When Sony last week announced that it was naming Welsh-born American Howard Stringer as its new CEO, the faltering share price jumped. With a stroke, Sony joined the tiny club of Japanese companies with foreign bosses. Market watchers compared Stringer hopefully to Carlos Ghosn, the Brazilian-out-of-France who turned around Nissan Motors. Only look closer: all Stringer and Ghosn have in common is little or no grip on the Japanese language. Ghosn is a brash engineer, imposed on Nissan when Renault took over the company. Stringer is a corporate diplomat and media guy who charmed outgoing CEO (and former PR man) Nobuyuki Idei into promoting him over Ken Kutaragi, a brash engineer and bad team player. Idei explained that a truly global company like Sony ignores nationality, but that misses the point. So what if Kutaragi is Japanese? He was the real outsider and consensus rattler, the real Ghosn.

One gets the sense, listening to all this, that investors are still desperate to believe in Sony. So long the leader among the handful of elite multinationals that define Japan Inc., the Sony name is riding the fading momentum of past successes that defined quality in consumer electronics, from the Trinitron TV to the Walkman. Today the leading edge is defined by others, including Panasonic, once seen as a cheap Japanese cousin of Sony. Quietly, Sony has fallen from first to last, or near last, in many measures of growth in Japan's top 10 exporting multinationals.

Consider this: Japan's recent recovery has been driven by exports, spreading hope worldwide that the economic engine of Asia is back in gear. Yet Sony, alone among the nation's 10 most famous multinationals, saw sales outside Japan slide last year (chart). While Toyota is poised to conquer GM in the American market, Sony is getting trounced there by Apple in the hot digital-music-player market. At home, one of the most encouraging recent economic stories is that Japan's corporations are returning to profitability, driving up the Tokyo stock market. Here too Sony is odd man out. Its profitability is falling, and it is one of only two companies among the nation's top 10 global brands that saw its share price fall last year. Yet many market pros still seem reluctant to acknowledge the fall of the king.

Idei's decision to depart a year ahead of schedule is a sign that the company may be even worse off than previously thought, that his goal of restoring profit margins to 10 percent by 2007 is now beyond reach. In an interview with NEWSWEEK (following story), Stringer says Sony has become too bureaucratic, and that the key to regaining its place as the premier manufacturer of consumer electronics is to once again "make the engineers the stars." But he also concedes that he is no engineer himself, and is noncommittal about whether he will reappoint Kutaragi, the star engineer behind one of Sony's most profitable division, games, to the board.

It is said that for all Sony's troubles, it still has huge strengths, including a golden brand name. But the power of the Sony name is slipping too. According to Interbrand, a market-research firm, the value of the Sony brand slipped from $16.4 billion in 2000 to $12.8 billion in 2004, stagnating in the rankings at 20th place, while rivals like Panasonic and especially Samsung of South Korea were gaining fast. In Shanghai, a bellwether city for the booming new consumer market in China, youths "find themselves drawn to Samsung," says Christopher Torrens, cofounder of Access Asia consulting in Shanghai. "Sony has definitely been left behind."

The word now widely used to describe Sony is "complacent." A company that financed its own birth back in the 1940s, Sony was long seen as an entrepreneurial maverick in Japan, where the state nurtured many of the nation's most famous companies. From early on cofounder Akio Morita saw Sony as a global company, to the point that he chose a name that would evoke the idea of "sound" to English ears, yet still feel Japanese, says Richard Doherty, research director of the Envisioneering Group, a market-research firm in Seaford, New York. "In Japan, Sony is not regarded as a Japanese company," says Doherty. "And that is how Mr. Morita wanted it."

Yet by leading Japan Inc.'s expansion as an export power through the '60s, '70s and '80s, Sony also became its icon. Over time, growth bred slow-footed gigantism, and Sony became a case study of the lingering stagnation in corporate Japan. "When circumstances change, Sony has problems reacting," notes Koya Tabata of Credit Suisse First Boston in Tokyo. While companies like Canon and Matsushita focused on making a limited array of consumer electronics well, Sony tried to do everything, and failed. Managers triumphed over innovative engineers and expanded beyond consumer electronics into everything from banking to insurance and movies. In an earlier era, says Doherty, "Panasonic, Toshiba and its competitors would always say, 'We can't beat Sony, they keep introducing smaller and smaller camcorders and everything else'."

Not anymore. The comparison with Matsushita, which makes products for the Panasonic brand, is particularly striking. Sony is now famous for its battling divisional fiefdoms, while Matsushita has a strict regime of top-down management rules. Four years ago Matsushita started a brutal round of cost-cutting that eliminated some 26,000 jobs in Japan alone and shuttered 30 factories. Sony, by contrast, got its restructuring underway in earnest only last spring. One result is that Sony has the lowest profit in the Japanese consumer-electronics sector, at 1.5 percent.

Sony's Japanese market share is also falling to its home rivals. As recently as 2001, according to a survey in Weekly Diamond magazine, Sony was still beating out Matsushita for market share in seven out of 10 consumer electronics categories. These days Sony is losing out to Matsushita in six of the 10 categories, including DVD recorders and plasma TVs. The fading glory of Sony's brand name has become a Catch-22, analysts say: if Sony doesn't compete on price, it will lose market share even faster, and if it does, it undermines the 50 percent price premium that it can still attach to many of its products.

The same slippage is happening worldwide; in the most famous cases, Sony failed to spot the potential of flat-panel TVs, ceding leadership to Samsung and Sharp, and fumbled the lead in digital music players to Apple. "I can't afford to be beaten this way again," concedes Stringer, if only because the iPod defeat has become a symbol of "Sony's stodginess."

Idei had hoped to find the answer to Sony's ills in the holy grail of "convergence"--the idea that linking digital devices together over the Internet would create myriad powerful and new ways to deliver music, movies and other "content." That's why Sony bought into American movie and music companies, which was an early disaster until Stringer came in, slashed 9,000 jobs and turned things around with megahits like "Spider-Man." His record as a reformer at Sony USA is one big reason investors hope that he can do the same in Tokyo. Yet he still talks like a true believer in Idei's vision, which was to deliver Sony content through exclusive Sony gizmos and services. "A hardware device is not worth anything without content," says Stringer. Yet most observers believe open systems like the iPod that accept content from all sources are the future. "The one convergence success story in this industry was the iPod," says Masahiro Ono of Morgan Stanley. "And it wasn't Sony."

Still, Stringer shouldn't be underestimated. Idei has suggested he passed over Kutaragi for a "good listener," so perhaps Stringer will listen to his investors. True to its global roots, Sony has more foreigners on the board and among shareholders (about 40 percent of the stock is held abroad) than most Japanese companies. Until a few years ago, a takeover or breakup of Japan Inc.'s iconic company would have been unimaginable, but now it is an open topic of discussion. Many foreign investors hope Stringer will spin off Sony's entertainment division, thereby freeing the company to return to its original focus on consumer electronics.

Stringer doesn't scoff at the worst-case scenario: a hostile takeover. He notes in the interview how alien such aggressive business tactics still are in Japan, citing the recent case in which a TV commentator described a surprise takeover attempt involving two Japanese companies as an unwelcome intrusion of "Anglo" and "Jewish" tactics. However, Stringer adds, pending changes in the law will make it easier to launch hostile takeovers, and his response is, in essence, Bring it on. Sony is no longer "complacent," it's ready to fight. "If the thought of a hostile takeover a year or two from now is a goad, so much the better," he says. "Everybody has to understand that we have a shared responsibility to make sure none of these things happen and that Sony is once again a cool company and innovative." If he can do that, he might just be able to restore Sony to its accustomed place at the peak of Japan's corporate Olympus.