TOKYO -- Revelations of Toshiba's questionable bookkeeping show it inflated profits largely for its infrastructure-related projects.
A fall in nuclear-related business meant the Japanese electronics and industrial conglomerate had to find other infrastructure opportunities, often regardless of profitability.
The company says the reduced profits from its electricity meter project accounted for about half its 55 billion yen ($441 million) profit revision. Toshiba won the contract to provide communication systems for smart meters from Tokyo Electric Power in September 2013.
An industry source recalls Toshiba's cost projections for the deal did not look feasible from the beginning. "Toshiba's technical evaluation was lower than its competitors, but it won the bid by asking a lower price," said the source. Toshiba initially planned to introduce technology from Swiss electric meter maker Landis+Gyr which it bought in 2011, but later discovered that the standards did not match. As the systems development stalled, the costs piled up.
Systems are the core part of smart meter technology, however, Toshiba's have in general lagged behind its competitors. Prior to the smart-meter deal, Toshiba failed to complete a contract to refine Japan's Patent Office's main system, cancelling it in 2012.
On June 12, Toshiba admitted to its insufficient business projections, saying, it was "aware at the time of receiving the order of the possible losses." It failed to book provisions for possible losses and provide reasons for the proposed cost reduction to cover the loss. In the end, the company revised its previous operating profits for the project down by 25.5 billion yen.
The change in the nuclear business after the Fukushima disaster was one factor that drove Toshiba to take orders regardless of profitability. In 2006, the company bought U.S.-based nuclear-related business Westinghouse Electric, aiming to join global competitors in the industry. However, following the March 2011 earthquake and tsunami, the company's ambition was hampered due to suspended developments in nuclear power plants around the world. The business suffered and Toshiba effectively withdrew its target of 1 trillion yen in sales for it. The plunge in the nuclear power business also prompted Toshiba to take on an electronic toll collection system project, which it also had to write down by 14.4 billion yen.
Another factor behind the company's shift in focus to infrastructure to build up a more stable profit structure was its heavy reliance on its single earnings source -- semiconductors. Toshiba's semiconductor business has made its performance vulnerable to the volatile market of NAND flash memories.
Attempts to manage new businesses are said to have caused inappropriate cost controls, triggering accounting irregularities.
The company, which has its annual shareholders meeting on June 25, is proposing to temporarily maintain current management, including President Hisao Tanaka. Tanaka has postponed making any decisions as to the liability of the management, including former executives, until the extraordinary general meeting in September.