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Opinion

Can a new Toshiba rise from the ruins?

A revitalised group would show Japan Inc can do radical change - and boost the economy

The soon-to-disappear Toshiba sign towered over New York's Times Square for the past decade.   © Reuters

As the Times Square ball dropped on New Year's Eve, few revelers noticed what else is coming down: the giant Toshiba sign that towered over New York's most fabled intersection for the past decade.

The symbolism was not missed in Tokyo, as the once-mighty icon dusts itself off from quite a comedown -- two-plus years of bad press for accounting scandals, poor investments and weak governance. Nor is it confined to one company. Emblazoned below "Toshiba" on that soon-to-disappear 55-by-55-foot billboard is the slogan "Leading Innovation," something Japan has not done in ages. All Japan Inc. is leading these days is a collective case study in how complacency and insular thinking get in the way of competing in an increasingly dynamic global economy.

Toshiba is often cast as Exhibit A. The once-proud conglomerate with roots dating back 142 years is a microcosm of how complacency, bureaucratic meddling and nostalgia for the glory days impede future growth. Famed for revolutionizing the telegraph, Toshiba is now telegraphing a new beginning with an $18 billion sale of its prized memory-chip business -- either to a Bain Capital-led consortium or via initial public offering.

This crossroads moment, though, is an opportunity to restore some of Toshiba's past greatness. Earlier this month, it exorcised a ghost that haunted management in recent years by offloading U.S. nuclear unit Westinghouse Electric to Brookfield Business Partners. That initial $5.4 billion purchase in 2006, aimed at diversifying Toshiba away from consumer electronics, went famously awry. Along with the struggles of building new reactors, the rise of cheap natural gas in the U.S. and the 2011 Fukushima meltdown turned the gamble into a cautionary tale.

Gaining closure on Westinghouse is a plus image-wise, a sign Toshiba is moving on. Questions about underlying fundamentals remain, though. Thanks largely to fallout from Westinghouse, Toshiba reported a net loss of $8.6 billion last fiscal year. But the challenge now is avoiding an own-goal with chip unit plans.

Talk about a Catch 22. Without a sale, Toshiba may lack the cash to invest in future growth. The funds are earmarked to help plug an estimated gap of nearly $7 billion in shareholder equity. Going ahead, though, may leave Toshiba without a coherent business focus, and a mere shadow of its former greatness.

The Westinghouse adventure was costly. But Toshiba survived its near-death experience, including a bankruptcy filing in the U.S. It also avoided a dreaded delisting from the Tokyo Stock Exchange. While plugging holes in the balance sheet is plenty important, Toshiba might be better off keeping part of its crown jewel as an engine for investment and growth.

Granted, the clock is ticking. Under TSE rules, two consecutive years of negative equity could lead to delisting. At a minimum, Toshiba should consider going the IPO route rather than sell off its fabled memory chip business to Bain at a fire-sale price. Then, Toshiba could retain some control even as it raises fresh capital. Toshiba also could reclaim the "Leading Innovation" mantle by boldly reinventing itself. Why not, for example, put more emphasis on the social infrastructure division in the short run to boost operating profit margins? Next, Toshiba must focus less on today's crises and brainstorm where to take the company -- and how to finance it.

Other Japan Inc. icons are recalibrating to good effect. Sony, for example, is regaining its footing. The Renault-Nissan-Mitsubishi alliance drove past Toyota in vehicle sales. Olympus is reinventing itself after a 2011 accounting debacle and Hitachi is going global anew. Sharp's resurrection was dramatized earlier this month when it returned to the first section of TSE shares.

With some fresh thinking and bold restructuring, Toshiba can join the list of old companies overcoming disaster. If it succeeds, the benefit would go far beyond shareholders and employees. It would also help Prime Minister Shinzo Abe revive his flagging efforts to revive breathe new life into corporate Japan.

Since December 2012, Abe's administration has prodded corporate Japan to boost returns on investment, add more outside directors and encourage shareholders to speak up. That, along with the Bank of Japan's historic easing and a weaker yen, has filled corporate coffers and driven the Nikkei Stock Average to near-30-year highs. What these moves have not done, though, is trickle down to Japanese not directly invested in the equity market. A majority, in other words.

Dragging company chieftains into the 21st century, Abe believed, would increase wealth and wages, kicking off a virtuous cycle of increased consumption and return Japan to its 1980s greatness. Data released Tuesday adds to already ample evidence that the strategy is flawed. Despite the lowest unemployment in decades -- 2.8% -- household spending sank 0.1% in December amid tepid income gains. Hopes that this year's spring wage negotiations will turn things around are running up against a now surging yen and U.S. President Donald Trump's trade-war threats.

The real problem is that Abe is trying to revive today's Japan with a 30-year-old strategy, employing old-fashioned corporate giants as policy levers. In the 1980s, before China's economy mattered, monetary blasts by the BOJ enlivened Japan's industrial system. Walls erected around the economy via trade tariffs and government support, meanwhile, protected national industrial champions.

More competitive companies would create greater wealth and have the confidence to boost wages, giving Abenomics a second wind. With majorities in both houses of parliament and stable public support rates, Abe should give reforms real teeth. That means increasing transparency, curbing cross-shareholdings between friendly companies, ending poison-pill provisions to thwart foreign acquisitions and getting bureaucrats who at times injected themselves into Toshiba's decision-making out of the private sector.

The old Toshiba towered over Times Square. But with some heavy lifting and bold strategizing, a new Toshiba may become a posterchild of Japan Inc.'s renewal.

William Pesek is a Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He has written for Bloomberg and Barron's.

 

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