August 25, 2017 6:58 am JST

Samsung threat pushes Toshiba, Western Digital to make up

Partners look to put flash memory dispute behind them, catch up to leader

The partnership between Toshiba and Western Digital at chip fabrication facilities in Yokkaichi, Japan, has benefited both sides.

TOKYO -- Fear of losing more ground to the already dominant Samsung Electronics has driven chipmaking partners Toshiba and Western Digital to resolve their conflict over the planned sale of Toshiba's flash memory operations.

The relationship between the U.S. and Japanese manufacturers began last year with Western Digital's acquisition of SanDisk, Toshiba's original partner. Their operations are now deeply intertwined, sharing information and patents, and investing together in one of the world's largest memory chip fabrication facilities in Yokkaichi, Japan.

Western Digital bought SanDisk in an effort to adapt to a structural shift in the storage media market from hard drives -- where the American manufacturer is No. 1 worldwide -- to memory chips. The hard-drive market is shrinking by the year even as memory chip sales rise by double digits. IHS Markit sees the global NAND flash memory market growing 40% through 2021 from last year's $36.7 billion.

Toshiba and Western Digital hoped for marketing synergy as well, looking to tap the customer base that the U.S. company built with its hard-drive business.

But the relationship soured over the Toshiba Memory sale. Western Digital has taken legal action to try to block it, arguing that any transfer without its consent would violate joint venture agreements.

A counterproductive fight

The spat has given Samsung an opportunity to solidify its lead. The South Korean giant's NAND memory chip market share grew 2.9 percentage points on the year to 36.7% in the January-March quarter. Toshiba's slumped 4.5 points to 17.2%, while Western Digital's slid 0.5 point to 15.5%.

As the battle escalated, Toshiba announced early this month that it would invest alone in production equipment at Yokkaichi. Since this is Western Digital's only memory production facility, being shut out of participating in the new investment would leave the company unable to procure cutting-edge memory chips.

As for Toshiba, further prolonging the dispute risked eroding its competitiveness. Toshiba has blocked Western Digital engineers' access to shared data, a move that has held up joint memory development. The friction delayed decisions on new plant investment as well.

Adding to Toshiba's conundrum is the possibility that an acquisition by a third-party other than Western Digital would complicate the the ownership structure of the Yokkaichi site to the detriment of smooth facility operation.

Helping the rapprochement along is a softer stance by Japan's Ministry of Economy, Trade and Industry, which is now willing to accept any deal that preserves investment and jobs at Yokkaichi and presents no security risks. It had previously preferred that Toshiba deal with a rival American-Japanese-South Korean consortium.

At this critical time, with an unprecedented boom in the chip market and a transition to 3-D NAND technology underway, Toshiba and Western Digital understand that they cannot afford to break up, sources at both companies say.

Just the first step

Yet actually reaching an agreement with terms acceptable to all parties before the month is out will be easier said than done.

Voting rights are one point of contention. Though Western Digital contends that it must have a certain amount of voting rights in order to fulfill management responsibilities, some at Toshiba worry that this would risk prolonging antitrust reviews. The Japanese company must complete the deal and fix the enormous hole in its finances within the fiscal year ending next March in order to stay on the Tokyo Stock Exchange.

Many other details must be agreed on, such as how to divide ownership, what the final price will be and when it will be paid, and whether Western Digital's stake might change later on. Multiple proposals have been floated, including Toshiba itself retaining an interest. Whether the competing interests and demands of the many parties involved can be sorted out in just a week remains to be seen.

Complicating matters is a deep-seated distrust of Western Digital among some at Toshiba Memory, who accuse the U.S. company of looking after only its own interests. If a deal is reached, an effort must be made to get these employees on board.

(Nikkei)

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 11,434.04M
Shares: 4,237.60M
Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 336,811.74M
Shares: 148.18M

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