10/29/2008 12:42:00 PM
Job cuts and losses: Sony Ericsson in trouble?
In conjunction with Sony Ericsson’s second quarter results this summer, president Dick Komiyama announced that he would be cutting the manufacturer’s workforce by 2,000 – hoping to save the company around £233m.
Last week the third quarter results were out but they did not bring any renewed hope to the company’s employees, as sales and margins were down and profits kept falling.
The first redundancies at Sony Ericsson will start soon and the company is already in talks with local unions. The target is to have all the redundancies completed by the end of June next year. The sites that face lay-offs include Manchester, Lund in Sweden and North America, and employees affected will mainly be those working in research and development.
Matthew Costello, head of strategy at Sony Ericsson, says: ‘We are trying to get a more manageable cost base and run the business as profitably as possible. This includes redundancies and managing cost of sales.’
Since the third quarter results were announced there have been rumours of further redundancies in addition to the ones revealed in the summer, but Costello says that more job cuts would be unlikely.
‘I think that we are tracking against the plans announced in July and I don’t foresee any additional job cuts,’ he says.
Another major part of the alignment strategy is to cut the number of handsets Sony Ericsson produces by 20% in 2009. The manufacturer has launched around 50 phones this year, many of which have received criticism from the industry for being too similar and cannibalising each other’s market share.
The majority of the handsets that Sony Ericsson has launched over the past 12-18 months have been in the same mid-range price brackets, while lower end and higher end handsets have been missing from the range.
Sony Ericsson admits that duplication has been a problem and cutting the handset range is part of its strategy to address the issue.
‘There will be some reductions. We have listened to the criticism and we are focusing our product range around what we expect to be competitive areas: price points, features and the types of devices at different price points,’ Costello says.
‘What we are focusing on is the spread. Our goal is to strengthen the high-end and lower end product range and to make them competitive,’ he adds.
One operator buyer says: ‘They need to make sure they are hitting those major price points. Their flagships didn’t do as well as they were hoping. They ended up having to push through succession products soon after launch. It was difficult for them after the K800’, which was such a massive success to keep it going.’
The challenge for the manufacturer is now to come up with new, innovative handsets. Although the majority of the job cuts will be in the research and development departments, the company is careful not to let it impact product innovation.
‘R&D makes up a big part of our business. Even if we are cutting costs in R&D we are not taking resources from creative and engineering,’ Costello says.
Can they turn it around?
Sony Ericsson and Motorola are both facing similar problems – sliding profits, branding issues and a lack of innovation. But analysts believe that Sony Ericsson is not in as much trouble as Motorola.
Adam Leach, principle analyst at Ovum, says: ‘Sony Ericsson and Motorola are in similar situations but for different reasons and their situations are not comparable. Motorola is over reliant on a single device, while Sony Ericsson’s problems are based on economic and internal factors.’
New handsets and the move to the service area could help Sony Ericsson sell more phones and turn around its sliding profit margins. ‘[The poor financial results] are not systemic, so I think they can turn it around. They have good focus to deliver good handsets that consumers like. I have all the confidence that they will turn it around,’ says Leach.
Nomura analyst Richard Windsor also remains positive about the company’s prospect. ‘They are around break even, they still generated cash and they held on to the market share. But they need more accurately-targeted products, so that they don’t overlap,’ he says.
Although the X1 Xperia is the type of innovation and move towards the higher end of the market that Sony Ericsson needs, it could prove to be a case of too little, too late.
The Xperia handset was announced in February this year at Mobile World Congress, but only started shipping to UK stores this week. Meanwhile, other handset manufacturers have launched competing Windows Mobile devices.
Leach says: ‘The problem with the Xperia is that it’s about six months late. HTC and Samsung have already come to market with high-end Windows phones, so the Xperia has a lot of competition now.
‘I don’t think it’s going to do for them what they expect. They should have been launching it when it was announced back in Barcelona. It’s an unforgiving market.’
But at least the Xperia is a move to something new. Although the Walkman and Cyber-shot brands have worked well for Sony Ericsson, with over 12 million Walkman handsets sold last year, these are not enough to carry the manufacturer forward.
One option open to Sony Ericsson could be to further leverage the Sony brand. Leach says: ‘The Walkman and Cyber-shot brands have been in market for a couple of years, but they need to leverage more Sony assets to show they are not only about Walkman and Cyber-shot. They could continue with brands like Bravia and PlayStation. It’s where they could differentiate and they are already known consumer brands.’
But Sony is reluctant to allow the company use of these brands on mobile phones until the quality of gaming and TV/video on the handsets is up to standard.
Sony Ericsson sees services as another potential new revenue source and recently announced it was planning to bring out handsets with unlimited music downloads at the start of next year.
Meanwhile, Nokia has already launched its unlimited Comes With Music service, but faced difficulty in persuading any networks to offer it. Only a week before launch, the handset manufacturer managed to get 3 on board.
Sony Ericsson is using the operators’ fear of Nokia’s huge market power to its advantage and is making sure that PlayNow Plus is only offered in conjunction with the networks. Because Sony Ericsson does not have as much influence in the market as Nokia, finding operator partners should be easier.
‘Nokia has come out with bigger, broader and a more ambitious service. Where Sony Ericsson can gain is being the friend of the operators. Going with operators and aiding them to drive up their data revenues as well as giving them branding and ownership [of the service]. They also have better music devices,’ Leach says.