Long awaited shake-up at struggling Sony

Once synonymous with innovation and quality, the fallen giant is slashing 20,000 jobs

Sony, the Japanese consumer electronics giant famous for launching a host of innovative electrical gadgets including the Walkman, yesterday unveiled its long-awaited restructuring plan designed to restore financial health and bring back some sparkle to its product range.

About 20,000 jobs will go over the next three years - equivalent to 13 per cent of the company's 154,500-strong workforce - to help get Sony back on track.

In addition, Sony also unveiled plans to revamp its television business by forging a $2bn venture with Samsung Electronics to make flat-panel displays in an effort to stimulate growth. "It may appear as though Sony is being sucked into a black hole," said Ken Kutaragi, executive deputy president. "But we hope to create a 'Big Bang' that will lead to new business," he added.

The news that the electronics giant has been forced to take such drastic measures to effect a turnaround will surely have Akio Morita and Masaru Ibuka - the company's founders - turning in their graves.

Since the pair set up the company after the war in 1946 - originally as Tokyo Telecommunications Research Institute, or Totsuken - it built up a reputation for churning out high-quality, cutting-edge gadgets.

The company created Japan's first tape recorder and transistor radio in the 1950s and launched the world's first personal stereo - the Walkman - in 1979. Then there were various TVs, video recorders and CD players, not to mention the hit PlayStation computer game consoles and the Aibo robot dog.

The Sony empire the pair created quickly became synonymous with electrical innovation while the brand became renowned worldwide for quality. Even the Sony name - apparently a combination of the Latin word "sonus" with "sonny" - was meant to typify innovation - showing the company as a "small group of young people" with the "energy and passion toward unlimited creation".

But yesterday Sony's 66-year-old boss, Nobuyuki Idei - a man who first joined Sony back in 1960 and then went on to take the top job in 1995 - was the bearer of extremely grim tidings, effectively admitting the company had taken its eye off the prize.

About 7,000 jobs will be going in Japan with the balance of the 20,000 losses spread around the rest of the world although, apparently, no jobs will be cut in the UK, where Sony employs about 4,500 staff in total.

The company has also given reassurances no jobs will be lost at its two manufacturing plants in Bridgend and Pencoed, South Wales, which employ almost 2,400 workers. Two Japanese factories manufacturing cathode ray tube TVs are expected to be hit hard as Sony focuses on slimmer, flat-screen models.

The company's restructuring is part of a three-year plan designed to produce annual savings of ¥330bn (£1.8bn) in 2006 and lift the company's operating profit margin to at least 10 per cent in three years from 4 per cent.

That Sony needed to pull a rabbit out of the hat to turn itself around was hardly a surprise, given the state of its finances, and talk of a massive restructuring had long been doing the rounds. Look no further than the company's financial performance for the reasons why. The company's shares dived in April after it unveiled a ¥111.1bn net loss in the fourth quarter to 31 March - a statement imaginatively dubbed by investors "the April shock".

And life is still tough. Only last week Sony reported a 25 per cent drop in quarterly profits after suffering a fall in sales of its PlayStation 2 game console and after a sequence of Hollywood box-office flops. Group net profits totalled ¥32.9bn during the three months to 30 September, compared with net profits of ¥44.1bn a year earlier on revenues of ¥1.80 trillion, up 0.4 per cent. In that statement, Mr Idei was talking of implementing "in earnest" cost reductions including headcount reductions to get the business back on track after predicting operating profits would drop 46 per cent to ¥100bn this year.

For a company that prided itself on innovation and whose brand still holds great sway with consumers, it is hard to fathom how it has got itself in such a mess.

Many reckon Sony has simply taken its eye off the ball and lost its way. While its computers are selling reasonably well, other products - mainly in the audiovisual market - are struggling as prices have been driven down by cheaper products from rivals. Analysts have also accused the company of being slow to identify the shift to flat screen TVs. Nor has Sony really managed to crack the mobile phone market as its phone joint venture with Sweden's Ericsson has taken longer to perform than hoped.

Meanwhile the Sony PlayStation - once the clear leader in the game console market -- has come under pressure from increased competition from the likes of Microsoft and Nintendo. Sony sold 0.49m more PlayStation 2 boxes in the quarter than last year but 0.94m less of the PlayStation 1 machines than 12 months before. There was a similar tale in software.

Then there is the company's entertainment division - bought from Columbia in the 1980s - which has been responsible for a string of flops such as Gigli, starring Jennifer Lopez and Ben Affleck.

The restructuring announced yesterday is quite clearly designed to reinstate Sony's focus on leading-edge products in an effort to get its electronics business back on track.

The move will see the company focusing on key products such as flat TVs, DVD recorders, home servers and the PSX games console. It also plans to invest ¥1 trillion over the next three years in semiconductors, including research and development for a high-powered microprocessor codenamed "cell" that is being developed with Toshiba.

Then there is the venture with Samsung - designed to capitalise on increasing demand for LCD TV sets - expected to total 14m units worldwide in 2005, according to Sony. A new plant is to be built in South Korea that is expected to be producing tens of thousands of panels a year by the Summer of 2005.

"The television is still the major appliance of the household," said Mr Kutaragi, adding: "We believe we can add value with our semiconductors and imaging technology."

The company is also setting up a financial holding company in which to put Sony Life Insurance, Sony Assurance and Sony Bank, that could eventually be floated.

Sony's restructuring plans were welcomed by analysts yesterday as they believe a radical shake-up of the business was long overdue, although they conceded the company's future well-being rests in the execution of the new strategy.

Whether Mr Idei can pull that off and turn the company around remains to be seen - the slightest hiccup would surely mean his days at the helm are numbered.