February 7, 2017 7:00 pm JST

Toshiba's temporary fixes could spell permanent trouble

Selling profitable units is no way to nurse a business back to health

KUNIO SAIJO, Nikkei senior staff writer

Toshiba's semiconductor plant in Mie Prefecture, central Japan.

TOKYO -- Battered by a huge loss in its nuclear business, Toshiba is once again letting go of one of its few remaining strengths. Last year, the struggling Japanese electronics giant sold its profitable medical systems unit to Canon. Now, it has decided to spin off its semiconductor unit and sell a minority stake in the new company.

This is significant given that Toshiba and Samsung Electronics of South Korea have been the dominant players in the global memory chip market.

The moves may bring temporary relief, but they could also have lasting negative consequences for the high-profile brand. 

The news triggers a strong sense of deja vu: When a slumping conglomerate like Toshiba is under pressure to drum up cash quickly, or boost its equity capital by posting an extraordinary profit, its management -- or the banks that have increasing control of the struggling business -- tend to take one of two actions.

Sell off your strengths

The first is to sell profitable units, because finding a buyer is easy. This is exactly what Toshiba is doing, and I have seen this happen a number of times.

Sanyo Electric, now a wholly owned subsidiary of Panasonic, began selling its healthy units in 2006. At the time, control of the business was effectively shifting to its lenders. In 2008, Sanyo sold its cellular business to Kyocera, despite the unit's high market profile in the U.S. In 2007, the company sold its entire stake in Sanyo Electric Credit to General Electric of the U.S., even though the financial unit was performing solidly.

In 2001, trading house Nissho Iwai, now known as Sojitz, turned its robust liquefied natural gas business to a joint partnership with rival trading house Sumitomo Corp. Before that, Nissho Iwai dissolved an equal partnership with Fujitsu that ran Nifty, Japan's leading internet business at the time, and sold its entire stake to the partner.

Sell younger units

The second option is to sell off newer businesses that have yet to find their feet. When a Japanese company is looking for businesses to unload, management often lets newer units go. Japanese executives tend to remain with one company throughout their entire careers, making them especially attached to units that have been around a long time. That means younger businesses generally have a weaker voice within a company and are often the first victims of business consolidations.

The fact is, however, that these emerging businesses often have higher growth potential than the older, more established units that get to stay.

Supermarket chain Daiei, for example, in 2001 handed over control of its Lawson convenience store chain to trading house Mitsubishi Corp. Daiei would be better off today if it had instead sold its supermarket business -- a core operation but one with a questionable future -- and kept the convenience store unit.

In the early 2000s, when the information technology bubble was in the process of collapsing, a number of established Japanese electronics makers, including Hitachi and NEC, let their chip business go. Unsurprisingly, the semiconductor operations did not have the same level of support within the groups as units with longer histories, such as heavy electrical machinery and telecommunications equipment.

So what happens when companies take these different, yet common, actions?

Let's use a professional baseball team as an example. Strapped for money, it is looking for an immediate cash boost by selling off either a key player or a rookie. Such a transaction could provide a short-term lift, but the following season, the team would lack the talent needed to bring the wins.

From a long-term perspective, stacking a team with less-competitive players will not result in a better record. That theory applies to the corporate world. Few of them cited here have really regained their momentum since shedding their strong performers. 

What, then, should Toshiba do? Although it might be too late at this point, I would urge its management to make bold decisions that are not guided by taboos or bound by tradition. They should focus on strengthening each business unit, and not just keeping them afloat or avoiding crises.

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 11,956.15M
Shares: 4,237.60M

Panasonic Corp.

Japan

Market(Ticker): TKS(6752)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 36,286.60M
Shares: 2,453.05M

Kyocera Corp.

Japan

Market(Ticker): TKS(6971)
Sector:
Industry:
Electronic Technology
Electronic Equipment/Instruments
Market cap(USD): 23,618.70M
Shares: 377.61M

Sumitomo Corp.

Japan

Market(Ticker): TKS(8053)
Sector:
Industry:
Distribution Services
Wholesale Distributors
Market cap(USD): 18,017.77M
Shares: 1,250.60M

Mitsubishi Corp.

Japan

Market(Ticker): TKS(8058)
Sector:
Industry:
Distribution Services
Wholesale Distributors
Market cap(USD): 37,321.83M
Shares: 1,590.07M

Sojitz Corp.

Japan

Market(Ticker): TKS(2768)
Sector:
Industry:
Distribution Services
Wholesale Distributors
Market cap(USD): 3,441.35M
Shares: 1,251.49M

Fujitsu Ltd.

Japan

Market(Ticker): TKS(6702)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 15,687.60M
Shares: 2,070.01M

Hitachi Ltd.

Japan

Market(Ticker): TKS(6501)
Sector:
Industry:
Producer Manufacturing
Industrial Conglomerates
Market cap(USD): 34,335.79M
Shares: 4,833.46M

NEC Corp.

Japan

Market(Ticker): TKS(6701)
Sector:
Industry:
Electronic Technology
Electronic Equipment/Instruments
Market cap(USD): 6,975.81M
Shares: 2,604.73M
Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 333,376.30M
Shares: 148.18M

Canon, Inc.

Japan

Market(Ticker): TKS(7751)
Sector:
Industry:
Electronic Technology
Electronic Equipment/Instruments
Market cap(USD): 45,838.60M
Shares: 1,333.76M

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