The International Finance Assignment

Published Date: 02 Nov 2017

Part A

Sony Corporation was founded in May 7, 1946 in Japan. It started up as an electronic company. Today Sony was a public listed company in Tokyo Stock Exchange (TYO: 6758) and listed under 1st section. It also listed is New York Stock Exchange (NYSE: SNE) in United State. Besides produce consumer electronic product, it also expended its business into electronic product, financial services, picture, music, entertainment and others. Despite expend into different field, electronic product still the core business of Sony which contributed 46.6% in year 2011 (Sony Co. annual report year 2011 pg. 37), follow up by Networked Products & Services and financial services. Umbrella branding strategy was used by Sony to most of its product and services across different segments. This helps consumers to identify the products and services offer by Sony and also leverage its corporate identity. Besides, Sony Co. also setup it key manufacturing production line in others countries like Malaysia, Singapore, China and others due to lower wages cost. To respond to different demand of product based on geographical area, Sony also setup manufacturing plant in certain location. For example Slovakia was built in respond to the demand of television in Europe. Due to subsequent loss in business, Sony Co. changes its strategies to cost saving method and restructure the company division. Some of the production line will be closed or combine and business that was not profitable or hard to maintain will be spin-off or close down.

On the other hand, Samsung Group was founded in 1938 not as an electronic company but as small trading company which later the group diversified into other area such as food processing, textiles, insurance, securities and retail. Samsung only entered to electronic industry in the late 1960s. Today Samsung is a multinational conglomerate company which has great influence in the South Korea and its affiliate companies which includes industry like electronic, machinery & heavy, chemical, financial, and construction that contribute around a fifth of South Korea’s total exports. Samsung is a public listed in Korea Exchange (KRX) and it is also one of the stocks in S&P Asia 50 Index. Samsung also used similar branding strategy as Sony which only requires promoting one single brand. Innovation is a global enterprise at Samsung. Its research and development network spans six Samsung centers in Korea and 18 more in nine other countries, including the United States, the United Kingdom, Russia, Israel, India, Japan and China, as well as other research centers and universities. Samsung is also the major driving force for South Korea economic growth behind the "Miracle on the Han River".

Next, we will be comparing the financial performance from year 2007to 2011 for both Sony and Samsung. First will be the earning per share, Sony EPS in year 2007 and 2008 was 128.88 and 367.57 respectively. However it has subsequent negative earnings per share (Losses per share) due to net losses in business. Meanwhile Samsung has a constant improvement on its EPS from year 2008 to 2010 and drop drastically at 2011. Second will be the return on asset which measure the effectiveness of the company in utilizes its asset. Sony’s was ROA fluctuated within 2% and 5% except year 2008 which was 8% whereas Samsung’s ROA is fluctuated between 16% and 23%. This indicated either both companies were either not using their assets effectively or holding too much of assets especially Sony.

Gross Profit margin measure the percentage of gross profit per 1 dollar of sales. Both Sony and Samsung consistently improved their gross profit margin which Sony increases from 29% to 33% and Samsung from 28% to 32%. The increment may due to the improved in production and advancement of technology. Net profit margin measure the percentage of net income per dollar of sales. In year 2007 and 2008, Sony’s net profit margin was 2% and 4% respectively. Due to subsequent 3 years losses from year 2009, Sony showed negative net profit margin. In year 2011, Sony suffers losses due to high value in non-cash transaction – Defer Tax. However, Samsung manage to obtain an average of 7.8% net profit margin throughout those 5 years. From gross profit margin to net profit margin, it may indicate that Sony has a higher interest payment and expenses than Samsung which contributed to Sony net losses. The ratio also indicates that Sony has high leverage compare to Samsung which will be shown in next part.

To measure the leverage of the company, we may use the debt ratio. Debt ratio measure how much debt is used to finance per dollar of assets. From the table, it shows that the debt ratio of Sony is between 65% and 77%, comparing to Samsung which is between 33% and 40%. This indicates Sony funded most of its assets through external finance and high risk in default payment on loans. Consequently, Samsung maintained it debt ratio below 40% which may shows the company funding its project or assets using internal finance. Given Sony maintaining high debt ratio, we may review how liquidity is the company. To measure liquidity, we will use the current ratio and quick ratio. The current ratio shows how much is the current assets used to offset per dollar of current liabilities. From the table, Sony current ratio is showing a downward trend, especially in year 2009 which the ratio was drop drastically from 1.25 to 0.95 but still maintain in high liquidity state. Whereas for Samsung, the current ratio is showing an upward trend which indicated it was highly liquidity compare to Sony and large holding of cash. However, higher current ratio does not show the company was performing well as the company may hold a large sum of cash or inventory but doing nothing. (Current ratio below one may indicate the company may not able to pay its obligate but not necessary true) In order to stress test the company liquidity, acid-test ratio was used as an indicator. In acid-test ratio, the inventory was not include in the calculation and therefore able to test whether the company able to cover its immediate liabilities. Sony again was showing a downward trend in acid-test ratio especially in year 2009 where the ratio is 0.74. This may indicate Sony may have financial difficult to pay their immediate obligate. Samsung however shows a health sign which the quick ratio was above 1 for subsequent 5 years.

Part B

Based on Japan balance of payment statement in year 2011, the capital and financial account increased from an outflow of -22,538.3 million yen to an inflow of 6,265.9 yen. This indicated more currency was inflow back to Japan. In recent years, the Central Bank of Japan set the nominal interest rate at 0% in order to stimulate economic and help growth of GDP. Due to the reason, market was borrowing from Japan to invest in other countries with highest interest rate (unwinding Yen carry trade) (T.Pettinger, 2008) and local investors shift their investment to foreign countries. So it is reasonable to see why Sony has higher debt ratio than Samsung. Japan cooperation mainly sources their fund from loan rather from shareholder or investor. High leverage cost was much lower in Japan compare to countries like Europe where the interest rate was around 3% to 5%.

On United States balance of payments, the balance of goods trade drop significantly in year 2009 when the subprime crisis happened. The imports of United Stated dropped around 24% which also reflect on Sony year 2009 financial statement which the revenue from United States decreased approximately 17% comparing previous year. In respond to the matter, Sony started to shift its focus to new immerge market in Asia, for example China where their resident purchasing power keep increasing. Others reason that affect on Sony performance was the tariff rate applied on import goods. For any goods import from Japan need to pay for import tax whereas Korea received a special tariff rate on import goods. Due to the tariff rate, Sony shifted its production line to others countries like Singapore, Malaysia, China and Thailand. Not only wages on workers were low but also reduce on import tax on its product or component which helps stay competitive. In the cases of Europe region, Sony has expanded its LCD production line in Slovakia which located in the heart of Europe, Italy. It’s not only improved on productivity in respond on the Europe market demand but also reducing import tax and transport cost (comparing shipping new television from Asia countries).

Exchange rate also will affect the multinational companies. Therefore we construct an exchange rate graph for Japanese Yen (JPY) and Korean Won (KRW) against U.S. Dollar (USD) from 1st of July 2007 to 25th of December 2011. For Yen, it shows a decreasing trend which drop from around 120 USD/JPY in July 2007 to around 77 USD/JPY in the end of December 2011. In contrary, KRW shoot up rapidly from 2007 at around 920 USD/KRW to around its peak at 1552 USD/KRW in 2009. Then it drop to 1100 USD/KRW level in 2010 and maintain this throughout 2011.

In the case of Sony, drastically appreciation of yen in Exchange rate actually affect the company net profit as around 75% of Sony’s incomes came from others countries. For example sales from Europe and United State both conduct around 45% of Sony total sales. In year 2008, United State was hit by the subprime mortgage crisis which the Lehman Brothers Holding Inc. filling bankruptcy. Lehman Brothers Holding Inc. was the 4th largest investment bank in United State. The bankruptcy of Lehman Brothers cause a disaster to the eastern country economic specially United State. This caused many investor pull out their investment from US. The crisis also weakening the US dollar but does not affected much on Asia market. As a result, the Yen keep appreciated against Euro and Dollar which cause Sony losses in exchange rate. Besides the subprime mortgage crisis, AIG bailout by the American Federal Reserve in year 2008 and United States Treasury Bond downgrade from risk-free borrowers for the first time in year 2011 also contributed to the depreciation value of Dollar.

Majority of Sony sales came from high income countries like Japan, United States and Europe due to Sony label themselves as a premium brand and produce high quality goods. The product price tends to higher than competitors. Since the subprime mortgage crisis, Sony revenue from United State and Europe showed a downward trend. United States segment revenue drop from 26.9% to 20.1% and Europe drop from 24.6% to 21.4% from year 2007 to 2011. It may caused by the strengthening of Yen and also slow down in electronic device sales in United State and Europe. Moreover rise of the Asia market changed the Sony business strategies which focus on United States and Europe shift to focus on Asia countries (In year 2011, Asia market contributed 17% of Sony total sales and was separated with countries like Brazil, Russia and others. Previously Asia was included in others segment due to low volume of sales.)

During recession period (2007 to 2009), Sony has reorganized the organization by rationalizing manufacturing operations, including reducing their 57 manufacturing sites by approximately 10% and furthering shift the manufacturing to low-cost areas and also cooperates with OEM/ODM partners. Sony focuses their growth in emerging market for example BRIC – Brazil, Russia, India and China as their GDP growth will normally outpace the global average growth. For example, Sony Sony joint venture with Toshiba to strengthen and expand the produce of semiconductor. In the joint venture, Sony will transfer existing facilities to Toshiba Fab. (Toshiba, Sony, and SCEI Sign a Memorandum of Understanding Establishing a Joint Venture to Strengthen Manufacturing Capabilities for High-Performance Semiconductors, 2007) The joint venture actually helps to reduce the cost of manufacturing the semiconductor needed by Sony Playstation®3. Comparing to new investment in wafer fabrication facilities, joint venture with Toshiba reduces the time lag and cost needed to obtain result from new investment.

In 2007, export of goods is $389,568.5 million compare to average of 5 year which is $439,124 million. Despite the financial crisis and lower than average current account in the BOP, Samsung is still the world’s leading manufacturer of LCD panel which they believe are profitable in the near future. There was a sharp fall in current account from $21,769 billion in 2007 to $3,197.5 billion in 2008. The main reason behind this is because the rise in import for goods $429,481 million compare to $434, 651.5 million of export for goods. Despite the fall in net income and higher expenses, Samsung focused their investment on adding on production line at S-LCD –joint venture with Sony—as they targeted highly profitable market segments such as 40-inch-and-up TV panel market.

In 2009, there is a sharp surge in current account reaching $32,790.5 billion is due to reduce in import of goods at $320,323.7 million. Samsung adopted a green memory strategy that has further expanded their share of the world DRAM market, to 33%, up from 30% in 2008. Furthermore, they became the first company in the world to mass-produce the 30nm-class NAND Flash memory chip and, spurred by this achievement, Samsung gained a 42% share in the global NAND Flash market (Annual Report).

In 2010, although the current account for Korean BOP drop slightly to $29,393.5 billion, but still remain high. Samsung realized rapid growth that time which they implement the global marketing strategy for mobile PCs, reaching the sales of 10 million worldwide. Global marketing strategy works well because they use different strategies to meets the customers’ desire in different region the company is marketing to.

In 2011, current account drop 11% to $26,068.2 billion but still remain higher than 2007. To encounter the drop in export, Samsung targeted to emerge into the smart phone market which is profitable using market flooding strategy. For the past year, its market share has doubled to more than 36% in Q2 2011 from 18% during the same period last year. Samsung expected that the launching of Galaxy S III could compete with its rival, Apple iPhones (Samsung's Market-Flooding Strategy May Not Work Much Longer, 2012).

Since Samsung’s revenue is generated mostly on export (around 90 percent), therefore it has direct impacts from exchange rate. The won appreciated in 2007 and 2008 which has caused Samsung’s products become more expensive and lead to lack of competiveness. We can see that the net income for Samsung has dropped in 2007 and 2008 when won appreciated. However, the won depreciated during 2009 and 2010 which causes the Samsung products to be cheaper relative to others competitors. This situation will result in an increase in net income of Samsung in that period. In 2011, the exchange rate for won stops depreciating and eventually bounces back in the second half of the year. Because of this appreciation, Samsung’s net income slightly drops in that year. Besides, the weakening in the exchange rate will cause Korean resident prefer to spend on domestic products such as Samsungs rather than imports because they are relatively more expensive which give the similar result for Samsung’s earnings.

Even considering the matching strategy of settlement currencies and expansion in oversea sites for production and parts purchase, the unexpected deprecation of the won is expected to help Samsung improve their profitability (Yoo, 2011). The matching strategy means tradeoff between benefits and damages from ups and downs from the foreign exchange rate by matching currency for selling products with currency for buying raw materials. Despite the comment of little impact on Samsung’s sales, it seems to be profitable in the sharp fall during 2009. In 2011, the surge in sales of smartphones is contributing to the rise of the sales as well as operating profit.

The drop in exchange rate not only benefit the company by increase its sales, but it is also increase the expenses. When won depreciates has brought negative effects on the import of raw materials which indirectly increase the cost for sales and reduce earnings. However, the effect of this is much smaller than the price competiveness strength so overall Samsung still can profit during the downfall of won.

Samsung has ended their joint venture with Sony by paid out about $940 million for Sony’s share in 50-50 venture, called S-LCD Co., production of liquid crystal display (LCD) for television. The takeover of Sony's part of the S-LCD venture will add about $5.5 billion to Samsung's annual revenue, while the absorption of Samsung LED will add another $600 million or so. Seoul-based Samsung is the world's largest technology company with revenue expected to be around $140 billion this year (Ramstad, 2011).

Since the subprime crisis, Korean began to have recession in 2007 where it growth fell by 3.4% in the 4th quarters of 2008 from the previous quarters, with year on year quarterly growth continuing to be negative into 2009. Most sectors of the economy reported declines, with manufacturing dropping 25.6% as of January 2009, and consumer goods sales dropping 3.1%. Exports in autos and semiconductors, two critical pillars of the economy, shrank 55.9% and 46.9% respectively, while exports overall fell by a record 33.8% in January, and 18.3% in February 2009 year on year.

In October 2008, rating agencies raised concerns about the credit risk of the South Korean banks because they are vulnerable to Western market panic. The stock markets and currency have dropped more than 30% since last quarter as foreign investors retrieve their capital. Later the government announces Asia’s biggest financial rescue package of $130 billion to open access to overseas credit markets and allay concern of a recession. The won climbed 1.4% to 1315 per dollar at the close in Seoul. The Kospi stock index rose for the first time in four days, gaining 2.3% (Cho, 2008).

Since then, South Korea was able to avoid a recession and have positive growth for the consecutive year of the crisis due to the strong domestic consumption of products that compensated for a drop in export. Korea rebound in 2010 with strong economic growth rate of 6.1% which return to the pre-crisis levels. South Korea's export has recorded $424 billion in the first eleven months of the year 2010, already higher than its export in the whole year of 2008 (Economy of South Korea).

In October 2011, the U.S Congress has finally approved the long-stalled multibillion trade agreement with South Korea after pending for 4 years since April 2007. According to an assessment by the staff of the U.S. International Trade Commission, the trade deals can expect to boost more than $12 billion in import from U.S companies and farmers (Montgomery, 2011).

Part C

Sony implemented "One Sony" as announced by his President and CEO Kazuo Hirai. "One Sony" is an integrated new management approach to accelerate decision making across the entire Sony Group. The five key initiatives include strengthening core areas, turning around the television business, expanding business in emerging markets, creating new businesses and accelerating innovation, and realigning business portfolio and optimizing resources.

Strengthening core areas

Sony has positioned its digital imaging, game and mobile businesses as the main pillars of its electronics business and anticipates that approximately 70% of its total R&D budget to these areas. Sony focuses on the areas that are more profitable, growing and expanding. Therefore, Malaysian Company in the same industry can learn from Sony to focus on the things that are successful and growing.

Turning around the television business

Sony initiated cost reductions and reducing model count by 40% in LCD panel manufacturing which was once huge but now a money loser. In parallel with cost reductions and the competitiveness of its product, the television business will seek to improve the image and audio quality in the high-sales-volume LCD television. Malaysian company can learn Sony to perform more efficient engineering, fewer models but with better image and audio quality to return profitability in the area.

Expanding business in emerging markets

Sony aims to increase the emerging market sales composition target from 50% in fiscal year 2011 to 60% in fiscal year 2014. Sony will try to expand in emerging markets such as India and Mexico. Malaysia Company can learn from Sony that not to limit its views and targets in fact they should aim for larger and fast-growing emerging markets.

Creating new businesses and accelerating innovation

One of Sony’s key new business fields is the medical business. Sony also plans to enter the medical equipment components business (endoscopes) and life science business (semiconductor lasers, image sensors and micro fabrication). The 4k digital cinema format which boasts more than four times resolution of Full HD is a prime example of accelerating innovation. Malaysia Company can find new areas which its core strengths related to grow so that they can enjoy significant competitive advantages.

Realigning business portfolio and optimizing resources

Sony plans to focus investments on its core businesses. Other existing business areas will be evaluated. Those businesses may be sold off or entered into partnerships with other companies. Malaysia Company can learn Sony to take a hard look into the businesses that are losing money, don’t have much chance to growth and don’t have much to do with the company’s core focuses.

(Annual Report)

References

Annual Report. (n.d.). Retrieved from Samsung: http://www.samsung.com/my/aboutsamsung/corporateprofile/ourperformance/annualreports_old.html?url=annualreports_old.html&__ncforminfo=H9Jx6jxaF0t-JZMQQWMto7PwRxxb_NF7lNH8scgwbeaCgyYOqMjEnIuQdqCzGGbA6ZfLoTDqsoVrhrPTxHhi4aLmMk-AoKDiVUQmQnGMnhs%3D

Cho, K. B. (2008, October 20). South Korea's Won, Stocks Gain on $130 Billion Financial Rescue . Retrieved from bloomberg: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aiX37JzQOYZ8

Economy of South Korea. (n.d.). Retrieved from Wikipedia: http://en.wikipedia.org/wiki/Economy_of_South_Korea

Montgomery, Z. A. (2011, October 12). Obama gets win as Congress passes free-trade agreements. Retrieved from The Washington post: http://articles.washingtonpost.com/2011-10-12/business/35277895_1_free-trade-agreements-colombia-and-panama-support-tens

Ramstad, E. (2011, December 27). Samsung Electronics Ends LCD Venture With Sony. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB10001424052970203391104577121761003753118.html

Samsung's Market-Flooding Strategy May Not Work Much Longer. (2012, June 9). Retrieved from Forbes: http://www.forbes.com/sites/greatspeculations/2012/09/06/samsungs-market-flooding-strategy-may-not-work-much-longer/

Sony | MIT Technology Review. (2009, 12 21). Retrieved 3 18, 2013, from MIT Technology Review: http://www.technologyreview.com/article/416848/sony/

Sony to create world's biggest LCD factory in Slovakia. (2008, 4 28). Retrieved 3 18, 2013, from France 24: http://www.france24.com/en/20080428-sony-biggest-lcd-factory-slovakia-television-europe

T.Pettinger. (2008, 3 11). Yen Carry Trade Unwinding. Retrieved 3 18, 2013, from Economics Help: http://www.economicshelp.org/dictionary/y/yen-carry-trade-unwind.html

Toshiba, Sony, and SCEI Sign a Memorandum of Understanding Establishing a Joint Venture to Strengthen Manufacturing Capabilities for High-Performance Semiconductors. (2007, 10 18). Retrieved 3 18, 2012, from Sony Global: http://www.sony.net/SonyInfo/News/Press/200710/07-1018BE/index.html

Yoo. (2011, September 21). Exporters in S. Korea delighted with won's depreciation. Retrieved from Xin Hua Net: http://news.xinhuanet.com/english2010/indepth/2011-09/21/c_131151812.htm

Appendix

Earning per share =

Net Income

Outstanding common share

 

2007

2008

2009

2010

2011

Sony

125.88

367.57

(98.42)

(40.59)

(258.21)

Samsung

62.59

46.45

80.19

152.34

105.52

Return on Asset =

EBITDA

Total assets

 

2007

2008

2009

2010

2011

Sony

5%

8%

2%

3%

4%

Samsung

20%

16%

21%

23%

20%

Gross Profit Margin =

Sales - COGS

Sales

 

2007

2008

2009

2010

2011

Sony

29%

29%

27%

32%

33%

Samsung

28%

26%

29%

34%

32%

Net Profit Margin =

Net Income

Sales

 

2007

2008

2009

2010

2011

Sony

2%

4%

-1%

-1%

-4%

Samsung

8%

5%

7%

10%

8%

Debt ratio =

Total Liabilities

Total Assets

 

2007

2008

2009

2010

2011

Sony

71%

65%

73%

74%

77%

Samsung

40%

40%

38%

33%

35%

Current ratio =

Current Assets

Current Liabilites

 

2007

2008

2009

2010

2011

Sony

1.28

1.25

0.95

1.02

0.93

Samsung

1.41

1.52

1.65

1.54

1.61

Quick ratio =

Current assets - Inventory

Current liabilities

 

2007

2008

2009

2010

2011

Sony

1.02

0.99

0.74

0.86

0.76

Samsung

1.14

1.23

1.38

1.20

1.26