Japanese consumer electronics manufacturer Sony drastically lowered its financial outlook, increasing the loss it expects to make this financial year to 230 billion yen (approximately $2.15bn or €1.65bn). This is an increase of 180bn yen (approximately $1.67bn or €1.3bn). The company cited the main cause of the reduction was an impairment charge against the entire amount of goodwill in its mobile business unit owing to lower than expected results.
The elimination of goodwill associated with Sony's mobile business underscores a major issue for many handset manufacturers. Aside from Apple and Samsung; no manufacturer is able to generate consistent profits because:
As a result, companies like Sony along with HTC and LG now find themselves in the smartphone catch-22. The smartphone market, and Android smartphones in particular have become a mostly commoditized market with handsets not only sporting the same physical design and same OS, but even sharing a lot of the same hardware meaning there is little performance difference to separate brands.
As such, achieving true global scale is key to survival. But Sony, LG and HTC are shipping mainly to specific regions and have relatively high cost bases due to lack of scale economy, the need they try to re-establish their mobile brands, and because of their headquarter locations in Japan, Taiwan and South Korea respectively.
The arrival of Android and increasingly commoditized smartphone hardware has reduced barriers to entry. Established smartphone makers are finding it extremely difficult to compete with Chinese manufacturers like Huawei, TCL Alcatel and Lenovo in a battle of scale. And, there are rising numbers of new entrants also enabled by the reduced entry barriers – Micromax, Wiko, Yezz, Karbonn, Spice, Gionee among them – although to date Sony's main competitive challenges have been from OEMs in the mid and higher part of the smartphone market such as the major Chinese OEMs, Samsung, Apple and the other established OEMs also seeking a come back.
Sony have pursued a strategy to focus on high and mid-range handsets and rely on their brand, wider assets such as movies or PlayStation, and design expertise to try to create additional value and thus profits. However, this segment of the market is rapidly maturing which has two important implications:
This places these tier 2 manufacturers in a catch-22 situation where they cannot survive at either end of the market. Similar issues led to Motorola’s pending acquisition by Lenovo and Blackberry’s step back from the consumer handset market, and led to Pantech’s dramatic collapse earlier this year. It is likely only a matter of time before we see strategic u-turns, consolidation or market withdrawals from other established challenger smartphone makers.