Sony: chip in to help Japan — and margins

Sony plans to splurge on strategic investments. Efforts by the Japanese electronics group to expand its gaming and entertainment services are grabbing media attention. But the group should consider allocating a bigger chunk of resources to a less glamorous business: chip making.

For the moment, a $9.2bn semiconductor plant to improve Japanese security of supply may be no more than a ministerial pipe dream. In public Sony has instead committed to spending about ¥2tn ($18bn) until the end of March 2024 on entertainment. The group hopes to bolster its customer base — across gaming, anime and films — to 1bn users globally.

It is a good time to take advantage of strong demand for games. About two-thirds of Sony’s current customer base of 160m comes from its games business. This has benefited from the PlayStation 5 console launch and lockdown video gaming.

There is room for improvement. Sony’s share valuation is in line with Nintendo. But its operating margins are below 11 per cent compared with 36 per cent for the House of Mario. That reflects diversification. Sony’s electronics and chips business demand higher capital expenditure than entertainment, Nintendo’s focus.

Sony could revive margins while remaining sectorally diversified via a chip manufacturing switcheroo. Its image sensor business, which makes semiconductors mostly used in cameras, once dominated that market. Sony has been losing ground to rivals like Samsung, which has grabbed 29 per cent of demand.

It might be no bad thing if Sony spent $9.2bn in partnership with Taiwan Semiconductor Manufacturing to build a Japanese chip plant. Local media reports claim the government is promoting plans for a factory making Japan’s first 20 nanometre semiconductors. These small chips are used in everything from cars to smartphones.

A new plant would serve two purposes. It would improve Japan’s security of chip supplies. Shortages and US-China trade tensions have shown the value of this. For Sony, producing a wider range of chips would help it nudge operating margins closer to TSMC at more than 43 per cent.

The Lex team is interested in hearing more from readers. How do you think Sony can best allocate capital? Please tell us what you think in the comments section below