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Japan electronic giants embrace autos after consumer-goods struggles

Tuesday, Apr 14, 2015

After pitching his company's PlayStation Vue cloud-based TV service and top-shelf Alpha 7S digital camera, Sony Corp. CEO Kazuo Hirai made a telling, if abrupt, segue.

The Japanese consumer electronics giant is targeting a new market, Hirai announced -- the mammoth auto industry.

"This growing automotive segment has enormous potential," Hirai told the crowd in January at the International CES in Las Vegas. "We're aiming to take a leading position."

Names such as Sony, Panasonic and Toshiba were once synonymous with cutting-edge household gadgetry, churning out everything from TVs and computers to fax machines and VCRs.

But these days, Japan's storied electronics companies are struggling in the cutthroat consumer goods market amid cheaper, and often more innovative, rivals from South Korea and China.

The trend has pushed the beleaguered blue chips to try reinventing themselves as suppliers to one of the few sectors of Japan Inc. still thriving: the auto business. The payoffs could be handsome because auto sales are on a global upswing and the profit margins can be higher than for old-school consumer goods.

The Walkman creator is the latest into the ring, with Hirai's plan to parlay Sony's expertise in digital cameras into sensors for advanced automotive safe-ty systems. But other Japanese electronics companies are already there, fighting for a larger slice of auto sales in everything from computer chips to electric vehicle batteries.

"It's a big trend," said Hiroshi Ataka, manager of Japan component forecasts at IHS Automotive. "A lot of electronics companies are expecting growth from automotive. Their traditional products have become commodity products."

Risky business

The gambit is risky. Though companies such as Sony, Toshiba, Hitachi and Panasonic enjoy top-notch brand recognition, they still must pry their way into a tight keiretsu system in Japan and win the trust of automakers in the U.S. and Europe.

They also will be battling enormous, well-heeled auto suppliers such as Japan's Denso Corp. and Germany's Robert Bosch GmbH, themselves sophisticated electronics companies.

And many consumer electronics makers may have to step up their engineering to satisfy the auto industry's more rigorous durability and safety standards.

But there is a push and pull on Japanese electronics companies. They are being pushed from old strongholds by tougher overseas competition. And they are being pulled to automotive by that industry's surging demand for everything digital.

"The connection between the consumer electronics business and automotive industry is certainly strengthening," Hirai said.

Sony sees a window in advanced driver assistance systems, the umbrella term for sensor-driven technologies that detect hard-to-spot road obstacles, control auto-braking systems or keep vehicles centered safely in their lanes.

The global market for automotive image sensors -- such as those used in Sony's $2,400-plus Alpha 7S camera -- will quadruple to 120 million sensors a year in five years, Sony predicts.

Sony supplies image sensors for rearview and front-view car cameras. But its auto business is small; a Sony spokesman declined to give a revenue figure. The company aims to begin mass production of its latest automotive image sensor in December.

Further expansion of the business is expected as Sony and others develop advanced sensors that can capture objects moving at high speeds up to 80 mph, spokesman Shinichi Tobe said.

Hirai wants Sony to "take a leading position in providing advanced sensor technologies to this growing automotive industry." But his company is hardly alone in going auto.

Betting on chips

Toshiba Corp. makes a range of microcontrollers, actuators and integrated circuits for automotive use, as well as batteries for hybrid and electric vehicles. In November, it announced plans for a new line of image recognition processors that enable nighttime pedestrian detection and 3-D reconstruction to better pinpoint motionless road obstacles. It targets mass production in December 2016.

Semiconductors have long been a Japanese bastion.

But electronics companies are shifting to chips for autos partly because margins can be higher. Companies can charge more for the extra evaluation needed for automotive chips. And cheap rivals from China have yet to flood the market for cars.

"Everyone is shifting from consumer to automotive," said Satoru Oyama, an electronics analyst at IHS Global.

Toshiba, Japan's big-gest semiconductor maker, derived 7.1 percent of its global semiconductor revenue from automotive sales in calendar 2013, up from 5.4 percent in 2009, according to Oyama.

At Sony, automotive sales accounted for just 0.2 percent of total semiconductor revenue in 2013, but was up from virtually nothing in 2009. Chip specialist Renesas Electronics Corp. has also been on the march. It derived nearly a third of its revenue from automotive in 2013, up from just 23 percent in 2009, according to Oyama.

Renesas' influence on the automotive industry became painfully apparent during the 2011 earthquake and tsunami in Japan. The temblor knocked one of Renesas' key microcontroller plants offline, torpedoing Japanese auto production for much of the year.

Meanwhile, autos accounted for 20.9 percent of total semiconductor sales at Panasonic Corp. in 2013, up from 10.1 percent in 2009, according to Oyama.

Panasonic's plan

Panasonic exemplifies the sea change, and the numbers show why.

Panasonic's automotive and industrial division generated the company's biggest slice of sales and operating profits in the first nine months of the current fiscal year ending March 31.

Meanwhile, the segment's operating profit margin rose to 4.0 percent in the latest quarter, from 3.5 percent the year before. By contrast, the margin at its traditional household appliances division slumped to 2.9 percent, from 3.5 percent a year earlier.

Panasonic President Kazuhiro Tsuga wants to boost automotive sales to ¥2.0 trillion ($16.81 billion) in the fiscal year ending March 31, 2019, so that it accounts for 20 percent of the company's global revenue. That is up from $9.18 billion in the fiscal year ended March 31, 2014, when automotive sales accounted for 15 percent of revenue.

Tsuga's aggressive expansion plan calls for entering the advanced driver assistance systems market, expanding the company's cockpit system business and becoming the world's No. 1 battery supplier for electrified green cars.

Panasonic already is a leader in power packs for electric and hybrid vehicles thanks to its supply of lithium ion batteries to Tesla Motors Inc.

It also supplies lithium ion batteries to Audi, Toyota and Ford and nickel-metal hydride batteries to Honda, Ford, Subaru, Nissan, Volkswagen and PSA Peugeot Citroen.

Panasonic expects its automotive battery sales to more than triple to $3.78 billion in the fiscal year ending March 31, 2019, from $1.08 billion in the fiscal year ended March 31, 2014.

Panasonic was among the early birds on the auto bandwagon.

Its Panasonic Automotive Systems Co. ranks No. 23 on the Automotive News list of the top 100 global suppliers. Among its other products: audio and video equipment, cameras, navigation systems, compressors, motors, monitors, sensors, switches and head-up displays.

Another Japanese electronics company that is a giant in autos: Hitachi. Hitachi Automotive Systems ranks No. 20 on the Automotive News list. CEO Kunihiko Ohnuma says he targets double-digit global growth in automotive sales from 2016 to 2020 as the company taps surging demand for auto electronics.

Hitachi Automotive aims to leverage the parent company's core competency in all things digital to boost electronics to 60 percent of global revenue in the year to March 31, 2021. That would be up from about 46 percent in the year to March 31, 2013.

Automotive revenue still accounts for just 9 percent of the Hitachi Group's overall business. But its share has grown steadily from 6 percent in the fiscal year ended March 31, 2010.

Hitachi Automotive's Ohnuma acknowledges tougher competition from Japan's numerous electronics makers. But the automotive business is not so easy to crack, he warns. Hitachi has been supplying auto parts for 80 years, longer than Sony has been in business.

It is also tough for electronics companies to muscle into the Japanese auto industry's tightknit keiretsu system of vertically integrated auto manufacturers and suppliers.

"They may come, surely. But it may take a little more time," Ohnuma said in an interview. "It is very, very difficult to get confidence from the OEM. They have to trust us. It takes time."

Hitachi, like other aspiring suppliers, is also aggressively courting foreign manufacturers in America and Europe, which are less committed to traditional supplier ties.

Part of the challenge for newcomers is adapting to the auto industry's long product cycles and exacting safety standards.

In consumer electronics, in which a customer's life rarely hangs in the balance, products turn over every two years and component evaluation time is as short as three months, IHS's Oyama notes.

Longer product cycles and development lead time also translate into daunting, longer payback periods.

"Cars are much riskier," Oyama said. "It takes them [automotive components] four to five years to be evaluated. When can you expect real revenue after shifting to the business?"

But the auto industry's surging demand for computer-driven safety and infotainment systems may open the door for new entrants prepared for a long-term play.

Modern cars, for example, are brimming with digital cameras.

That means big business for a company such as Sony, the world's biggest maker of image sensors. Today, a big chunk of its image sensors go into mobile phones and other gadgets with one or two cameras.

But cars, by contrast, can have up to seven image sensors, handling everything from backup vision, surround-view parking assist, frontal crash protection and side blind spot detection.

"If you bought a car recently, I'm sure that you have also been amazed at the number and also applications of various in-car sensors," Sony's Hirai said. "We're putting our sensors to work also in a new industry."

 

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