Sony faces an uphill battle to make its mobile communications unit a success after announcing it will target more niche (high-end) consumer segments, claims rating agency Fitch. The change in direction follows a review of its smartphone strategy and a JPY180 billion ($1.65 billion) write-down.
Fitch Ratings said Sony’s revised strategy to focus on premium mobile products in certain markets is more sound than trying to compete strongly in the mid-range smartphone market. “However, a lack of scale means it will struggle against the big two, Apple and Samsung, and will also face competition in the premium market from LG Electronics, HTC and Nokia,” the agency warned.
In addition, the premium market is under threat from lower-cost Chinese manufacturers such as Lenovo, Huawei and Xiaomi. Fitch said their growing strength in the low-end and mid-range markets is narrowing margins across the board.
Fitch said the write-down, which didn’t come as a surprise and won’t likely impact Sony’s credit rating, supports its long-held view that mobile phones are unlikely to be a key element in Sony’s recovery, and its rating assumes continued weak performance in this segment.
Fitch reported: “Our assumptions about Sony’s mobile business profitability and cash generation have been consistently lower than those of management, given the competitive nature of the smartphone market and Sony’s struggle to achieve the scale required for this business to be a success.”
Sony’s share of the smartphone market fell to 3.1 per cent in the year to June from 4 per cent a year earlier, according to IDC. In contrast Huawei’s H1 share rose to 6.7 per cent from 4.3 per cent, Lenovo to 5.2 per cent from 4.7 per cent and Xiaomi to 4.6 per cent from 1.7 per cent.
Beyond mobile devices, Fitch commented: “Management’s resolve to make difficult decisions will be tested if performance in the mobile business does not improve. Apart from PCs, the company continues to produce the same products as five years ago, and we believe that more aggressive reform to revamp Sony’s product and business portfolio is overdue.”
For example, the rating firm said the company appears committed to turning around its TV business following ten straight years of losses. “We rate Sony’s chance of meeting its break-even target for TVs in the year ending March 2015 at no greater than 50 per cent.”
Fitch said that while the write-down is not likely to affect its credit rating, credit markets were surprised by the announcement, with five-year CDS prices spiking up to 142bp from 112bp, according to Bloomberg, despite the positive news that the company will not be paying a dividend this year.