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Why is Sony's mobile business in the red?

Sony recently posted a $1.7 billion loss, which it attributed to poor smartphone sales. But with LG, Xiaomi, and others performing well, we explore why Sony is struggling.
September 22, 2014

If you had a read of our “state of the industry” piece last week, you will probably have noticed that Sony was missing from a few of the charts in key regions. Not only that, but the company posted a $1.7 billion loss recently, led by poor smartphone sales.

Globally, Sony’s share of smartphone shipments has shrunk slightly to 3.2 percent this year. This puts the company further behind rivals LG (4.9 percent), Xiaomi (5.1 percent), and Huawei (6.8 percent), who have all seen rather large gains so far this year.

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At the same time as announcing the loss, Sony recognised that sales has not lived up to expectations, which it says was caused by a significant change in the market environment and increased competition. In other words, Sony didn’t sell enough phones and is probably looking to blame the rise of the cheaper Chinese manufacturers.

So, firstly let us investigate if Sony’s theory is true. Has the company been losing market share in regions where low cost, ultra-competitive companies have recently shown up?

Sony Asia Pacific

Firstly, we won’t waste time analysing North America or Africa, as Sony shifts less than 1 million smartphones there each year, and has done through its history in these regions. North America is a market increasingly dominated by Apple and Samsung, and Sony’s market presence has not change there at all over the past 2 years. Apple and Samsung are also omitted from the graphs, so that we can focus on how companies of a similar size are faring.

Xiaomi is the real success story in Asia, having quadrupled its regional shipments in a little over a year.

Instead we should turn our attention to Sony’s biggest markets, Asia Pacific and Europe. Overall, Sony’s shipments have remained fairly constant in both of the regions throughout the past two years. However, the company’s market share has fallen in Asia over this period, and has taken a further dive over the course of 2014 in Eastern Europe.

In Asia specifically, this trend can be seen across legacy manufacturers like LG and HTCtoo. Smaller upstarts, such as Oppo and Micromax, have bucked this trend has have seen sales and shares increase over the past year. Xiaomi is the real success story in Asia, having quadrupled its regional shipments and seen almost a tenfold increase in its market share in a little over a year. These local companies have clearly had an impact on Sony’s ability to shift new units.

Sony Europe Sales

Turning to the market where Sony is a more dominant player, Western and Central/Eastern Europe, we can see a not too dissimilar trend. Overall shipments have risen in the region, but have taken a slight dip so far this year. Importantly, again we see that although shipments are steady, the company is not growing at the same speed as some of the newer competitors in the market.

There is also a decisive split between Sony’s larger Western Europe market and the smaller, more price sensitive Central & Eastern European market. Although Huawei is making ground in Western Europe, Sony’s market share has remained relatively resilient, therefore helping to increase its total sales as the general market continues to grow. However in C&E Europe, Sony has been losing out to Lenovo’s impressive growth spurt, as have LG and HTC.

Overall, Sony’s analysis is confirmed by the recent figures. Increased competition from nimble, cost effective competitors is hurting Sony in its largest markets. Which is quite a major problem for the company.

xiaomi mi4 first impressions aa (12 of 13)
Xiaomi is doing something vastly different with its business model, and is pocketing much of the growth in Asia as a result.

Interestingly, it is not smartphone shipments that are suffering substantially, but rather growth is not keeping up with the rest of the market. With Sony’s major markets continuing to be some of the fastest growing in the world, the company had no doubt expected to see its shipments grow alongside the market, as Huawei’s and Lenovo’s have in Asia. However, more price competitive manufacturers have managed to grab much more of this growth. The end result is that Sony’s expensive investments into new product lines and revisions has not led to an increase in shipments in line with expectations, resulting in a financial loss for the company.

Why is Sony faring so particularly poorly?

On the upside, the company hasn’t seen its market share and shipments take quite the nose dive that HTC’s have. The company is not in the danger zone yet, but warning lights are definitely flashing. Strangely, LG, a global company of similar size and structure, has been faring better over the same time period, despite suffering from a similar decline in Asian and Eastern European markets and fighting against the same competition. On the global scale, LG’s market share has grown from 3.7 to 4.9 percent over the past 2 years, whilst Sony has seen its share cut from 4.7 percent to 3.2.

So what has been LG doing that Sony missed out on? Quite simply, LG has somehow managed to expand its market share in more saturated Western markets, whilst Sony has remained virtually irrelevant in North America. Perhaps more importantly, LG has also come out on top in Central & Latin America, where the company sits in second place behind Samsung. Two years ago LG and Sony both held roughly 8 percent of this market. Today Sony accounts for just 3.2 percent compared with LG’s 15 percent.

LG vs Sony Shares
Despite both losing out in Asia, LG has managed to offset this issue with a strong presence in North and Latin America. Sony has been too slow to adapt to these new trends.

The exact recipe to LG’s short-term success is a little harder to define, although my suspicion is that the company has done a much better job at marketing and defining its products, particularly in the premium-tier of the market. It is possible that Sony’s regular, incremental revisions from the Xperia Z1 through to Z3 simply haven’t made a noticeable impact with consumers and critics. 

Without the established loyal customer base of Apple or Samsung, Sony is more sensitive to price pressure

On the other hand, LG has made markable improvements to its premium line-up with the G2 and G3, offering notable and easily conveyed improvements over its previous flagships. Not to say that one is better than the other, just that it’s easier to convey improvements in LG’s technology, such as a quad-HD display or laser focus camera, to consumers, than it is to talk about Sony’s display and camera tweaks.

In Latin America LG’s mid-tier range has been competitively priced against the likes of the Moto G, which is more expensive than the $179 price tag in the US, whilst Sony’s devices tend to be a tad more expensive.

sony xperia z3 aa (12 of 17)
Despite the improvements, the Xperia Z3 is not a major technical upgrade over the Z2, or original Z1 for that matter.

In response to all of this Sony says it will “change the strategy of the Mobile Communications segment in certain geographical areas, concentrate on its premium line-up, and reduce the number of models in its mid-range line-up”. But with all of the above in mind, better flagships won’t necessarily address the underlying problem of cost competitiveness. The premium line-up may be part of Sony’s problem, in so far as it isn’t innovative, and could be addressed through additional investment. But chasing this single market segment will most likely not solve the problem.

Two years ago LG and Sony both held roughly 8% of the CALA market. Today Sony accounts for just 3.2% compared with LG’s 15%.

HTC’s lack of a revival in North America is proof of this, as are the declining global market shares for hugely popular brands like Samsung and Apple. Consolidating its mid-range products might help to give Sony more of a presence in this market, but there are already a number of popular competitors here, such as Motorola, which are leading the field.

Sony will not only have to consolidate, but also up its game in the mid-tier segment to really turn things around.

lg g3 vs sony xperia z2 aa (23 of 24)
LG and Sony have focused on very different strategies over the past 2 years. It seems that LG was better prepared for the explosion of cheaper retailers.

In summary, Sony appears to be another casualty of the increasingly competitive smartphone market and the surge in popularity for smaller brands. The company is not close to falling out of the race yet, but appears to have missed the boat in a lot of growth areas over the past year. Without the established loyal Western customer base of Apple or Samsung, and lacking the emerging market appeal of LG or Motorola, Sony is now starting to feel the price pressure and being applied by Lenovo, Huawei, and Xiaomi.

Regardless of which regional market you look at, the fastest growing brands are those offering the best value for money, and Sony need to address this first and foremost if it wants to return its mobile division to a profit.