A model displays Japanese electronics giant Sony's harddisc audio player...

A model displays Japanese electronics giant Sony's harddisc audio player system "HAP-S1" and speaker system "SS-HA1" as Sony unveiled the new series of high quality audio set series called "High-Resolution Audio", which equals the quality of compact disc (CD) in Tokyo. (Sept. 26, 2013) Credit: Getty Images

To hear Yoshinori Onoue tell it, designing the perfect TV requires more than just engineering acumen. It also takes the eye of an artist.

“There’s a canvas on which you paint the picture, and that’s the panel. It has to be absolutely clean,” the veteran Sony Corp. engineer explained. “Then you apply the colors,” he said, describing the three years it took to fine tune contrast and crispness. “There’s no equation for it.”

When Onoue and his handpicked team of engineers -- many old Sony hands, too -- had it just right, he ditched the old set in his bedroom for one of their newest creations. HiVi, Japan’s version of Consumer Reports, this summer rated the bellwether 32-inch model best for picture quality.

A victory for Sony engineering. Not for Sony. The logo on the box belongs to Onoue’s new employer: LG Electronics Inc. The former head of Sony’s display business is among hundreds of engineers behind hit products who’ve left amid a decade of cost cuts that soured a once-celebrated culture of risk-taking. Hemmed in by a fourth and record annual loss of $4.6 billion, one of Kazuo Hirai’s first acts as new president last year was to put 10,000 more jobs on the block, bringing losses to almost 60,000 since 2003.

“They’re pushing out engineers like some kind of bargain sale,” said Onoue. “It’s a huge mistake. You need good people to make good products.”

Brain Drain

The brain drain threatens Hirai’s mission to resuscitate the iconic brand that gave us compact discs, Trinitron color TVs and the Walkman, Sony’s game-changing 1979 portable music player. It’s also given a leg-up to rivals such as LG, its South Korean big brother, Samsung Electronics Co., and Taipei-based Hon Hai Precision Industry Co.

“There’s nobody in top management who understands how damaging the technology drain is,” said Yasunori Tateishi, whose 2011 book “Goodbye Our Sony” was his ninth charting the company’s 15-year course from Asia’s most-valuable maker of consumer gadgets to an also-ran with a price tag one-10th that of Samsung’s. “Where do these people go after they leave?”

For Sony’s part, the company views its engineers as its most important management asset and is strengthening measures to retain talent in areas crucial to its business strategies, said Mami Imada, a Tokyo-based Sony spokeswoman.

“Under the leadership of many senior executives with engineering backgrounds, Sony is strengthening research and development that can lead to new businesses, speed up innovation and establish core next-generation technologies,” she said.

Chased Out

Because Japan’s labor laws and customs restrict the firing of workers, companies that want to trim payrolls offer packages to flush out volunteers -- effectively giving the most skilled (and frustrated) a cash incentive to jump ship. Unwanted workers who choose to stay are often consigned to oidashibeya, or chase-out rooms, where they’re given menial tasks or asked to do nothing at all in a bid to bore them into quitting.

Hirai raised the pressure in April, introducing automatic demotions for most managers when they reach their 50s. Sony spokeswoman Imada says the policy was designed to get new blood into decision-making roles. Critics say it’s another strategy to shame older, higher-paid workers into leaving.

As Sony’s head of manufacturing strategy in 2009, Onoue quit when he was ordered to come up with a plan for shuttering factories. His three decades of experience were just waiting to be tapped when LG wanted a third crack at Japan’s $2.9 billion TV market. They’d pulled out twice before because the quality of their products failed to meet Japanese standards.

Doing It Right

“They couldn’t just bring over the stuff they were manufacturing in Korea,” said Onoue, 62, now president of LG Electronics Japan Lab, the research unit he started for the Seoul-based company in 2010. “They wanted to do it right this time, and spend the money and hire the people.”

More than 100 Japanese engineers now work at the lab’s sleek, glass offices in Tokyo’s Shinagawa district, a few metro stops from Sony’s headquarters. Onoue, tieless, in a dark, pin-striped suit, says he’s still looking for talent as Japan’s electronics industry retrenches. It’s not just Sony; Panasonic Corp., Sharp Corp. and Fujitsu Ltd. are among manufacturers that have cut tens of thousands of jobs in the past year.

LG isn’t alone when it comes to hiring Sony workers. Defections to Samsung began as far back as 2000 with Masaki Oguro, one of the engineers behind Sony’s revolutionary 1995 digital camcorder.

Masaaki Tsuruta, former chief technology officer for the games business, this year became head of Samsung’s Japan operations. Another Sony engineer, Masaharu Tokuhara, overhauled the image-processors -- the brains -- in the Korean company’s TVs.

Old Mojo

Don’t write off Sony just yet, cautions Damian Thong, a Tokyo-based analyst at Macquarie Securities Ltd. A slate of critically acclaimed smartphones and cameras, and the buzz surrounding the planned November release of its first new games console in eight years, are signs the company hasn’t entirely lost its old mojo.

“If Sony really had no people with talent left then I can’t see how they produce things like the RX100, which is the best compact camera in the market,” said Thong, who recommends investors buy the stock. “It’s not just me, it’s every reviewer.”

Changing Tone

Sony’s movie, music and insurance divisions are pulling their weight, and Hirai is playing twin global trends of aging and rising health spending by teaming up with Olympus Corp. to push into medical devices. Sony forecasts $500 million in net income this year, after one-time gains that included the sale of its New York HQ helped it post a first profit in five years in the 12 months through March.

There are early signs, too, that Hirai is changing the tone. He boosted the R&D budget 9 percent last year, as well as visiting Sony offices, factories and labs in 16 countries since taking over from Howard Stringer. Unlike Stringer, Hirai has a good feel for gadgets, according to former Vice Chairman Minoru Morio.

“Hirai asks lots of questions,” said Morio, 72. “He’s totally different from his predecessors, who’d breeze through and just say, ‘Keep up the good work.’”

Still, the 52-year-old, who studied sociology at college and came up through Sony’s music arm, will have trouble reviving the electronics division. The TV unit alone has lost almost $8 billion in the past nine years, and the company never quite figured out how to marry its library of movies and music to hardware.

Fresh Lineup

Sony’s Xperia smartphones were launched to critical acclaim -- into a market already saturated at the top end. Engadget, an online reviewer, last month lauded the Ultra model as “the best phone you’ll probably never buy.” PlayStation4 comes as gamers migrate to mobile and desktop computers. While Sony’s biggest electronics money-maker, CMOS sensors that act as digital eyes in smartphones and cameras made by Apple Inc. and Samsung, is the fruit of decades of research.

“They’re reaping the harvest of work that was started a long time ago,” said Tateishi, the author. “Sony isn’t inventing anything anymore. That’s their biggest problem.”

In the winter of 2000, when Sony refugee Oguro arrived at the camcorder factory in Suwon, Samsung’s base about an hour’s drive outside Seoul, the South Korean company bore little resemblance to the one now dominating global production of smartphones, TVs and semiconductors. Its video cameras were “not saleable products,” according to a secret Sony report that Oguro said turned up mysteriously at his office.

Dusty Monitors

Small wonder. Workers didn’t wear gloves or hair nets. Components sat around in trays so long they’d gather cobwebs. Oguro says he led his boss, who like other Samsung executives never visited the factory floor, to the quality-assurance room where he traced letters in the dust on monitors used to check picture quality to show how dirty they were.

Then he started the cleanup. When the next pilfered Sony report arrived a year later, it said: “Major strides in quality. Reason unknown.”

“It was me,” said Oguro. He followed this by designing the Miniket, a camcorder the size of a cigarette pack that landed Samsung on the cover of BusinessWeek in 2004. “The Korean company makes some of the coolest gadgets on earth,” the magazine said. “Now it’s reinventing itself to get even cooler.” It took Sony three years to catch up.

New Mission

Oguro said an executive’s title, almost double his salary, and a chauffeured car didn’t win him over to Samsung as much as the freedom to innovate -- something that was already slipping away at Sony in 2000. “They wanted me to raise the quality of their video cameras, and they said ’how you do it is up to you,’” he said. “I had a mission again.”

Sony sprouted from the post-war rubble of Japan, an embodiment of the country’s recovery and rise as an economic power. The company was founded by two men who formed a remarkable business partnership: Masaru Ibuka was the restless inventor who pushed engineers to new heights; Akio Morita supplied the vision of what consumers wanted -- sometimes before they knew it themselves.

Sony’s “Founding Prospectus,” handwritten by Ibuka in 1946, described “a stable workplace where engineers could work to their hearts’ content in full consciousness of their joy in technology.”
They scored an impressive list of firsts: Japan’s first tape recorder and transistor radio, the world’s first portable TVs and video-tape recorders. By 1998, the Sony brand overtook Coca-Cola as the best-known and most esteemed by American consumers, according to a Harris poll.

Toy Chest

The Sony spirit was going strong when Susumu Kusakabe, a prodigy who invented a machine for copying floppy disks in bulk while still in college, was recruited in 1981. The Sony lab in Tokyo where he worked had a parts shelf that covered an entire wall, with thousands of drawers full of chips and components -- the ultimate Lego set for inventors. Tinkering was encouraged.

It was an engineer playing around at the parts shelf who came up with the Walkman, Sony’s best-known hit, he said.

By the time Kusakabe left in 2005, the bean counters had the keys to the toy chest. Engineers wanting access had to fill out forms and wait for approval -- often denied, he said.

First To Go

After he was asked to explain an early-retirement program to his workers, the then 50-year-old decided he’d be the first to go. Kusakabe now runs Quadrac, a start-up developing cellphone chips, building on the subway fast-pass he invented for Sony that’s used in Japan and Hong Kong to buy groceries and concert tickets, as well as pay for fares.

If the inventor has his way, his chips will one day let consumers make purchases with a wave of their hand -- using faint signals beamed through the body from a phone in their pocket or bag.
More clues to how Sony lost its way can be found above the company museum near its Tokyo HQ, where retired Vice Chairman Morio still keeps an office after half a century with Sony. A bronze bust of founder Ibuka in thick-rimmed glasses greets visitors as they step out of the elevator on the second floor.

“My generation, who took orders directly from the founders, we were never questioned about a profit margin. Not once,” Morio said. “We just wanted to be the first with groundbreaking products.”


By the time Morio became an executive, he said, the numbers had become a strait-jacket. Japan’s economic bubble had burst, and the analog era Sony dominated was being replaced by digital technologies that leveled the playing field for new entrants. By 1999, the company already had 185,000 workers, more than four times today’s Google Inc.

An evaluation system that tracked return on investment at each of Sony’s businesses discouraged managers from betting on innovations as long as older technologies were still making money. That was a big reason Sony was slow to switch to flat-panel TVs, surrendering its lead to Korean competitors, said Sea-Jin Chang, author of “Sony Vs. Samsung.”

“We were focused on the short-term, and that’s not the way you build for the future,” Morio said. “If I get a meeting with Hirai, I plan to tell him, ‘It’s not your fault. Your responsibility is to find new businesses so the president 10 years from now doesn’t have to do the same things.’” 

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