Tokyo -- By any measure, 2006 has been Sony Corp.'s annus horribilis, a year of high-profile manufacturing snafus that have cost the company dearly--in revenue, market share and prestige.

Sony, arguably the most recognized electronics brand in the world, endured costly production-related mishaps with lithium-ion batteries for laptop computers, CCD image sensors for digital cameras, Bravia LCD TVs and the blue-laser diodes that power its Playstation 3 gaming console and Blu-ray Disc products. When all's said and done, the failures are likely to cost Sony more than $500 million in recalled products and lost revenue. But the damage to its reputation may be more devastating.

A case in point is the urban myth, now propagating in cyberspace, that Sony designs a device into its products that causes them to fail once the warranty expires. Even Sony president Ryoji Chubachi, in a recent interview, seemed to damn the company with faint praise when he said of its manufacturing technology, "I don't think Sony is largely inferior to other companies."

The question for 2007 is whether Sony can turn itself around.

"Sony is down, but it's not out," said Chris Crotty, an analyst with iSuppli Corp. (El Segundo, Calif.). He hedged on whether Sony's 2006 manufacturing issues could be traced to a single underlying weakness, saying, "That's the right question to be asking, but I don't know." Nonetheless, Crotty said the manufacturing issues are best considered case by case.

Senior analyst Kazuharu Miura at the Daiwa Institute of Research Ltd. agreed. "The lithium-ion battery case was a manufacturing problem" affecting an established product, Miura said, whereas the blue-laser diode yield issues that delayed the Playstation 3 should be viewed more as "a challenge to a brand-new business. After years of development, is a half-year delay in the production of a brand-new device that much of a problem?"

Analysts agreed that the lithium battery fiasco, which forced Sony to recall 9.6 million battery packs from brand-name notebooks after some users reported fires or explosions, will end up costing the company market share in the battery segment. Sony has acknowledged that the recall alone will cost about $430 million, and at least one notebook supplier, Toshiba Corp., is seeking compensation for damage done to its own brand as a result of the recall.

Some observers believe Sony stands a better chance of recovering from its Playstation 3 slip-up now that it has reportedly corrected the manufacturing glitch that stymied yields for its blue-laser diodes. Sony initially said it would ship a combined 1 million units in the United States and Japan in time for Christmas. It then halved that target to 500,000 but, according to analysts fell short of even that goal. That left the door open to Nintendo's Wii to gain market share.

Still, Crotty of iSuppli believes the beleaguered Playstation 3 will ultimately prevail. "It's an amazing device," said Crotty, who likened Playstation's cachet in the videogame business to that of the iPod in portable music players.

Miura, meanwhile, cited the Playstation 3's prospects as a central platform for home networking as the primary reason he remains high on Sony, though he conceded that for now he's in the minority.

Even as the Playstation 3 shortfall was making headlines, meanwhile, Sony was forced to issue a recall for eight models of its CyberShot digital still cameras because of a packaging-related defect in the units' CCD image sensors. It was not the first time packaging problems had prompted the company to pull back its cameras.

Perfect storm
While Sony appeared to be its own worst enemy in 2006, outside forces helped create "the perfect storm" that knocked the company off its pedestal, said Stu Lipoff, a partner at consultancy IP Action Partners, (Newton, Mass.).

Certainly, the internal problems are legion, and they go beyond the manufacturing issues. Wave after wave of internal reorganizations in the past decade drained engineering resources and sometimes forced group managers to scrap product development projects just as they were nearing completion. Sony management at times has proved less than adroit at juggling the hardware vs. software sides of the business. The result has been a company in perpetual catch-up mode.

The company's marketing tag line--"Sony, like no other"--evokes its historical willingness to take risks to innovate disruptive technologies. But on occasion that maverick approach has bred "consumer confusion and [product] incompatibility, without any benefits," said Lipoff. Sony's insistence, for example, on using proprietary flash Memory Sticks instead of the industry-standard SD or Compact Flash card pitted Sony's brawn unfavorably against industry brains.

"Contrast the Memory Stick with Sony's introduction of the Trinitron CRT in the 1960s," Lipoff said. "Like the Memory Stick, the Trinitron CRT was different from the state-of-the-art color TV CRT; but unlike the Memory Stick, the Trinitron provided spectacular improvements."

Sony's Chubachi, however, noted that some of the company's problems are in fact industrywide struggles. "Digitalization has enabled standardized products to hit market in volume," he said. "The supply chain requirement has changed. It is no longer sufficient for a component supplier and a set manufacturer to produce products just by exchanging specifications. . . . The clock has started turning faster than in the past, and it is not only Sony that faces this challenge."

Lipoff also pointed to larger trends. "Today, the basis of competition is shifting away from purpose-specific hardware devices to software-defined platforms," he said. Most consumer electronics executives have lost sleep over how to ease out of the ultralow-margin business of manufacturing boxes without sacrificing their companies' core engineering skills in the process. The end game they see is a service-oriented business where they can reap profit from every transaction.

To their credit, Sony's managers started talking about a service-oriented model by the mid-1990s. In Japan, Sony dabbled in the Internet service provider business and in satellite video services. But, said Lipoff, "Being good at manufacturing purpose-specific products does not develop the skills and expertise to be good at running software-defined and content-rich businesses."

Sony has made moves to right the ship. After the battery problem surfaced, Chubachi charged corporate senior vice president Makoto Kogure with responsibility for product quality and safety across the board. And shortly after being named president in March 2005, Chubachi dissolved Sony's Engineering, Manufacturing and Customer Services unit, saying "I believe that a comprehensive operation for design, manufacturing and marketing better fits the reality." EMCS was reorganized as an R&D operation focused on production infrastructure. "Vertical integration is often said to be Japanese companies' advantage, but we should be careful not to depend too much on the idea," Chubachi said.