SONY EXECUTIVE ON CHALLENGES TO JAPAN'S

UNCLAS SECTION 01 OF 02 TOKYO 000309 SENSITIVE SIPDIS STATE FOR EAP/J, EEB STATE PASS USTR FOR MBEEMAN DOC FOR KROTH, DLEE E.O. 12958: N/A TAGS: EIND EINV ETRD PGOV JA SUBJECT: SONY EXECUTIVE ON CHALLENGES TO JAPAN'S ELECTRONICS INDUSTRY REF: TOKYO 232 TOKYO 00000309 001.2 OF 002 Sensitive But Unclassified. Contains Proprietary Information. -------------- Summary -------------- ¶1. (SBU) Sony reports serious concern within Japan's electronics industry about actions various governments have taken recently that restrict or could restrict trade. He included in his assessment adoption of the "10 2" rule in the U.S. and reports of possible "Buy American" amendments to the Stimulus Package. He rejected critical comparisons of Sony and Nintendo appearing in the business press saying performance has varied between the two companies because each follows a very different business model. Sony will cut production and jobs in Japan as part of an urgent effort by firms in the sector to lower production costs. Actions by governments that increase the time it takes to get products to market have also been harming Japanese electronics manufacturers. End Summary. ¶2. (U) EMIN met February 3 with James Toyama, Sony Deputy General Manager for International Public Affairs and Trade Policy Committee Chair for JEITA, the Japan Electronics and IT Industry Association. The conversation covered the economy and electronics markets, measures Sony is taking to address dramatic changes in its operating environment, and Sony's primary policy concerns. -------------- Concerns about Protectionism -------------- ¶3. (SBU) Concern over actual and possible protectionist measures stood at the top of Toyama's agenda. He cited worrying moves in India, Russia, China, Europe, and elsewhere, noting the negative precedent should larger developed countries like the U.S. adopt measures others could see as protectionist. He then raised the U.S. "10 2" rule and said adoption of the "Buy America" provisions reported in the press could have ongoing negative consequences. ¶4. (SBU) Toyama listed other concerns as well, including India raising select applied tariff rates, Russia's disputes with Ukraine and Georgia, China's consideration of new encryption standards, and the EU's customs reclassification of products covered by the WTO Information Technology Agreement. From business' perspective, such moves could easily trigger many more protectionist actions, Toyama said. -------------- More Difficult Times -------------- ¶5. (SBU) Taking a look at Japan's electronics sector in general, Toyama said it is important to differentiate how different companies have been affected by the global downturn. He rejected criticism in a January 28 Wall Street Journal article that Sony operates too many product lines and lags behind competitors. Nintendo, the only major Japanese electronics manufacturer to report a profit in the October-December quarter, licenses production to others, Toyama said, and this model for mitigating some risk seems to serve the company well in the current market. In contrast, Sony has a more diversified model with a broader range of products in which it manages factors such as research and development and domestic/foreign production differently across distinct product lines. Despite the current headlines, Sony feels this model is effective in the longer-term. Toyama explained Sony carefully manages its production allocation to consider factors besides labor and logistics costs as products move through their lifecycle, TOKYO 00000309 002.2 OF 002 e.g., the need for engineering support and protection of sensitive IPR. ¶6. (SBU) In talking about production and cutting costs, Toyama said Sony and the Japanese electronics industry as a whole must lower their respective break-even points. Sony recently announced plans to cut another 8,000 out of 160,000 jobs world-wide by March. This announcement comes on top of the nearly 10,000 already cut during the 2005-07 period. Sony will reduce investment in its electronics business by roughly 30 percent by March 2010, as well as discontinue or delay projects in areas such as semiconductors and LCD televisions. The company recently announced it will cut its total number of manufacturing sites by 10 percent, from 57 currently, by March 2010 and will cease production at the Sony Dax Technology Center in France. -------------- The Importance of Trade Facilitation -------------- ¶7. (SBU) Toyama also raised concerns with measures that complicate product development and distribution in the IT sector. Changes in government regulation and slower logistics negatively affect the sector's production-distribution cycle and the current economic environment has magnified risk to the industry from holding inventory or taking longer to get products to market. He cited as risks the lack of commercial credit, exchange rate movements, and changes in consumer demand. While Toyama does not see the bankruptcy of retailer Circuit City by itself affecting Sony sales significantly, the possibility of additional retailers going out of business adds another risk factor. He complained that governments had worked hard during the 1990s to help reduce times to market, and now these gains are under threat. ZUMWALT