The Decline of Japan, Inc.

There are numerous examples of American companies performing badly this earnings season (hello, JPMorgan Chase!). But at least they're not doing as poorly as several formerly world-beating Japanese companies. Both Sony (NYSE: SNE  ) and Panasonic (NYSE: PC  ) posted near-catastrophic losses recently, throwing doubt on their future viability and opening the question of whether they'll be able to recover at all.

Sinking deep
Both companies were so deep in the red it's hard to believe they'll ever surface again. On the heels of a $3.2 billion net loss in 2011, Sony lost the yen equivalent of a head-spinning $5.7 billion in fiscal 2012 (on $81 billion in revenue). Not to be outdone in the scary results department, Panasonic posted nearly that deep a loss in its most recent quarter. Investors bailed -- no, ran away screaming -- from both companies, plunging their shares to the lowest levels in three decades.

It's a drastic understatement to say that these companies are in serious trouble. Panasonic's recently released full-year figures revealed a record net loss, an almost inconceivable $9.6 billion.

It's (insert excuse here)'s fault
Both firms put the blame on the numerous acts of god and man plaguing Asia and the world last year (floods, earthquakes, the economic slowdown in Europe, etc.). Those events certainly had an effect, but the real problem looks more fundamental: The two are still putting an emphasis on the wrong kinds of products.

Panasonic insisted on a continued push in selling TVs, despite the fact that it was essentially offering the same kind of sets as its many competitors. Sales of its TVs cratered on an annual basis, by far the worst showing of any of its product lines. The company saw a 28% decline in the take from its LCD TVs, to $4.9 billion). Revenue from increasingly unpopular plasma displays fell more sharply, by 41% to $3.6 billion.

The companies are selling into a saturated market too. According to market research concern HIS iSuppli, TV shipments to the globe's fattest market, the U.S., will drop 5% this year on an annual basis. Some manufacturers are still doing a brisk trade selling the devices, but this small club doesn't include Panasonic or Sony. Rather, it's nimbler Asian suppliers like Korea's Samsung (OTC: SSNLF) that are leading the pace and posting sales records.

We want our gadgets!
Rather than TVs, what the market is really hungry for is mobile devices -- smartphones and tablets. Consumers are spending money on the electronics they can tote around with them, not the ones that hang on a wall. Shipments of tablets grew a powerful 155% year on year in 4Q 2011, according to market researcher IDC. In contrast to that anticipated 5% shrink in the flat-panel TV market, tablet shipments are anticipated to zoom ahead by 54%, estimates IDC.

No Japanese manufacturer has a significant presence on the high-stakes U.S. tablet market, which is currently and will probably remain dominated by Apple (Nasdaq: AAPL  ) . Neither Sony nor Panasonic nor Sharp is among the top six tablet sales leaders.

The same goes for the smartphone leaderboard. Even on a global basis, where such formerly innovative companies from Nippon should at least compete, they're nowhere to be found. In 4Q 2011, for instance, Samsung was No. 2, Apple took No. 3, and the remainder of the top five was rounded out by a European, a Korean, and a Chinese firm. This is a vast opportunity missed, as smartphones grew robustly as a category in 2011, blasting ahead by 63% year on year in terms of shipments.

And there's plenty of room left for growth and profits. In 2011, 487 million smartphones were shipped; this number is anticipated to muscle past 1 billion in 2014.

Once upon a not-very-long time ago, Japan was the world's factory for hot electronic devices. Old-timers will remember how incurably popular Sony's Walkman was, pretty much from the moment it was introduced to the market. More recently, the company walked the cutting edge with its PlayStation series of video game consoles.

Past glories
Both Sony and Panasonic put on the bravest face possible reporting these deeply embarrassing results. The two companies anticipate making a token profit going forward this coming fiscal year -- Sony says it should net $375 million on revenues of $92 billion, while Panasonic hopes for $624 million and $101 billion, respectively.

Given the awful recent financials and the current dominance of rivals like Apple and Samsung, though, that looks unlikely. These Japanese electronics bigwigs need to find a way to craft market-leading new products, or at least make devices compelling enough to sell briskly in the popular categories. Otherwise, these multibillion-dollar losses won't be the last pools of red ink these firms will spill.

One thing's for sure: Sony's and Panasonic's failure has increased opportunities for higher-potential companies elsewhere. We've found one stock looking to take advantage of a massive, booming market that Sony and Panasonic certainly want a bigger piece of. Find out which company that is in our FREE report, "The Next Trillion Dollar Revolution."

Fool contributor Eric Volkman owns no stocks mentioned in the story above. The Motley Fool has sold shares of Sony short. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On May 15, 2012, at 3:03 PM, catoismymotor wrote:

    Sony started to slip after they bought Paramount Studios a couple of decades ago. Ever since they have been treading water at best.

  • Report this Comment On May 15, 2012, at 3:18 PM, TMFAleph1 wrote:

    I think the death of Japan, Inc. is easily exaggerated. The U.S. would be delighted to have a manufacturing industry in the same state of "decline" as that of Japan!

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