Sony's Battery Exchange: A Huge Price Tag

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When Apple Computer (AAPL) followed Dell (DELL) and recalled laptops powered by faulty Sony (SNE) lithium-ion batteries on Aug. 24, the Japanese company said that the problem, which could cause cells to overheat or catch fire, was due as much to the design of specific laptops as to the batteries themselves.



That, Sony added, meant a global recall of the affected cells wouldn't be necessary, and the cost of fixing the problem wasn't likely to exceed $255 million -- not exactly pocket change, but not enough to break the bank, either.



Unfortunately for Sony -- not to mention its investors -- that notion has turned out to be as faulty as the batteries. Triggering further recalls by other manufacturers, Sony on Sept. 28 announced a global exchange program for problem cells. That could affect up to 10 million computers from various manufacturers.



SPIRALING COSTS.

"Sony will consult with customers that utilize these battery cells and work with those that choose to participate regarding quantity and the scheduling of replacement battery packs," the company said in a statement [see BusinessWeek.com, 9/29/2006, "More Sony Recalls"].



So far, Lenovo, Toshiba (TOSBF), and Fujitsu (FJTSY) have followed Dell and Apple and announced Sony-related recalls. Sony also provides batteries for other laptop makers including Hewlett-Packard (HPQ), Hitachi (HIT), and Sharp (SHCAY).



The recalls have sent the potential cost spiraling upward. Sony is mum on how big the hit might be, but analysts say it could be around double the original estimate, or as much as $500 million. That could cut Sony's net income for the year ending March, 2007, in half from the current projection of $1.05 billion.



SERIES OF PROBLEMS.

For Sony CEO Howard Stringer, though, the potential impact of the recall goes far beyond the cost of fixing the faulty cells. For one thing, Sony's share price is sinking. In trading Oct. 2 in Tokyo, Sony's stock price bucked a rising market, falling 1% to a two-and-half-month low. Since reaching a 2006 high on Apr. 21, Sony's stock price has slumped 23%, including an 11% drop since Aug. 14, when Dell first said Sony's problem batteries might ignite. "The event casts a shadow over Sony's strategy and quality," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo.



Just as worrying for Stringer is that the battery recalls are just one of several quality-related missteps. In July, 2005, Sony recalled 16,000 LCD TVs in Japan due to a glitch that could cause home circuit breakers to be thrown or even an electric shock. Then in December, the company recalled six digital camera models produced in China.



In September, Sony further delayed the launch of PlayStation3 in Europe until next spring, having already put the global launch back to November [see BusinessWeek.com, 3/16/06, "Sony's Delay of Game"].



SLOW TO OWN UP.

The latest PS3 delay stemmed from slow production of blue laser diodes. Those are a key component in the Blu-ray Disc, a next-generation DVD format that will be included in the PS3. "If asked whether Sony's production capabilities have weakened, I would have to say that at the moment, that is true," said Ken Kutaragi, Sony's PlayStation chief, at a press conference last month.



With the battery recalls, add critics in Japan, Sony has only itself to blame. First, it misread the size of the problem. Second, Sony has failed to communicate effectively and executives have been slow to comment publicly on the issue. By contrast, Toyota Motor (TM) CEO Katsuaki Watanabe and other executives made several public apologies after the automaker issued recalls earlier this year [see BusinessWeek.com, 7/20/06, "Troubles Can't Stop Toyota's Growth"].



Another concern is the impact on Sony's battery business. While the unit accounts for a small fraction of Sony's sales, batteries are a growth industry and deliver solid margins. That business could suffer if computer makers start looking elsewhere for batteries, says John Yang, an equity analyst at Standard & Poor's (MHP) in Tokyo. "For companies like HP, Toshiba, and Apple, laptops are their bread and butter," Yang says. "If Sony cannot convince them that its batteries are reliable then they will have no reason to do business with Sony."



NOT ALL BAD NEWS.

Sanyo (SANYY), the world's number producer of Li-ions, could be one beneficiary of such an outcome, although the company says it's too early to say if there has been an impact on its battery arm.



Still, it's not all doom and gloom at Sony. Since Stringer became CEO in March, 2005, the company's flat-screen TV business has gotten stronger [see BusinessWeek.com, 4/26/06, "Sony's TV Star in the Spotlight "], it remains the world's No.2 maker of digital cameras, and should more than double net profits to $2.2 billion by 2009, projects Merrill Lynch (MER). What's more, adds Brian Barnett, a battery expert at Tiax, a technology research firm based in Cambridge, Mass., the current concerns risk overstating the true dangers to laptop users.



The problems may be costing Sony big bucks, but the odds of any individual being injured are very small. "It's a remarkable reaction to a very rare event," he says. "I'm not sure anyone has been hurt by one of these things." Still, that will be little comfort to Sony at present.