Electronics companies in Japan are starting to turn themselves around, but they are a shadow of their former selves

FOR Sony it was a bittersweet moment. On July 1st the firm bid a final farewell to its Vaio personal computers, a global brand which won such a devoted following after its launch in 1996 that the late Steve Jobs, a fan of Sony in its glory days, once asked to equip it with his Apple Mac operating system. Cut off from its parent, Vaio is floundering. Since Sony announced its sale to a Japanese private-equity fund, in February, it has suffered a slump in its market share in Japan to just 2%, down from 10% at the start of 2014.

The vertiginous drop will have dismayed Sony, which had kept a tiny stake in the business. However, investors have put Sony’s bosses under pressure to do something about the company’s chronically poor performance. It has lost money in five of the past six years and is forecasting a further loss in the year to March 2015.

Vaio is the most significant business Sony has quit in recent times. Cutting it adrift may be the start of a far-reaching reorganisation. On the same day the firm shifted its loss-making televisions arm, once the core of its profits and brand image, into a separate legal entity. For now, Sony’s chief executive, Kazuo Hirai, rules out an outright sale, and many people criticise him for not acting more drastically. Yet the firm admits that an alliance with another television-maker could be an option.

After years of denial that surgery was needed, optimism is rising that Japan’s consumer-electronics firms are facing up to their steady loss of global market share (see chart 1). In 1982 we published a briefing on how “The giants in Japanese electronics” were set to keep conquering the world with all manner of exciting new gadgets: Video cameras! Fax machines! CD players! And they did, for a while. But now they all struggle to compete in the most important categories of consumer electronics against rivals such as Samsung of South Korea and especially Apple of the United States.

Even at home in Japan’s thriving consumer-electronics market—only Americans have more devices per person than the tech-obsessed Japanese—former champions, including Hitachi, Panasonic and Sharp as well as Sony, have lost much ground. Local firms have largely ceded the PC market, and they are losing out quickly in mobile phones. They never really made their mark in smartphones, today’s most-desired gadgets. Sony’s Trinitron TVs and Walkmans once helped build a fearsomely large Japanese trade surplus, but nowadays the country suffers a deficit, and foreign smartphones account for about a fifth of it. One consolation is that consumer electronics is an impossible business for nearly all firms, says Eiichi Katayama of Bank of America Merrill Lynch in Tokyo, so competitive has it become. A strong brand is no longer enough to justify a sharply higher price. This week Samsung said its operating profits were down, for a third quarter in a row, in the three months to June, as it was pressed from below by cut-price rivals like Xiaomi, a three-year-old upstart from China, and squeezed from above by Apple. That said, the Japanese firms have blundered for the past decade. They continued to obsess about fancy hardware, neglecting fast-growing software and services (such as Apple’s iTunes) and failing to spot consumers’ changing tastes. They were slow to recognise the developing world as a fast-growing market and not just a low-cost manufacturing base, says Peter Kenevan, a consultant at McKinsey in Tokyo. The Japanese firms now have some hard decisions to make, about which existing products they should give up on and which new ones to pursue. Sony’s bosses are reportedly studying reforms made by Philips, a Dutch firm which has quit a number of poorly performing businesses. Last year it got out of making televisions, and a chunk of its lighting division is next out of the door (see article).

Panasonic is already making an abrupt change of direction. Under Kazuhiro Tsuga, its newish chief executive, it is exiting both plasma televisions and consumer smartphones. Its new focus is on making equipment for energy-efficient homes. Car parts, including battery cells for electric and hybrid vehicles, are another strong area of growth. Mr Tsuga is also seeking ways to serve emerging Asian markets better. He recently shocked his fellow managers by saying Panasonic would set up a product-development headquarters in India, staffed chiefly by locals.

Other firms, such as Toshiba and Hitachi, which were already less reliant on consumer electronics, are paying new attention to their heavy industrial businesses. All these moves should help solve a common structural problem in Japanese industry, which is that too many firms all make similar products. Some electronics giants are moving into a surprising new field: high-tech farming. Fujitsu, Hitachi, Panasonic and Sharp are converting disused factory space and opening high-tech greenhouses to grow vegetables, which are expensive in Japan.

The financial results of the changes have started to emerge. Aided also by a recent fall in the value of the yen, Fujitsu, Panasonic and Sharp all returned to profit in 2013. The other big electronics firms all improved their bottom lines, with the exceptions of Sony and NEC. Sony promises that 2015-16 will be the year in which it returns to profit. Its smartphones and tablets are at last gaining some traction, with the help of one simple, customer-centred innovation—making them waterproof. It will take little short of a miracle for it to make up the ground lost to Apple (see chart 2) but such hints that the worst may soon be over have helped Sony, so far, to fend off calls by Daniel Loeb, an American activist investor, for a radical break-up of the company.

Seeking a path to growth

For the foreseeable future, Panasonic, Sharp and Sony will continue to rely on consumer electronics for much of their sales and profits. Although Mr Tsuga has done a lot of restructuring and redirection at Panasonic, say executives in the industry, he has not yet found a reliable path towards growth. Films, music, television and financial services are solid businesses for Sony, but consumer electronics still accounts for 60% of its revenues.

If their chief executives were visionary leaders willing to take risks, Japanese electronics firms could do much to regain their lost lustre, says Roderick Lappin, who heads the Japanese operations of China’s fast-rising Lenovo. Their unrivalled engineering, though often in excess of customers’ needs, is still an advantage, he says. They sit on a trove of intellectual property in the form of patents. Much of this could prove invaluable in the field of “wearable” technology or in the much-hyped “internet of things”, in which appliances, equipment and even pets may in future be wirelessly web-connected.

However, the Japanese firms will find themselves hindered by their old-fashioned corporate cultures. With a few exceptions such as Mr Tsuga, Japanese bosses, with an average age of 60, are extremely cautious. Years of losses and restructuring make it still harder for them to place bold bets on future technologies.

In particular, they are still too attached to Japan’s culture of lifetime employment. At most large Japanese firms, around a third of permanent staff are surplus to requirements, yet cannot be fired due to the country’s unclear labour rules.

There is some hope that Shinzo Abe’s reforming government may take steps to make the labour market more flexible, which would help electronics more than any other industry. Had lay-offs been easier, Panasonic, Sony and others would have had far greater financial flexibility to cope with changing market conditions. Instead, their limited voluntary severance packages, typically offering two to three years’ pay, are cripplingly expensive. Those who accept them are often the most talented.

Since the firms are no longer run by their high-powered founders but by employees who rose through the same lifetime system, says Hidemi Moue, boss of Japan Industrial Partners, the private-equity buyer of Vaio, there is too little willingness to tackle these problems. In all, it will take a lot more than a few whizzy new gadgets to fix the Japanese electronics firms.