Wednesday, November 30, 2011

No. 11: The asset-light approach alone is not enough (December 1, 2011)

Panasonic started to integrate TV manufacturing plants, but Sony is one step ahead of Panasonic in the asset-light approach. Sony had 15 TV assembly plants in 2004, but it promptly integrated them responding to the sale decline caused by the Lehman Shock. It has only 4 TV assembly plants at present. It improved the tangible asset turnover rate to about 7 times, increasing the rate by 1 time in five years. Sony’s current tangible asset turnover rate is well above the figure of Samsung of Korea. However, Sony’s results still remain stagnant. Sony’s consolidated operating profit is 20 billion yen this year, while it was about 200 billion yen last year.

The asset-light approach that decreases in-house production means increasing outsourcing production. From the financial viewpoint, the fixed cost (depreciation cost) changes to variable cost (purchasing cost like materials cost) in the asset-light approach. Because the price reduction is so steep in the TV business, Sony has not been successful enough in reducing the variable cost to improve the consolidated operating profit. Another factor for poor results is the heavy burden of labor cost. Samsung is expected to achieve the “sales per employee” that stands at about 61 million yen, while Sony is estimated to score the figure at about 39 million yen. This means Sony is not as successful in reducing the labor cost as it is in reducing the asset.

These two facts indicate that the asset-light approach is not enough to improve the balance between sales and number of employees. Therefore, it is necessary to formulate measures that consist of two approaches: decreasing the input (reducing the number of employees, etc.) and increasing the output (increasing sales), and allocate the capital raised by them to research and development effectively. As a matter of fact, the asset-light approach alone is not enough to improve results. Any approach is not enough alone because it has pros and cons.

1 comment:

  1. So this is one way of simplifying this and putting it in a manner that is very easy to comprehend. Nice job here.

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