Sony Cuts Semiconductor Spending Investments

It’s tough times over at Sony Corp. (NYSE: SNE) these days. From exploding batteries to the mediocre launch of its Playstation 3 videogame console, the venerable electronics and media giant has certainly seen better days.

Now the company is cutting resources at its semiconductor business, and considering whether or not to continue manufacturing its Cell chip used in the PS3 in-house.

The Tokyo, Japan-based company announced that its capital expenditures in its semiconductor business will be much less than the 460 billion yen ($3.79 billion) it spent over the last three fiscal years, according to Executive Deputy President Yutaka Nakagawa, who heads the company’s semiconductor and component device business.

Last month, Sony blamed the launching costs of its PlayStation 3 game console for much of the 5 percent drop in group net profit for the last three months of 2006 to 159.9 billion yen ($1.32 billion).

The company has been engaged in a massive turnaround effort since 2005, when Welsh-born American Howard Stringer took the chief executive job. Sony has dropped unprofitable businesses, sold off assets, cut jobs and closed plants.

Nakagawa also said that production of 45nm Cell processors – the main chip used in the PlayStation 3 – would probably begin at the end of fiscal year 2008 or the beginning of fiscal year 2009. Sony had yet to decide whether the 45nm chips will be manufactured by Sony itself or in cooperation with another company, he said. The processor is currently made using 90nm technology, and Nakagawa said the chips will soon be made with 60nm technology.

Components such as the Cell chip and a Blu-ray DVD player have driven up the PS3 price. Lower costs for the high-speed chip are expected to help the new game machine better compete with Nintendo’s Wii and Microsoft’s Xbox 360. However, finer circuitry also means heavier initial investments for chipmakers as costs for chip-making equipment balloon.

Among the possible businesses to which Sony may outsource the work are Taiwan Semiconductor Manufacturing Co. and United Microelectronics, which are the world’s largest and second-largest contract chipmakers, respectively.

“They are aggressively investing in cutting-edge technology,” Nakagawa said of the two companies. “Our basic understanding is that we probably won’t need to do everything by ourselves for next-generation chips.

“When we first offered the PS2, there were no semiconductor companies that were able to make chips for the machine, so we did it ourselves. But now, there are companies that specialize in (such) chip production.”

Despite the cuts, Sony expects revenue at its chip operations to grow 57 percent to $6.35 billion during the current business year that ends in March, accounting for 9.4 percent of its estimated group sales, although part of its chip sales are made through in-house transactions.

Sales have been driven by brisk demand for chips used in its game machines as well as in digital cameras, Nakagawa said.

Sony’s PS3 sales have so far paled in comparison with the rival Wii.

The Nintendo machine outsold the PS3 nearly three to one in Japan last month, according to videogame magazine publisher Enterbrain, which blamed PS3’s higher price tag and a shortage of game titles.