Weak market demand to hit Japan producers

Aside from being hit by the strong yen, Japanese consumer-electronics companies will be battered heavily this year compared with their South Korean counterparts on weakening demand in key markets and comparatively smaller diversification in emerging markets, according to a Moody's Investor Service report.

In "The Asian Electronics Report", the ratings company expects consumer sentiment to remain weak as the result of continued slow economic growth in Europe, the United States and Japan, which together control half of global sales.

Demand in China, which accounts for about 15 per cent of global sales, is expected to witness monthly sales growth of 10-15 per cent until the end of May, thanks to a subsidy programme. Demand will then slow in the second half when the subsidy ends and economic growth slows.

Sales in China expanded more than 20 per cent in 2011 as the subsidy programme, including a government subsidy for energy-efficient electronics products, and the shift from analog to digital broadcasting inflated sales.

"Europe, which accounts for about 25 per cent of global sales, will continue to weigh on global demand for consumer electronics products," said the report. "Given continued challenging economic conditions, we expect sales there to remain negative.

"We expect sales in the US, which make up about 15 per cent of total global sales, to remain flat. Although there may be a slight recovery in sales in the next few months as the result of a gradual economic improvement, we do not expect it to be strong or sustained.

"We expect Japan, which accounts for about 10 per cent of total global sales, to be slightly negative, also due to the sluggish domestic economy," Moody's said.

The agency highlighted that South Korea's LG Electronics and Samsung would remain better placed than their Japanese peers because they were more diversified outside their home market, with a meaningful portion of revenues from emerging markets such as Latin America and China.

Japanese companies' growth prospects will be limited by the slowing of Europe, the US and their domestic market because these companies depend more on these markets for sales.

"Of the Japanese companies we rate, the revenues of Panasonic and Sharp will come under the most pressure, as about 50 per cent of sales are generated in their domestic market, which also increases concentration risk.

"In the case of Panasonic, its leading positions in home-appliance and lighting and wiring products in Japan provide the company with some stability in earnings at the same time. In addition, about 15-20 per cent of their sales come from China, where tensions related to an ongoing territorial dispute between China and Japan may continue to limit sales of Japanese branded goods," Moody's said.

Meanwhile, Chinese manufacturers such as TCL Corp and Skyworth Group, which have been spurred by the year-long subsidy programme and which continue to expand overseas, are expected to enjoy a higher market share.

Non-Japanese and non-Korean manufacturers, accounting for 35-40 per cent of global share, should see the share rise to more than 40 per cent in the coming 12 months, the report said.

"Japanese companies' competitiveness will erode further because they lack product differentiation. They also have a weaker presence in growing markets, and higher cost structures caused by a strong yen despite recent yen weakness, especially when compared with their Korean competitors," Moody's said.

"The yen has strengthened against major currencies and we do not expect it to weaken substantially unless there is a drastic change in the economic situations of Japan and the other major countries," it noted.