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Toshiba's memory chips yield surprise gold mine

Toshiba's semiconductor fabrication facility in Yokkaichi, Japan.

TOKYO -- Toshiba's earnings report Friday far exceeded expectations thanks to the soaring prices of smartphone memory chips. But the company's lack of diversification threatens to stymie a full recovery from last year's accounting scandal.

A pleasant surprise

"We never thought Chinese smartphones would increase memory capacities this much," said Masayoshi Hirata, Toshiba's chief financial officer. But the demand for NAND flash memory grew beyond any expectations. Standard-issue chips now sell for over $3 apiece, highs not seen in two years.

Toshiba earned 96.7 billion yen ($905 million) in group operating profit for the April-September half, a turnaround from the operating loss of 89.1 billion yen suffered a year earlier. During the previous fiscal year ended in March, the Japanese company carried out job cuts and reorganized loss-leading operations such as the personal computer business.

Toshiba initially had expected to slow the bleeding to 20 billion yen for the first half of fiscal 2016. But after three upward revisions, the company managed to rise into the black.

That reversal was due mainly to memory chips, which accounted for half of the operating profit. Toshiba also upgraded its full-year operating profit outlook by 60 billion yen to 180 billion yen. The company recorded a 708.7 billion yen operating loss for fiscal 2015.

China's surge and Samsung's fall

In China's smartphone industry, handsets containing 64 or 128 gigabytes of memory have become the best-selling models faster than anticipated.

"Opportunities are spreading in the high-end device market, and Chinese smartphone makers are scrambling to secure memory, which spurred the rise of prices" in memory products, said Ichiro Tsumaki, president of Japanese semiconductor trader Tomen Devices.

Toshiba also benefited from the troubles at Samsung Electronics. Reports emerged in August that the South Korean giant's newest smartphone was a fire risk, and Chinese competitors jumped on that opportunity to boost production. Orders for Toshiba's memory chips rose as a result.

A fire earlier in the summer at a nearby power station resulted in an outage at Samsung's Chinese memory chip plant, temporarily disrupting production. That tightened supplies for memory, aiding Toshiba. Growing demand for solid-state drives also trickled down to the memory chips installed in the devices.

A fickle market

However, the memory market remains prone to sharp swings.

"This year is strong, but the first three months of next year may see smartphone output receding from the peak, and prices could drop," said Akira Minamikawa, lead analyst at market research firm IHS Technology.

If the market does hit the skids, Toshiba will need to mass-produce next-generation 3-D memory chips quickly to weather the storm. Toshiba says mass production will begin during the first half of 2017, but Samsung is seen beating the company to the punch.

Toshiba will need to hone its overall earnings structure to withstand slumps in memory chip prices. The nuclear power business is expected to produce steady profit. But equipment used to generate thermal and hydroelectric power still has weak margins, and the television operation continues to struggle.

Toshiba dedicated 60 billion yen in new funds toward restructuring, and has named TVs, power distribution equipment and vehicle motors as problem areas. With Toshiba focusing on profit over scale, those operations likely will fall under the knife.

The memory business requires investments in the hundreds of billions of yen. But Toshiba's shareholder equity ratio wallowed at 7.5% at the end of September, leaving the company in poor position to raise those funds when needed. Toshiba also is awaiting removal of its status as a "security on alert" on the Tokyo Stock Exchange.

Nikkei staff writers Kotaro Hosokawa, Hiroto Tanaka and Soichi Takano in Tokyo contributed to this report.

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