Fitch: Panasonic's Turnaround Provides Lessons for Sony
Published on: 12th Feb 2014
By: Ian Mansfield
The debt ratings agency Fitch Ratings says that the credit profiles of Panasonic and Sony will continue to diverge in 2014 as Panasonic's performance continues to improve while Sony struggles to improve profitability and develop growth products.
The key difference in the rating drivers is that Panasonic is shifting away from consumer electronics towards business-to-business products, building its housing-related segments and automotive and industrial systems products, which have strong market positions, solid margins and new contract wins. In addition, Panasonic was faster than Sony in deciding to get out of unprofitable businesses, which led to the quicker recovery in its margins and cash generation.
Panasonic's turnaround holds lessons for Sony, which remains exposed to the fiercely competitive consumer electronics sector, while its financial services business and its underperforming entertainment business do not significantly support its credit strength. Sony's latest restructuring measures - involving cutting 5,000 jobs, selling the personal computer (PC) business and splitting the TV division into a separate unit - should rein in costs. The latter two actions reflect the relative weakness of Sony's decision-making process compared with Panasonic.
Fitch said that it believes Sony's divestment of the PC business could have come at least 18-24 months ago as it has been apparent for some time that the business had ceased to be a value driver for Sony. The PC market as a whole has struggled with weak economic conditions in developed markets, a prolonged replacement cycle, commoditisation of products and substitution by smartphones and tablets. As a relatively low-volume/high-price competitor, sales of Sony's PC products have been badly hit by these market trends and also by competition from Apple's products.
Sony has also continued to retain its TV business, which recorded nine straight years of losses through to the financial year ending March 2013 (FYE13). The recent decision to spin off the TV operations into a separate subsidiary should improve accountability and transparency. However, this is a decision - along with an honest appraisal of whether there is value in retaining these operations - that Sony should have made years ago.
The ratings agency said that it believes that Sony will not return to its former glory unless it demonstrates that it is able to take tough business decisions, unaffected by sentiment surrounding products associated with its heyday but for which there appears to be little profitable future. Furthermore, the company has yet to convince that it can develop compelling "must-have" products to drive growth.
The two companies' divergent pace of deleveraging is inevitable. They expect Panasonic to generate positive free cash flow in FYE14, allowing funds flow from operations (FFO)-adjusted leverage to drop to mid-3x (FYE13: 4.6x). Sony will face a challenge in turning around its electronics business in FYE14, and the FYE15 outlook remains tough. Excluding Sony Financial Holdings, they expect Sony's FFO-adjusted leverage to stay above 5x (FYE13: 5x) in the short term.