Chapter16 The Extended Family of Sony Corporation of America

The Extended Family of Sony Corporation of America

Sony Hawaii's opening ceremony in 1968 (Morita is
second from left)

Six months after Tamiya returned from Latin America, Morita gave him a new assignment. The assignment was to establish a subsidiary company in Hawaii that operated independently of SONAM.

At the time, Sony's business in Hawaii was being conducted through a dealership, which in turn was handled by SONAM's office in Los Angeles. In May 1968, Tamiya landed alone at Honolulu Airport with $50,000 in operation funds. In approximately one month, Tamiya found office space and a warehouse and hired the minimum number of employees necessary to start the operation. Tamiya founded the company with six employees, including two Japanese staff. This is how Sony Hawaii Inc. was born.

The $50,000 was spent quickly, and Tamiya began to use his salary to pay utility bills and employees' salaries for the first two or three months. The products had not yet arrived, so money was spent while none was coming in.

Products finally arrived in August. Sony Hawaii had already established agreements with a number of dealers, and once the products were distributed, revenues began to come in. At the time, "products" meant only transistor radios. Sony Hawaii could not sell tape recorders due to an exclusive dealership agreement Sony had with Super Scope, which covered the U.S. mainland and Hawaii, and color television sets were not yet available. The first order Sony Hawaii received was for two radios and two stereos.

In 1969, a year after Sony Hawaii was founded, Sony of Canada Ltd. joined the Sony family. Established in Toronto, Sony Canada originally dealt in professional-use VTRs and other equipment. Shigeru Inagaki was appointed its president and Tsunoda appointed its vice president. After tireless negotiations with Morita and lawyer Edward Rosiny, Sony Canada expanded in the mid 70s through a merger with Gendis Inc., a dealer with a long history of selling Sony's home-use audio products. The new Sony Canada (50% Sony-owned and 50% Gendis-owned) was established under president Albert Cohen. In 1995, Sony Canada became a wholly-owned Sony subsidiary.

On the other side of the Atlantic Ocean, preparations to establish sales companies in Europe were underway. Sony Overseas S.A. (SOSA), established in Zurich in December 1960, oversaw all European accounts as well as European finance and foreign exchange related operations. Komatsu, Koriyama and Suzuki founded SOSA. While Nobuyuki Idei, Masakazu Namiki, Yasumasa Mizushima, and Suehiro Nakamura were stationed in cities throughout Europe as sales representatives. Namiki was in the UK, Mizushima in Germany, and Idei in France. The three had a friendly competition among themselves when selling transistor radios and Trinitron TVs. Their shared goal was to counteract the traditionally negative image that Japanese products held at the time. They emphasized to customers that Sony products were of high quality and worth the higher average prices. Sony products were 10% more expensive than European brands and 20% more expensive in Germany.

They were also seeking to establish local sales companies in Europe. Sony was preparing to sever ties with its distributors and establish companies that would function as wholesale companies and sell directly to retail outlets in major European countries. Sony's aspirations were high: to increase direct sales, boost brand-image, and build a servicing network.

Morita always said, "Sales is a form of communication. To persuade consumers that Sony products improve their lives, we must have our own sales channels." Morita wanted to get as close to consumers as possible, whether in Japan or abroad.

Three New Sales Companies

The Sony UK sales office around 1970

In 1967, the European Community (EC) was formed among six countries and this union has continued to expand ever since.

Namiki, Mizushima, and Idei were not yet quite 30 years of age when they were given assignments to establish local companies in Europe. When they were chosen, there were voices within Sony advocating older, more experienced businessmen for the assignments. But one of Sony's policies is to give young and inexperienced employees a chance if they are promising. Rising stars are given great responsibilities and a degree of freedom. The three men were entrepreneurs and full of energy. Once abroad, they struggled with new business practices, laws, and rules which were totally different from what they were accustomed to, but they made steady progress. They received the full support of Tetsuro Yotsumoto back at the International Division in Japan. In May 1968, Namiki was the first to dissolve a relationship with local distributor Debenhams, founding Sony (UK) Ltd. under Haruo Fukatsu.

Debenhams at that time had only three sales representatives dedicated to selling Sony products. These three handled the accounts of 600 dealers. When Namiki learned of this, he was in utter shock. "We'll never be able to expand in large strides with this kind of sales infrastructure," he said to himself. Fortunately, Debenhams had a well-earned reputation, and the dissolution of Sony's distribution agreement occurred on amicable terms. The president of Debenhams even gave Sony (UK) a "gift" to congratulate the company on its new beginning. Debenhams allowed Sony (UK) to hire several of its employees who had been working on the Sony account and sold Sony a large desk for Namiki and two delivery trucks at a very low price. Debenhams even agreed to be the guarantor for Sony (UK) to rent its first office space. Because the Japanese government had imposed a strict limitation on foreign exchange transactions, the support Debenhams provided Sony (UK) was invaluable to the new company.

Due to the strong support and encouragement from Debenhams, Namiki and his team were extremely motivated to succeed. Business in the UK therefore grew at a rapid pace. In its first month of business, sales were double what Debenhams had recorded in the previous month. In six months, Sony was selling three times what Debenhams had sold in the same month of the previous year.
In June 1970, Mizushima founded Sony G.m.b.H. in Cologne, home to Grundig, Nordmende, Telefunken, and other electronics giants. In terms of hierarchy at Sony G.m.b.H., Akio Morita served as president, Haruo Fukatsu as director, and Yasumasa Mizushima as company secretary. As the Germans were proud and confident that their domestic electronics manufacturers were the world leaders, it was an uphill battle for a little-known Japanese company like Sony to sell in Germany.

Sony G.m.b.H. began with only slightly more than 20 local and 5 Japanese employees. When Sony products were sold through distributors, sales floundered. But once Sony began selling to dealerships directly, Mizushima's policy of promoting the superior quality of Sony products boosted sales. By the end of 1970, Sony G.m.b.H was affluent enough to provide Mizushima with a Mercedes-Benz as a company car.

Establishing a Brand Name

Idei in front of the Tranchant Electronique building
in Paris. In the background is a Sony van painted
with a Japanese red rising sun motif.

France proved to be the country where it was most difficult to set up a new business. Idei began preparations to establish a sales company there in 1971. At the time, France had effectively sealed its borders to direct investments from abroad. Idei paid many visits to the Ministry of Finance in the Elysées Palace, seeking permission to establish Sony France. France's Ministry of Finance emphasized the protection of homegrown industries and thus was not amenable to the idea of Sony France. Furthermore, the owner of Tranchant Electronique, then Sony's exclusive distributor, and Minister of Finance Giscard d' Estang were close personal friends. Accordingly, Sony's request to terminate the distributor agreement as a premise to the founding of a 100% Sony-owned subsidiary was not warmly received.

After Idei spent much time negotiating through lawyers, a three-year contract to form a quasi-joint venture with the Suez Bank was finalized. In February 1973, Sony France was founded with Jacques Dontot, former chairman of the French Electronics Industry Association as its president, and Yasuhiko Ohga of Sony as its vice president. The two years of negotiations were a nightmare for Idei, but the solid relationship that was formed during this period later enabled Sony to buy out its partner with relative ease.

In September 1971, a showroom was completed on the busy and fashionable Champs Elysées, just as Morita had requested. Idei was gradually awakening to the realization of what it takes to establish a brand name in a market. Brand name goods are those goods which are not easily attainable, but yet are in constant demand. He was beginning to understand that in Europe, and especially in France, brand name goods were desirable. Thus, it was very important for Sony, virtually unknown in France at the time, to quickly establish its brand name. The Sony showroom on the Champs Elysées played a crucial role in measuring the improvement of the Sony image among those who visited Paris.

The success of these sales efforts effectively ended an era when Sony sales staff worked from a rented office belonging to an exclusive distributor. With its own sales operations, Sony was now ready to directly promote its high quality products and establish a brand name both in Europe and the US. Each Sony pioneer went through many hardships. Yet to have been given such a large task at such a young age, and to have experienced the building of a business in a foreign country, was enriching and satisfying to both Sony and the pioneers. Once the new companies were established, local staff members were sought. The fact that Sony was an unknown foreign firm worked to its advantage because the people who came to work for Sony in those days were ambitious risk-takers.

Raising Capital in Foreign Markets

Morita (left) and Yoshii (right) rejoicing over
the listing of Sony on the New York Stock
Exchange (NYSE)

Raising capital became a major concern as Sony continued to pursue its goal of establishing its own sales channels around the world. Sony was the first Japanese firm to issue American Depository Receipts (ADRs) to raise funds in the US market (see Part I, Chapter 12). The issuance of ADRs marked the beginning of Sony's ambitious efforts to raise foreign capital, which in turn led to the internationalization of its capital. Sony raised approximately 4 billion yen through the issuance of a total of 5 million ADRs over two occasions in 1961 and 1963.

On September 17, 1970, the chairman of New York Stock Exchange (NYSE) welcomed Morita and Noboru Yoshii of Sony onto the trading floor 30 minutes prior to opening with a warm "Congratulations." At the time, the NYSE was the world's largest exchange and handled 75% of the world's stocks in terms of value. Sony had finally fulfilled all qualifications for listing and became the 1,305th firm, as well as the 30th non-US and first Japanese firm traded. Ten long years had passed since Sony first issued ADRs and it was the day that Sony management had long awaited.

At exactly 10:00 am, bells rang announcing the opening of trade. Morita immediately bought 100 Sony ADRs in his name in accordance with NYSE tradition. As soon as this order was sent to the back office, the letters "SNE" for Sony flashed across the electronic bulletin board with the opening price of "$15 5/8". Morita and Yoshii joyfully held up the ticker tape to display the price.

What did listing on the NYSE mean? It meant that Sony had finally become a truly international company worthy to share the floor and be traded with giants like General Motors Corp., whose sales exceeded Japan's entire national budget at the time. Moreover, once a company was listed on the NYSE, the Canadian and European exchanges would list it with virtually no questions asked.

Sony stocks were traded nonstop that day closing at $15 1/4. Trading volume was 120,300 shares and Sony ranked 13th among the 1,305 companies listed. Sony stocks had made a stunning debut.

At the press briefing that followed, Morita announced enthusiastically, that Sony had "taken its first step toward becoming a global company" and stated his intention to also gain listings on the European markets and turn Sony into "an international company built on a global foundation."

In the early 1960s, aside from SOSA and SONAM, Sony's two other overseas operations consisted of the Hong Kong Office, established in 1958 and a production plant in Ireland, established in 1959. Members of the International Division took turns taking two to three month business trips to establish local distribution channels and conduct market research.

By 1977, Sony was listed on 18 major exchanges in 10 countries and Sony stocks were being traded somewhere in the world virtually 24 hours a day. Sony had become a truly world class company for both its products and its stock.

Building Plants Close to Markets

The ground-breaking ceremony to mark the beginning
of construction at the San Diego site (Iwama holds a
shovel at center)

In June 1971, Iwama, who had already spearheaded R&D efforts on the world's first FM transistor radio, transistor television, Trinitron color television and home-use VCR, went to the US to take the chair of president of SONAM. Iwama spent three years searching for the ideal location for a plant in the US.

While he was promoting the establishment of direct sales channels abroad, Morita was also putting forward plans to construct production facilities near the markets Sony served. However, Morita remained cautious, as he did not wish to rush into anything. He firmly believed that the first order of business should be the construction of a suitable distribution system to establish market share. He felt that the construction of production facilities without a full understanding of the market would be a mistake. His priority was to gain the trust of the market by providing adequate service to customers, while developing his knowledge and a sense of how to behave.

By 1970, sales in the US had grown considerably and Japanese shipments of large televisions had increased. Morita decided that the time was ripe to build a color television plant on US soil. It did not make financial sense to endure the high costs of shipping televisions with bulky picture tubes across the Atlantic. As an additional benefit, if a plant were built close to the US market, products could easily be tailored to the market through adjustments in production volume and product design. Iwama agreed to oversee the development process.

At the time, an anti-dumping lawsuit, which included Japanese color TVs, was in the courts. The US was not pleased with the growing trade deficit with Japan, and Morita was quick to pick up on this. He believed that they could not allow such an "emotional outcry to escalate and hinder the Japan-U.S. relationship." He felt that the establishment of a domestic production facility would alter the export-focussed business pattern and contribute to the growth of US industries, thereby furthering development in both countries.

With a strong US dollar, wages in the US were so high that many of Sony's competitors such as RCA, Zenith Electronics and Admiral, were switching to overseas production. At an exchange rate of 360 yen to the dollar, US wage rates towered over those in Japan.

Masakazu Jinno and Junichi Kodera accompanied Iwama on his search for potential plant sites. Based on the exchange rate, Kodera submitted a pessimistic cost estimate indicating that the new plant would be in the red for the first several years of operation. But Ibuka and Morita were undeterred and decided that the plan had to be executed as soon as possible. Kodera prepared alternative, more economical plans for plants in Japan and in the Republic of Korea, but Morita believed that the exchange rate would not last forever and the plan would eventually succeed. Kodera was then instructed by Morita to go to their TV plant in Ichinomiya and learn about the latest production systems. He was surprised with this sudden request but soon discovered that he had been earmarked to become Sony's first US plant manager.