Sony is about to lose prestige ahead of being ousted from government-backed stocks and the markets are expected to downgrade Sony. The ‘shame’ of this in the domestic culture is expected to play against Sony, furthering the problem.

Culture meets business in an unavoidable way from time to time and the home front can either dramatically support or deflate the fortunes of a popular corporation so strongly tied to the pride of a nation, like Sony Corp. is in Japan. In 2013, much was made of the Japanese Prime Minister Shinzo Abe’s famous efforts to lift the nation’s exporting companies by tweaking fiscal policy, often called Abenomics. While some analysts are skeptical of this approach as a short-term magic trick, others note that at least the key economic indicators are clearly responding well.

Now, unfortunately, Sony is apparently about to suffer a fall from grace as it loses a coveted government-supported position which highlights companies with the best operating income, return on equity, and market value. From January 2015, the JPX-Nikkei Index 400 (JPNK400) is expected to dump Sony Corp. from its list of 400 companies with the solid financial grit and stable outlook worthy of investment.

How much will this affect Sony and what will the CEO do about it?

Read on to take a look.

Losses are Digging a Grave

An array of brokerages including Goldman Sachs are indicating that Sony is not making the upcoming 400 cut, instead wallowing way back at about 960. The losses that Sony has been suffering even as recently as for the full year 2013 particularly related to the TV division (being separated from the core of Sony operations) and the PC division (which has now been sold off) seem to have a legacy impact as Sony is losing its investment-worthiness. With several rating agencies having already reduced Sony stock grade to junk status early in 2014, now a further downgrade is expected soon and the cost of insuring Sony against the risk of non-payment has soared. If anyone can find the ‘silver lining’ amongst this, please write in.

 If you’re dropped, the impact on your share price could be quite big, 

Tomomi Yamashita, Shinkin Asset Management Co.

The Kite that Won’t Fly

It’s bittersweet for many of us over at SRN – and our readers – to learn this. We’re all passionate about Sony products from both a consumer and a business perspective. It’s easy for the financial news about Sony to focus on the troubled TV business, yet major product successes aren’t getting the spotlight that they deserve. Sony has scored quite a victory with the success of the PS4, leaving the Xbox One competitor in the dust. Also, prospects of growth are not limited to typical Western markets, as a vast opportunity in the Chinese market is just opening a potentially major, long-term source of fresh growth. Sony smartphones and tablets have thrived since they took over Ericsson’s half of the joint venture, with Sony performing very well in many markets, noticeably ranking third behind Samsung and Apple in Europe, also augmented by growth in Asia where the next wave of the smartphone boom is coming. Full year fiscal results show that financial services have been the leading source of profit throughout all segments of the corporation, with the Imaging segment pushing ahead despite the trend of smartphones replacing dedicated cameras.

The questions about Sony’s viability are apparently not related to these successes, or rather, these successes are not enough to fix the problems. The markets are focussing one of the biggest thorns in its side – the TV business. We learned in February this year about its divestiture and also that VAIO would be sold off. While from a sustainability standpoint, selling of the VAIO PC business was surely the right one, it represented the departure of a successful and popular consumer brand.

Hope?

Q1 results for 2014 show that Sony has reported a profit, backed mostly by the PS4 and perhaps even more surprisingly, the Pictures segment. The Pictures segment? Yep. Spider-Man Amazingly contributed to profit, along with 22 Jump Street. Another beacon of hope however is that a key executive with much reputation and respect in Japan moved up the Sony ranks to become the CFO from the start of fiscal 2014 in April, Kenichiro Yoshida. Remember his bullish comment on getting a grip on restructuring?

 We’ll make this a year of biting the bullet on restructuring 

He’s going to need more public appearances and serious plans to appease the markets.

Brian J. Bushee, professor of accounting at Wharton School of Business notes of investor relations:

 A lot of bets investors are making are on the management, not on the financials. 

For Sony’s sake, let’s hope that other investors actually feel that way.

Discuss:

Exactly how bad is this going to get for Sony and what can they do about it?