Why Sony wants to win over Tesla despite Honda tie-up

Seven months ago when Sony and Honda revealed that they were going to develop an electric vehicle together, there was much hype in Japan about a tie-up that brought two of the country’s greatest companies together.

Some of the initial hopes dimmed, though, this month as the two groups confirmed that their first electric car would be sold online in the US and Japan in 2026 — which would be 18 years after Elon Musk launched Tesla’s first electric vehicle in 2008.

For all the excitement about a potential electric vehicle champion to challenge Tesla, it is also tempting to draw parallels with the 2000s when Sony was outsmarted by Apple first with the iPod and then the iPhone, having failed to adapt its hardware to the digital era.

There is an ominous feel of déjà vu to Sony’s and more broadly Japan’s electric vehicle experiment. Honda is quite late to the game and critics say Sony’s effort could be a costly distraction at a pivotal moment when it is on the verge of becoming a fully integrated entertainment company.

But with its foray into electric vehicles, Sony is actually turning to the same playbook that it used to drive the turnround of its sprawling businesses ranging from films, music and games to camera sensors.

There is no exclusivity agreement in the automotive tie-up and the jointly produced car will not be sold under either the Sony or Honda brand. Crucially, the deal won’t deter Sony from selling its camera sensors to Tesla even if the product the two Japanese groups develop competes with Musk’s vehicles. 

Executives stress that the relationship would be similar to the one Sony currently has with Netflix, which is an important customer that buys Sony’s films even though the two companies are rivals in producing content. 

Instead of being drawn into the crowded streaming wars by launching its own service, Sony used what it calls “an arms dealer” approach of selling film and TV rights to the highest bidder. For now, that strategy is working well. 

Some investors have expressed concerns that a tie-up with Honda would hurt Sony’s chances of expanding sales of image sensors used in its smartphones to other carmakers. But Jefferies analyst Atul Goyal thinks that the deal may actually help to promote the shift. And he believes Sony’s real objective is to win over Tesla as a customer, not to compete against it.

Sony has not necessarily been discreet about its ambitions for cars where its sensors can be used to capture objects in low-light conditions, a feature that will be critical in the era of autonomous driving. It commanded about 45 per cent of the global smartphone image sensor market by revenue last year, according to Strategy Analytics. In the automotive sector, the company wants to supply its image sensors to 15 of the top 20 carmakers by fiscal 2025. Considering the industry transition to battery-powered electric vehicles, one would expect Tesla to be included in that list of 15 manufacturers.

In mobile, Apple is also Sony’s biggest customer for image sensors even though the iPhone competes with the Japanese group’s Xperia phone.

Many investors had repeatedly urged Sony to give up selling its own smartphones. But the company has ploughed on, arguing that staying in the market allowed it to stay on top of the technological advances in the industry. That in turn, it claimed, benefited its ability to make image sensors. It is hoping the same will be true by getting its hands on car making and bringing its entertainment assets such as PlayStation and films to the riding experience.

To plug losses, Sony scaled down the size of its mobile phone business and focused on high-end models that offered richer margins.

People close to the company suggest a similar approach is likely to be taken with cars. Sony and Honda will make electric vehicles using existing facilities such as Honda’s plant in Ohio, and the automotive chips are likely to come from TSMC’s new plant in Japan which Sony is co-investing in. “People may be disappointed to learn that the scale of the electric vehicle business is likely to be quite small,” said one of the people.

At the end of the day, it won’t really matter whether the electric vehicle Sony makes is a top bestseller or not. The success of this deal for Sony will hinge on whether it can convince Tesla as well as a majority of the 14 other carmakers on its future client list that its image sensors are good enough for their fully electric and self-driving vehicles.

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