October 5, 2017 10:50 am JST

Toshiba crushed by hubris and hesitation

Investment missteps humble a once-proud Japanese industrial leader

TETSUYA ABE, Nikkei staff writer

Toshiba unit Westinghouse spent billions of dollars constructing new nuclear reactors at a power plant in the U.S. state of Georgia, but the company declared bankruptcy before they could be completed. © AP

TOKYO -- Toshiba's travails started 11 years ago at a closed-door meeting between then-President and CEO Atsutoshi Nishida and corporate vice president Norio Sasaki.

"Spend more," Nishida told his subordinate in January 2006, after receiving a report from Sasaki on the bidding for Westinghouse Electric. Toshiba wanted to lay its hands on the U.S. nuclear power plant builder, and money was no object. The Japanese industrial conglomerate soon found itself in a bidding war with another Japanese company, Mitsubishi Heavy industries. The final price tag ballooned to $5.4 billion.

Many board members questioned the proposal to buy Westinghouse. But Nishida decided to go ahead, arguing Toshiba would have to scale back its nuclear business, or sell it entirely, within 20 years if it limited its ambitions to the Japanese market.

Bigness complex

The Westinghouse acquisition was the linchpin of Toshiba's effort to expand overseas in heavy electrical equipment. It was eager to catch up with bigger foreign rivals, including General Electric of the U.S.

In 2008, Westinghouse signed a deal to build two nuclear reactors for Southern Co., a big U.S. utility. At the time, there was talk of a nuclear renaissance in the U.S., but there were delays in construction and cost overruns. Then, in March 2011, a massive earthquake and tsunami struck northeastern Japan, triggering a meltdown at a nuclear power plant. The nuclear rebirth was a dud and Toshiba was left with a dead asset.

Westinghouse filed for bankruptcy in March this year in the wake of that misstep and others.

Nishida and other senior executives resigned over a massive accounting scandal at Toshiba. The ill-conceived Westinghouse purchase cost Toshiba 1 trillion yen ($8.86 billion) in losses, the largest ever by a Japanese manufacturer.

Toshiba is still trying to dig itself out of a hole. It has a negative net worth of more than 500 billion yen and must erase it by the end of March 2018 if it is to stay listed on the Tokyo Stock Exchange. To do that, it was left with no choice but to sell off its crown jewel, the company's memory chip unit that makes around 90% of the group's operating profit.

Toshiba's chip plant in Yokkaichi, southwest of Nagoya, is one of the world's largest. Many of its 9,000 employees are angry with the parent company's decision to sell Toshiba Memory to a consortium of Japanese, American and South Korean buyers.

During the golden age of dynamic random access memory chips, Japan's semiconductor industry looked like a world-beater, with a global market share of more than 50% in 1990. But with U.S. companies holding most of the basic patents for chips, Japanese manufacturers could not keep pace with low-cost South Korean and Taiwanese producers. One by one they threw in the towel.

He who hesitates

Toshiba's NAND flash memory technology offered a new ray of hope. The company held the basic patents, and demand for flash memory products increased sharply as the chips were used widely in smartphones and other devices.

Despite this, the semiconductor division was treated as a nuisance at the sprawling company, whose businesses ranged from heavy machinery to home appliances. The chip business required continual large investments, which the head office was reluctant to provide. While Toshiba dithered, Samsung Electronics of South Korea pumped in money, taking advantage of patents provided by Toshiba to expand its market.

Now Toshiba finds itself in second place behind Samsung. During the next downturn in demand, that business, too, could find itself deep in the red.

While the decision to sell off its cash-cow memory unit has raised questions, an official at one of Toshiba's main creditor banks offered this harsh assessment: "No one can tell what will happen to [the business] a year later, though it is performing well now."

Japan's Ministry of Economy, Trade and Industry wants to protect proprietary Japanese technology, so Toshiba and another Japanese company, Hoya, will together hold the majority of voting rights in Toshiba Memory under a plan drawn up for the sale of the chip unit. While companies such as Apple of the U.S. and South Korean chipmaker SK Hynix will provide capital, it is uncertain whether Toshiba Memory under new ownership can compete strongly with Samsung.

In recent years, Japanese companies have tried to come up with new technologies in the face of challenges from lower-cost competitors elsewhere in Asia. Although the strategy has borne fruit in the form NAND flash memory, lithium-ion batteries and blue light-emitting diodes, to name a few, manufacturers from South Korea and elsewhere have overtaken Japanese companies in many markets.

High-tech industry is an increasingly winner-takes-all affair, where companies that can see off rivals gain virtual monopoly power. Toshiba and other Japanese companies will have a fight on their hands in such an environment.

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 17,894.01M
Shares: 6,520.70M

Mitsubishi Heavy Industries, Ltd.

Japan

Market(Ticker): TKS(7011)
Sector:
Industry:
Producer Manufacturing
Industrial Machinery
Market cap(USD): 12,711.82M
Shares: 337.36M
Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 342,720.87M
Shares: 147.34M

HOYA Corp.

Japan

Market(Ticker): TKS(7741)
Sector:
Industry:
Health Technology
Medical Specialties
Market cap(USD): 18,883.93M
Shares: 385.73M
Asia300

SK hynix, Inc.

South Korea

Market(Ticker): KRX(000660)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 51,852.58M
Shares: 728.00M

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