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Giants Sony & Panasonic Downgraded To Junk Status

By Tony Ibrahim | Friday | 23/11/2012

Sony and Panasonic have had their credit rating downgraded to 'Junk' status for the first time.

The Fitch ratings agency downgraded the two Japanese companies to junk on the basis of their weak balance sheets and their continual decline in the global electronics sector in the face of strong competition from Korean rivals Samsung and LG.

Fitch cut Sony's ratings by three notches to BB- and Panasonic's to BBB-. The ratings provide a negative outlook, voicing Fitch's prediction they will default on their debt. Borrowing money will also be more expensive for the firms.

Sony: Make Believing for years

In its assessment of Sony, Fitch recognised the company's "continual suffering" in the TV, home theatre and sound. Sony has never turned a profit in its television business and the Company as a whole hasn't turned a profit since 2008.

"The downgrade reflects Fitch's belief that meaningful recovery will be slow, given the company's loss of technology leadership in key products, high competition, weak economic conditions in developed markets and the strong yen," the official Fitch release said.

Despite assigning them Junk status, Fitch does recognise Sony has a few strengths. The first is its imaging division's CMOS sensors, "where the company retains market and technology leadership."

The Sony Ericsson venture was built upon Sony's Walkman (music) and CyberShot (camera) brands. Fitch predicts it's likely "Sony will use its strength in imaging sensors to promote its next range of smartphones as best-in-category for photography." At present, smartphones are experiencing dramatic growth, (Sony's Korean rival, Samsung, owes half of its Q2 2012 operating profit to its smartphone sales).

Although the latest products unveiled by Sony inspire some confidence, Fitch warns there's inherent risks associated with executing its strategic initiative.

"The strategic initiatives announced in April 2012 to turn around the company's electronics business are the right approach, but execution is a risk and macro headwinds and intense competition across almost all of Sony's key products may delay the recovery," continued the statement

Panasonic Under Pressure

Fitch is concerned with Panasonic's weakened competitiveness in its core business, "particularly in TVs and panels," implying the company has buckled under pressure from Samsung and LG.

"The company's market position in its core business suffered from strong competition from Korean manufacturers, which led to a subsequent downsizing of the business." 

The company's weak cash generation also concerned Fitch, who predicts Panasonic's finances won't improve any time soon.

However, the consolidating of Panasonic's manufacturing facilities and its labour force rationalisations were praised, but the agency continues to preach caution:

"Fitch acknowledges that the company is in the right direction in its restructuring efforts which could potentially lead to margin recovery over the long-term. However, the company's turnaround programme remains exposed to execution risk."

Can two wrongs make a right?

Ironically Sony and Panasonic are jointly developing next generation OLED panels for production in 2013. The two are integrating their core and printing technologies in an effort to mass produce affordable OLED panels, overall improving " the overall efficiency of development."

At present, large OLED panels (55 inches) have been painfully hard to manufacture. Even Samsung has been struggling, appearing to default on its promise of releasing an OLED TV before Christmas as it is "at the mercy of production capabilities."

After four years of losses, Sony expects to make a small profit, while Panasonic has warned it is on track for an annual loss of almost $US10 billion.

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