Matsushita, Sony Expected to Stay in the Chips : News analysis: Despite movie studio woes, both firms remain consumer electronics leaders.

When Sony Corp. bought Columbia pictures in 1989 and Matsushita Electric Industrial Co. followed the next year with the purchase of MCA, officials at the two electronics powerhouses portrayed their new “software” acquisitions as the critical “second wheels” to their existing manufacturing operations.

Now, Matsushita is giving up its wheel: The company agreed Sunday to sell 80% of MCA to Seagram Co. for $5.7 billion. And with Columbia Pictures in a shambles, Sony is limping along with the corporate equivalent of a flat tire.

So are these two consumer electronics leaders facing the future as wobbly unicycles?

Well, not exactly. Sony and Matsushita remain premier producers of everything from televisions and VCRs to CD players and computer components, and aggressive efforts at improving efficiency and moving more production offshore have helped boost profits.

Matsushita’s net income nearly tripled in the last three quarters of 1994. The cash it receives from the MCA sale will be piled onto an existing cash hoard of some $18 billion.

Sony, for its part, appears determined to pursue its dream of breaking into the software world. Nobuyuki Idei, who took over as Sony president on April 1, stressed in a recent interview that in addition to hardware and software content like movies and music, Sony would also target what he calls “content distribution.” He wants not only to produce the entertainment, he wants to build the equipment used to deliver the entertainment to homes.

Still, both companies face some big problems, for the strategic challenges that led them to invest in Hollywood in the first place have if anything grown even more acute. Simply stated, consumer electronics is a low-margin business, and blockbuster products such as the VCR and the CD player are proving very thin on the ground.

Promising initiatives such as high definition television have fizzled, as have efforts to carve out new markets with products such as the mini disc and the digital compact cassette. And the continuing appreciation of the yen is making it difficult for many Japanese companies to compete with overseas competitors, especially emergent Korean firms.

Matsushita’s predicament is particularly stark. Along with MCA, the company bet heavily on the 3DO Co. as the platform for a booming new market in multimedia games and set-top boxes for interactive television systems. But 3DO’s sales are weak and its prospects look dim.

These two failures “pose the question of just where they’re going to fit in the software world. Where is Matsushita’s route to building exposure in intellectual assets?” asks Alan Bell, an electronics industry analyst at Schroder Securities (Japan) Ltd.

One promising area is entertainment distribution, through satellite and cable TV networks. Cable is still an embryonic industry in Japan, and satellite broadcasting is expanding rapidly in Asia: Both are fields where a company like Matsushita could be a heavyweight.

The distribution business, whether by cable or satellite, “is closer to the thinking of a manufacturing company,” Bell said. “You don’t have to deal with all the egos. It’s much more a matter of applying capital.”

Sony has some similar ideas. The company will soon begin building satellite TV receivers for the Hughes DirecTv system, and Idei says digital satellite systems and interactive television will drive sales of a whole new range of high-quality entertainment systems that take advantage of digital sound and high-quality pictures.

But Sony is not even a player in set-top TV boxes or multimedia computers, both of which promise to be key elements in this new digital entertainment infrastructure. And the company would face plenty of competition from nimble rivals ranging from Silicon Graphics Inc. to Compaq Computer.

Matsushita used to be called maneshita (copycat) because of its tendency to follow the lead of others like Sony. But Sony is no longer the innovative company it once was, and neither firm has shown the versatility to compete in markets like multimedia computers.

“The Japanese are good network-based companies, but they have closed networks,” says Vladimir Pucik, a Japan expert at Cornell University, referring to the tendency of Japanese conglomerates to try and build everything within their industrial groups. Pucik says such “closed networks” are ineffective in dealing with “systems” products like personal computers where being competitive means getting the most advanced product from the cheapest suppliers.

There are a few bright spots in the traditional electronics business. Already, sales of projection TVs, those one-thousand-dollar-plus monstrosities, are booming, up 37% last year to 636,000 units. And there are some other promising new businesses: 2.6 million customers put CD players in their cars last year, an increase of 22% from the year before. Sony is also excited about sales of its new navigation devices to help you find your way on the streets.

But for companies the size of Matsushita and Sony, these markets, as big as they are, remain niche markets. They can keep growing by cranking out a range of such products, but to do so profitably they will have to cut costs.

While both companies have trimmed blue-collar jobs, they may soon be forced to cut white collar workers as well. Matsushita is already moving some 30% of its administrative staff into more productive positions in sales and marketing. Sony is taking similar steps.

“Reorganization,” which was pooh-poohed four years ago as a symptom of the American disease, is the new rallying cry of Japan’s leading-edge companies. Says Pucik: “There is nothing wrong with these companies that (General Electric Chief Executive) Jack Welch couldn’t solve.”

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