from the Tokyo interbank offered rate, or Tibor. The rate that helps determine costs for about 137 trillion yen (Dh5.8 trillion) in domestic lending suggests banks are setting benchmark rates at about double what they charge each other for short-term loans.

This is really a low-grade scandal. No clear villains, exactly, but some banks are rigging interbank rates to generate better spreads. What's good for their quarterly earnings statement is bad for the economy. Officials at the Federal Reserve would be wise to track the Bank of Japan's chronic inability to turn liquidity into fresh lending.

Sony's slew of new products, be it 3-D television or motion-sensing controllers for its game platforms, don't trump a worsening economy. Factory output dropped 1.5 per cent in June, while the jobless rate climbed for a fourth month to 5.3 per cent, figures showed last week.

Exposure

That gets us to the yen. Given Sony's global exposure, it loses about 7 billion yen of annual operating profit for every 1 yen decline in the value of the euro and 2 billion yen for every 1 yen the dollar weakens. Late last week, the yen strengthened against all of the 16 most-active currencies and reached its highest level this year versus the dollar.

Stringer's biggest weakness is innovation. Sony makes lots of decent stuff that everyone else makes.

Unless you are a video-game enthusiast, Sony hasn't come out with a must-have product in many years. Every time Apple introduces a new game-changer, Japanese investors are left wondering what has become of the creator of the Walkman. Sony has gone from being the one and only to just one of many.

Since taking the helm in June 2005, Stringer has failed to marry Sony's vast entertainment content with its hardware. In February 2008, I even argued that Apple CEO Steve Jobs should just buy Sony. Apple needs music and movies to sell to iPod, iPad and iPhone users; Sony has it in spades.

Such a deal would happen over the dead bodies of many Japanese shareholders. And yet a surge of fresh innovation is needed for Sony to thrive. Firing thousands of workers and shutting factories will only get Sony so far.

Corporate Japan remains maddeningly stubborn about sticking with its postwar business model, the anchor of which is exports. As US growth slows and Europe's troubles deepen, Japanese companies can expect less demand for their wares.

All the high-fiving going on in Tokyo over Sony's profit outlook ignores the dreadful state of the global economy. It glazes over how much more needs to be done to resurrect Sony's greatness. Japan's, too.