Sun Sets On Japan's Once-Shining AV Equipment Industry

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TOKYO -- The decline of Japan's audiovisual industry shows no sign of stopping, with Onkyo preparing to sell off its flagship audiovisual business to a U.S. peer and concentrate on contract manufacturing.

Once upon a time, audiovisual was at the forefront of Japan's electronics industry. But in recent years the market has shrunk as smartphones have taken over more and more functions from previously separate gadgets. That has left equipment makers struggling to survive.
Is Onkyo's move a sign of things to come in the industry?

On May 15, the Osaka-based company announced that it had begun talks with Sound United and its U.S. holding company, Viper Holdings, to sell its audiovisual business.

Later in the day, Onkyo President and CEO Munenori Otsuki explained the reason for the move. "We will halt manufacturing in the AV business and aim for growth through OEM," or original equipment manufacturing. On May 21, Onkyo announced that it had reached an agreement to sell the business to Sound United and Viper Holdings for $75 million on July 1.

Under the deal, which must be approved at a regular shareholders meeting on June 26, Onkyo will retain the rights to its namesake brand and receive licensing fees from Sound United for products sold under that name.

In addition to its core subsidiary, Onkyo & Pioneer, Onkyo will divest a domestic sales subsidiary and a plant in Malaysia. It will also sell some operations of two sales subsidiaries in Asia, one in China and the other in Hong Kong.

Onkyo has around 1,600 employees. The divestment will shrink its workforce by roughly 60%. "I think there was no other way to allow the Onkyo brand to survive," said one sad-looking worker.

Time is running out for Onkyo to turn itself around. In the year ended March, the company sold off around 1 billion yen ($9.1 million) in assets, including an equity stake in Kawai Musical Instruments Manufacturing and a research and development center.

Now it is taking the drastic step of divesting a core business. Sales from the company's audiovisual operations totaled 29.7 billion yen in fiscal 2018. Operating profit for the segment amounted to 1.7 billion yen.

Following the announcement of the deal, Onkyo forecasts its overall sales will tumble 43% to 25 billion yen in fiscal 2019, but it predicts an operating profit of 500 million yen, compared with an operating loss of 1 billion yen last year.

The company expects the sale of the audiovisual business to significantly lower its operating costs and lift its profit by around 500 million yen through its licensing deal with Sound United and lower fixed costs. But the long-term outlook remains murky.

Onkyo began life in 1946 under the name Osaka Denki Onkyo. Founder Takeshi Godai left Matsushita Electric Industrial, now Panasonic, where he had worked for the speaker division, to set up his company.

The Japanese word onkyo means "audio." True to its name, Onkyo focused its attention on speakers and sound quality. Godai created Onkyo because he was dissatisfied with the lack of high-performance speakers on the market at the time.
Along with speakers, stereo amplifiers were Onkyo's flagship products. An amplifier connects devices such as a turntable, receiver or tape deck, and adjusts output and sound quality depending on the source. From the 1960s to '80s, when records were in their prime, Onkyo competed with specialized manufacturers such as Sansui Electric, Denon, Trio and Marantz.

Over time, audio components got smaller and the way people enjoyed music changed from a family activity to something one did alone or in a small group. Audio equipment makers competed to sell mini component systems, and brands such as Pioneer and Kenwood became popular. They also coped with the shift to digital media such as CDs.

These days, fewer people buy specialized audio equipment: Portable music players and smartphones are the main way people get their music. According to the Japan Electronics and Information Technology Industries Association, Japan's audio equipment market more than halved to 85.3 billion yen in 2018 from 210.4 billion yen in 2008. The long-running contraction forced Onkyo to pull out of the business.

It is not the only one in dire straits. Pioneer sold its audio equipment business to Onkyo in 2015. Kenwood, which absorbed Trio, merged with Victor Co. of Japan, or JVC, in 2008. Sansui Electric, which was once considered one of Japan's top three equipment makers, along with Pioneer and Trio, went under in 2014. Doshisha now sells Sansui brand products. Marantz and Denon merged in 2005 and were later acquired by Sound United in March 2017.

The same trend is visible elsewhere. In 2017, South Korea's Samsung Electronics bought U.S.-based Harman International, which owns brands such as JBL and Harman Kardon.

While many manufacturers are struggling, Bang & Olufsen, a Danish company that dates back to 1925, has thrived as a high-end audiovisual equipment maker and has succeeded in setting itself apart from its rivals with superior design and performance.

Onkyo now plans to devote itself to contract manufacturing, but the transition could be bumpy. Toru Hayashi, a company director, paints a bullish picture, saying. "We want to expand sales to 30 billion yen within three years and to 50 billion yen within five years."

The view from the stock market is skeptical, however. "Competition is intensifying in terms of both costs and technological capabilities. It is necessary to determine whether [Onkyo's] growth scenario will take place as planned," said Masayuki Kubota, head of Rakuten Securities Economic Research Institute.

Other Japanese companies will be watching to see whether Onkyo's all-or-nothing bet on contract manufacturing pays off.

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