Wary of S. Korean Competition : Sanyo Boosting Research in Spite of Falling Profit

Sanyo Electric, one of Japan’s giant makers of electrical products, faces crises both of identity and profitability.

“The public’s image is of a company just churning out inexpensive color TVs, refrigerators and so forth,” said Akiko Emori, an electronics analyst for Jardine Fleming Securities.

That image, plus a reputation for quality, helped Sanyo post sales of more than $7.44 billion in 1985, one of only three Japanese companies set up after World War II to achieve this. The others are Sony and Honda.

But the Japanese yen’s almost 50% surge against the dollar since 1985 and the emerging prowess of South Korean manufacturers have tarnished Sanyo’s winning image, industry analysts say.

The Osaka-based company is also saddled with an international production structure built for an earlier economic era, they added. “Its major product lines are under severe pressure. The outlook is grim,” Emori said.

The strong yen has undermined Sanyo’s ability to sell at low cost. Sanyo expects a group net loss of $35.2 million in the year ended Nov. 30, down from net profit of $15.5 million in 1986, President Satoshi Iue told Reuters in an interview.

Broad Range of Products

But sales are expected to rise 1.6% from a year earlier to $8.8 billion due to higher domestic demand, and Iue said the company was working to overcome the various challenges facing it.

Sanyo, which started in 1950 manufacturing bicycle headlights, now makes everything from digital audio tape recorders to electric fans. It supplies parts to Zenith Electronics, which is providing 90,000 small portable computers to the U.S. Defense Department, Iue said.

In rechargeable battery and solar cell technologies, Sanyo is considered a world leader.

Sanyo was also a pioneer among Japanese companies in producing overseas. It opened a plant in Hong Kong in 1960 and now boasts 73 affiliates in 29 countries.

Its head start in foreign operations has given it an international network built for an earlier and easier era of currency and trade relations, analysts said.

“We started building plants in the United States before the yen surged, to exploit each country’s unique strengths,” Iue said. “Our strategy had been to export from Japan half the value of a product which was assembled overseas.

“But exporting parts is now a disadvantage. From now on, new plants will be planned under the assumption of procuring parts locally.”

Much has already been accomplished in boosting procurement near manufacturing plants. Sanyo’s exports from Japan, as high as 65% of total sales in 1985, will fall to 35% in the six months to November of this year and could soon drop to 30%, Iue said.

Research Coordinated

In one of Iue’s first efforts to streamline Sanyo’s diversified operations after he became president last year, Sanyo revamped its corporate organization and merged with Tokyo Sanyo Electric.

Tokyo Sanyo, a member of the Sanyo group, had conducted its own research and manufacturing, including production of Fisher brand audio gear, which competed with Sanyo’s own products.

Now activities ranging from research to sales are coordinated in eight divisions representing Sanyo’s major products. These include video and audio systems, home appliances, information systems, air-conditioning, refrigeration, semiconductors and batteries.

But Iue said the rise in the yen overshadowed any benefits during the reorganization’s first year.

Despite plunging profit, research and development investment held fairly steady last year at $31.6 million. It will show a slight increase this year, Iue said, and should also grow slightly next year.

“Profits are down now, but it’s actually the best time to boost investment in research and development,” he said.

Research and development is increasingly crucial to Sanyo’s ability to beat South Korean competition with higher quality products, analysts said.

“The quality of goods sold in Japan has taken off in the last few years,” Iue said. “Products are developed here first. This gives us manufacturing technologies which we can export to other countries.”

Sanyo’s research is concentrated on semiconductors, optics, rechargeable batteries, medical equipment and heating and cooling techniques. Sanyo has linked up with Nippon Telegraph & Telephone to make a communications network for medical equipment, a spokesman said.

“Software which integrates systems holds the key to adding value to consumer products,” Iue said.