Phone recalls may hurt Sony's profit

Sony Corp's first-quarter profit probably fell 27 percent on charges related to the recall of defective cellphones and as demand for its products cooled.

Current profit, or pretax profit from operations, probably dropped to ?28.6 billion (US$230 million) in the three months ended June 30 from ?39.1 billion in the year ago period, according to the average estimate of eight analysts surveyed by Bloomberg News.

Sales probably rose 4.3 percent to ?1.63 trillion.

The second-largest consumer-electronics maker this month said it will take a ?12 billion charge after recalling 1.1 million faulty cellphones. The recall raised questions about the reliability of Sony's brand as consumers spend less on electronics, potentially undermining the company's focus on products that provide network access.

Sony's "profits will be swamped by the costs of recalls" if its products aren't reliable, said Alan Bell, an analyst with Credit Suisse First Boston Securities (Japan) Ltd, who recommends investors ``hold'' the stock. "Sony will put its brand name at risk and its ability to charge a premium for its products."

The cellphone recall is a setback for Sony as it tries to boost sales of new products amid shrinking profit margins for other electronics such as computer monitors and disk drives.

"Sony's cellphone operations are clearly damaged," said Hitoshi Kuriyama, an analyst with Merrill Lynch Japan Ltd, who rates the stock "outperform."

"Almost half of Sony's cellphones shipped out were recalled."

The maker of the Clie handheld computer and mobile phones linked to the Internet is also contending with investment costs related to its PlayStation2 video-game console.

Sony, second to Matsushita Electric Industrial Co in worldwide consumer electronics sales, will report results for the April-June quarter at about 3pm Tokyo time today.

Investors will likely focus on the performance of Sony's consumer-electronics division, which has been driving growth in recent years. Profits at the division, a unit that accounts for about 75 percent of the Tokyo-based company's sales, may slump as much as 40 percent in the quarter, analysts said.

Group operating profit -- or what's left from sales after manufacturing, selling and administrative expenses and before taxes -- probably fell to ?32 billion in the first quarter from ?33.7 billion a year ago, analysts said.

That would be a challenge for 59-year-old Kunitake Ando, the leader of Sony's parent company and chief operating officer since April 1 last year. Three months later, on June 29, Ando was appointed president to oversee Sony's day-to-day operations, with a special focus on the company's electronics business.

As head of the consumer-electronics division in 1999 and 2000, Ando focused on developing products for personal use such as Sony's Vaio computers, digital cameras and palm-sized digital movie recorders.

Since becoming COO, Ando has overseen the introduction of the Clie, a so-called tablet PC known as the "Airboard" and Sony's push into mobile phones, which led earlier this year to a joint venture with Sweden's Ericsson AB.

Investors aren't convinced Ando's strategy will work, especially given the worldwide slump in demand for mobile phones and other electronic products.

Sony's shares have lost more than half their value since Ando's appointment to the position of COO. The shares have fallen about 8.5 percent since the beginning of the year, outperforming the 19 percent decline in the TOPIX Electric Appliances Index and the 35 percent slump for rival Matsushita Electric.