The return of Sony

The question now: Could the same happen to cameras? The Sony Cyber-shot has a 40% share of compact cameras. (Sony also has a presence in DSLRs with the Alpha series.) The market is believed to be around Rs 4,000 crore. But the trouble is that as smartphones become more advanced, the need for compact cameras decreases. In other words, seen from Sony’s viewpoint, more advanced smartphones (a business imperative) could cannibalise compact cameras.

Hibi doesn’t disagree with the broad thrust of the argument and admits that sales of compact cameras could fall. But he adds that Sony now sees itself as a photography technology company rather than a camera company. Thus, the technologies it develops could go into third-party devices. For example, Xiaomi phones use Sony’s photo technology.

Getting distribution right for mobiles will be a humungous task for Sony. You are no longer talking about a few thousand stores, but a few lakh points of sale. Add to this pressure from online retailers selling millions of units within days. Currently, Sony sells at little over 8,000 outlets, expected to go up to 12,000 by the end of 2014.

This business is particularly price sensitive and individualistic in nature unlike TVs or audio which are family buys. Sony, you guessed it, wants to be in the premium segment of the market. Though it has products in the Rs 10,000 to Rs 15,000 range, its primary focus is the Rs 15,000-plus market. It is not willing to bring down Xperia to the mid and mass segments that contribute almost 80% of the market. At the same time, Chinese players like Xiaomi, which use Sony components, are offering comparable and at times better specification phones below Rs 14,000. “We do not want to destroy the market by lower price points,” explains Yamamoto.

So could Sony eventually go the Samsung way by shifting attention towards smartphones and tablets? Says Nayyar: “This business [mobiles] will accelerate our growth in India but certainly does not mean we are ignoring TV or any other business. They will also grow and the entire pie will increase.”

Yamamoto evokes Sony’s hallowed past in the context of mobiles. “We want to recreate the success of Walkman with Xperia.”

Hibi's biggest challenge will, however, be the mobile phone business. Currently it accounts for 30% of sales; Sony is targeting to take that to 50% over the next few years. To get there, Sony will battle some of the biggest names in the business, such as HTC, Motorola, Samsung, LG, and Apple, plus home-grown heavies such as Micromax and Karbonn.

Till 2012, Sony partnered Ericsson. Back in 2001, they had come together to develop and market mobiles. In October 2011, they separated. Sony took full control of the mobile business and paid $1.5 billion (Rs 9,012 crore) to Ericsson for its 50% stake. Sony got patents from Ericsson mainly on the network connectivity side, commonly known as the radio part. After the split, Sony moved over to the Android platform. Till 2010, Sony struggled with less than 4.7% share of smartphones. “We are in our infancy here. We are trying to learn, taking one step at a time,” says Taro Yamamoto, business head, Xperia, Sony India.

Sony pulled out all the stops to integrate best-in-class technologies in the Xperia series. The results are visible; in 2013 it cornered 8.6% market share, according to research firm IDC. Yet, its push with mobiles lays bare some hard facts of how Sony is coping in an age of rapid technology changes.

Consider what happened with VAIO, Sony’s range of laptops. When it was launched in 1996, it was seen as the company’s entry into the booming and lucrative world of personal computing. Yet, globally, VAIO couldn’t compete with HP, Dell, and Lenovo, and earlier this year Tokyo decided to pull shutters on the business. The logic: Channelise resources into mobiles. All very good, except that in India, VAIO was accounting for nearly 15% of sales.

Hibi defends the move. “Consumers were not willing to pay for the value which Sony was offering through VAIO. It was a strategic call taken to shift resources to mobiles.” Equally, Sony didn’t want to lower prices of VAIO.

One of the first things Nayyar did with Tamagawa’s support was change how the trade worked. Sony has always insisted that it will not discount the brand for its retailers. In an industry where discounting is the norm, that meant Sony’s sales never picked up. Predictably, towards the end of the month, to meet their targets, Sony officials would push stock to dealers.

Nayyar assured dealers that he wouldn’t push unnecessary stock. He went a step further, and told them that stock would be replenished only once the sale happened, and equally, there would be no frenetic end-of-the-month sales. In return, he got an assurance that dealers would push Sony’s products, aggressively, every day. Retailers that Fortune India spoke to say that the arrangement still continues.

Of course, dealers oftentimes give customers discounts from the margins they make. In Sony’s scheme of things, even that’s frowned upon. Nayyar refuses to say what they do if a dealer discounts, but admits the measures they take are quite potent as Sony has rarely seen price erosion.

Sometimes, if there is excess inventory with a retailer, Sony takes the stock back and tries to identify the problem. To deal with technology obsolescence, Sony informs retailers what new products to expect and when. Beyond sharing the roadmap, Sony also helps them clear stock. Sony officials say stock compensation for Sony is around 0.6% while the industry average is 1.5% to 2% of the total revenue. This adds to profitability.

Sony’s willingness to battle dealers on discounting is a bit like asking children not to indulge in candy: It may not be a part of their regular diet, but they rarely lose an opportunity to badger for them or snack on them. Most companies have on paper a no-discount policy, but that is rarely ever practised. Especially given the hyper competition in consumer electronics.

“Quantity follows if the basics are right,” says Nayyar. He believes that random discounting spoils the market for a brand as there is no benchmark price. Equally, it doesn’t allow any one retailer to dominate distribution and seek a favoured status with the company, which Nayyar says ruins the entire trade network ultimately. What also helped Sony in great measure are the Sony Centers. “The concept of brand stores brought sanity in the market. Without them Sony can’t survive,”
says Nayyar.

At the same time, Sony worked on other things like selection of products, display, etc. It worked with retailers to train their staff on how Sony products should be demonstrated and sold. Everything was down to a process, and to ensure that these were followed, Sony hired independent auditors to check on retailers. This is done daily.

More recently, Sony has rolled out an initiative called RED (retail enhancement department). Its members support sales teams by managing display issues and resolving dealer problems. Simultaneously, a retail management system has also been put in place. This system collects weekly market-share data which is reviewed by headquarters every month. Sony claims this monitoring has made them nimble. “This helped us increase sales during special events like the FIFA World Cup, IPL, and the festive season, if we found things were not going as planned,” says Satish Padmanabhan, business head, Bravia, Sony India. To the 10,400 outlets that existed in 2011, Sony added another 10,000 over the next two years, and plans adding yet another 4,600 in 2014, taking the tally to 24,600. (Samsung’s reach is around 150,000.) Backing these are 25 branch offices and 30 warehouses.

Given that the subsidiary is fully owned by its Japanese parent, it doesn’t disclose profits in India. The margins in electronics (mainly TVs, mobile phones, and cameras) are in the range of 12% to 15%. Sony’s average margins should be way higher than that, given the focus on it. Also, remember that Sony still doesn’t have a factory here. Hibi says that manufacturing is not just about volumes “but factors like tax and regulatory issues weigh heavy on such decisions. At Sony we optimise our manufacturing capabilities, and even with imports of all our products, we are doing profitable business. This is not to say we are not evaluating our options but there is no investment outlay or dates to announce yet.” Sony employees say sotto voce that when the global president and CEO, Kazuo Hirai, comes visiting next year, he may reveal something about Sony’s India manufacturing strategy.

So, even when Sony became aggressive in India, it didn’t mess with prices. The push started in 2007, under Hibi’s predecessor Tamagawa. He was rewarded with the position of president, Sony Europe. Tamagawa brought people like Sunil Nayyar back from Dubai to head sales in India. Nayyar says that West Asia is the finishing school for Sony’s sales people because the market is fiercely competitive there.

Hibi’s challenge is to grow volumes without compromising on Sony’s premium positioning. That’s a bit of a fine line. Moreover, the idea that Sony is the only premium electronics brand available has been undermined with the rise of Samsung. Over the last few years, the Korean company has consciously invested huge sums in research and brand building globally to counter its image of just being a volume player.

While Hibi doesn’t characterise the conflict is such terms, some of his moves show that he is keen on continuously reinforcing Sony’s capabilities and, therefore, by extension, its premium position. He’s introduced a clutch of products which carry Sony’s pricey stickers, but have been specially designed for India to heighten their appeal. They include 22-inch and 23-inch flat-screen TVs (standard sizes are 32 inches and more); Bravia TVs tuned for more vivid and brighter pictures; and the UV 300 sound system made for Indian DTH (direct-to-home) viewers. For this, engineers from Tokyo visited India, and met customers to figure what was missing in their listening experience. The feedback: While home theatre systems are available, they are too complex and need wires. So, the UV 300 plug-and-play home theatre system was created.

Other exhibits: Though already a quarter of Sony’s sales come from Sony Centers, essentially franchise-owned outlets that exclusively sell Sony products, (the industry average of sales from exclusive brand outlets is 15% to 18%), Hibi has recommended the creation of Sony Experience Zones. These centres will not sell products but will display what Sony offers, and also its future technologies. Sony’s yet to take a call on how many will be set up.

It seems counter-intuitive to invest capital in stores that won’t sell and aren’t expected to fetch immediate returns. But as Hibi argues, it’s very important for customers to see and feel what Sony is truly capable of. This, in turn, will allow Sony to protect its premiumness. Think of the Experience Zones as very expensive brand building. Now, if you throw in the Rs 800 crore Sony spent on advertising and marketing (Samsung spent a similar amount last year, but on a larger turnover), you get a sense of how mammoth Sony’s India push is.

The Japanese are very excited about India’s prospects. Four years ago, they made India an independent region, making it the fourth country after Brazil, China, and the U.S. to have region status. While it’s still part of the Asia-Pacific region for financial accounting purposes, operationally it’s fully independent. For perspective, remember that all the European countries, even biggies like Germany and France, are a part of the European region. What this means is that now Hibi and his team have direct access to Tokyo, where Sony is headquartered, which will give them a better chance of swinging things their way. (Earlier, Sony India reported to Singapore.)

Sony Corp’s accounts for FY14 throw some clues about India’s growing importance. Over a three-year period (2011-14), while sales in mobile products, imaging solutions, and home entertainment and sound have increased globally by 14.6% annualised, sales in India have grown the most, at 26%. Globally, these segments have been showing operating losses for Sony, but in India, they have been profitable. In such a scenario, any market that shows significant double-digit growth and is also home to a huge middle class with substantial buying power will be very important. But as Hibi puts it, India isn’t just a business with lots of potential; it also brings some of the best margins in the Sony universe.

Before there was Samsung, LG, or heck, even Apple, there was Sony. For a generation growing up in the ’80s and ’90s, those four letters in serif font spelt cool in caps. Teenagers flashed their Sony Walkmans while their parents would proudly show off their Sony TVs, typically the Trinitron, with its blue, green, and red emblem sometimes stuck to the side panel. Not all the stuff was legally available. Some, like TVs, were made through a partnership with Orson Electronics, while other things, like Walkmans, were either imported or plain smuggled. But, if you could afford it, it was always a Sony!

By the late 1990s, however, Sony was no longer the most desired, must-have label. The Koreans, with their feature-laden products, cut-throat prices, and mammoth distribution networks had almost finished off Sony. Then, as the new millennium progressed, Sony was again mostly absent in the defining product, cellphones. Then came flat-screen TVs replacing their clunky CRT (cathode ray tube) predecessors, MP3 players, tablets, and a host of electronic stuff ... and once again, the market belonged to others.

But Sony is back. In the last two years, it has quietly clawed back share, ramped up distribution, and thrown wads of cash at advertising. At Rs 10,000 crore, it’s still not as big as its Korean rivals (Samsung at Rs 38,000 crore or LG at Rs 16,000 crore, according to market estimates), but an annualised growth of 26% over the last three years indicates that the company (here, the electronics business, and not the TV network or the PlayStation businesses, which are run separately) is doing something right. Akio Morita’s inheritors have taken the battle right back to the Koreans.

Chief among them is Sony India’s managing director Kenichiro Hibi who took over in June 2012. A lot of the growth has happened on his watch. A 25-year Sony veteran, he’d worked in Mexico and the U.S. previously, and was country head of Russia just before moving to India. Hibi, whose candidature was pushed by predecessor Masaru Tamagawa, says India is a confounding market, particularly for Sony. “In the other markets where I’ve worked no one gets stuck on price. You give them the latest product and it works. Here, price comes first, everything else later. For a company like Sony, which takes pride in its innovation and quality, this is tricky.”

So Hibi still spends a lot of his time trying to figure out the Indian customer. His colleagues say he’s rarely in Sony India’s Delhi HQ for more than 10 days a month. He’s forever meeting dealers, distributors, sales reps, etc. Recently, on a market visit to Bangalore, he discovered that at one store, Sony’s TVs on display were switched off. The staff had hell to pay for.

In his playbook, however, understanding the customer goes beyond meeting dealers and distributors, or having focus group chats. He’s literally immersing himself in India. “To understand the dynamism and character of the market, you have to feel it and experience it. Data is not enough. The Indian market is so alive that you have to smell the changes to take the right decisions,” he says. So, Hibi often has masala dosa for breakfast, buys Kanchipuram saris for his wife and Fabindia kurtas for himself, and watches subtitled Hindi DVDs. He has watched all the latest movies such as Aashiqui 2, Highway, and Queen. At a recent function, he sang a duet from Aashiqui 2 —Tum hi ho—along with another Japanese colleague.