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Toshiba turnaround hopes, planned sale of Westinghouse find skeptics

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Staff Writer

Toshiba Corp. has been forced to sell off a number of its businesses as it continues to lose money since its accounting scandal broke in 2015, and is now burdened with its troubled U.S. nuclear unit Westinghouse Electric Co.

Last year, the 142-year-old conglomerate sold its white goods and medical units. It is now looking to let go of its flash memory business and Westinghouse. Those businesses were its main profit drivers and helped establish Toshiba’s corporate identity.

Now that those businesses have been deprived from Toshiba, it has left many with a big question: Can Toshiba really get out of its nuclear debacle and rebuild with its remaining businesses?

The overseas nuclear business is likely to probably continue to pose major risks, so shedding Westinghouse is probably an obvious step to take, though it might be easier said than done due to the political and security hurdles, experts say.

Toshiba has said it can bounce back with its remaining businesses by focusing on social infrastructure and electronics devices, but experts say restructuring will be critical if it really wants to achieve its goal of a 5 percent operating profit margin in three years.

“Westinghouse has become such a burden . . . I think Toshiba is desperate” to eliminate the risks of the overseas nuclear business, said Tomoko Murakami, manager of the nuclear energy group at the Institute of Energy Economics, Japan, a Tokyo-based think tank.

Indeed, Toshiba President Satoshi Tsunakawa said in a news conference last week that the sale of the majority stake in Westinghouse is the key to turning the firm around.

That remark is a major shift for Toshiba, which has repeatedly plugged nuclear power since its ¥600 billion acquisition of Westinghouse in 2006 ahead of what was expected to be a nuclear renaissance at the time.

But Toshiba announced last month that it would post a ¥700 billion impairment loss tied to Westinghouse due to cost overruns derived from construction delays for AP1000 reactors in Georgia and South Carolina.

In a stroke of bad luck, the landscape for the nuclear power industry changed drastically after the nuclear crisis erupted at the Fukushima No. 1 power plant in 2011. This damaged the domestic market and resulted in the nationalization of Tokyo Electric Power Co.

Yet Murakami said the nuclear power industry still has growth potential. Westinghouse provides, for instance, plant maintenance as well as fuel-related and consulting services used by existing plants around the world. Also, more reactors are expected to be built in China and other emerging economies, including India.

But it is doubtful whether Westinghouse can really compete in that business while managing its risks properly, Murakami said.

Because it failed to handle the cost overruns from the AP1000 reactors under construction in the U.S., “Westinghouse’s other businesses, such as maintenance, fuel and other solution services, might have problems” in the future due to management problems, Murakami said.

In that case, Toshiba may be on the right track with its plan to sell Westinghouse. But whether Toshiba can really sell the troubled unit is a different matter.

“Buyers won’t purchase Westinghouse at the same price (¥600 billion) that Toshiba paid. That would be the biggest issue for Toshiba,” Murakami said.

She said there are companies, especially in China, looking to acquire Westinghouse’s nuclear know-how. China is developing its own reactors, but “it knows that the technologies have not been as high compared with the makers in the U.S. and Europe,” so it might want to turn to Westinghouse.

However, it won’t be easy to sell Westinghouse to the Chinese because the U.S. government is likely to be reluctant to let its nuclear technology drop into China’s hands, experts said.

Shedding the risk presented by Westinghouse is the top issue for Toshiba, but another matter is how to revive itself after selling off its flash memory business.

Last week, Toshiba unveiled a three-year business plan aiming for sales of ¥4.2 trillion and an operating profit of ¥210 billion in fiscal 2019. The sales figure is down from the estimated ¥5.5 trillion logged in fiscal 2016 to account for the presumed shedding of Westinghouse and the flash memory unit, but the margin for operating profit was hiked to 5 percent from about 3 percent.

Toshiba’s new core area will be the social infrastructure business, including elevators, air conditioners and train systems. It will also continue to focus on electronics devices including semiconductors and hard-disk drives.

But experts said things won’t go that smoothly.

“It almost seems like a pie in the sky now,” said Toshiro Sato, director at Kyokuto Securities Research Institute, adding that Toshiba has not provided details of how it will meet its goals.

The 5 percent operating profit margin is a tough goal because it’s not an easy figure for other Japanese electronics makers to attain either, he said.

Other than the flash memory unit, Toshiba’s businesses aren’t that profitable, which means restructuring steps including job cuts will likely be needed, Sato said.

Atsushi Osanai, a professor at Waseda Business School, also questioned Toshiba’s strategy.

“Toshiba has lost two core businesses (flash memory and nuclear power). It is saying that it will focus on social infrastructure, but that’s just what’s left in the company. Toshiba may have top-notch technologies in social infrastructure businesses,” but its sales and profit levels are not at the top in those industries, he said in an email interview.

Excluding flash memory, Toshiba said it still sees its digital storage business as a growth area, but Osanai pointed out that HDDs will soon be replaced by solid state drives based on flash memory, so the firm can’t expect much growth.

Meanwhile, “in the past, Toshiba depended too much on its flash memory unit,” so if it really gets serious about improving the profitability of other businesses, there is a chance, Sato said.

While social infrastructure businesses may not have huge growth potential, their sales are quite stable, so by restructuring costs, Toshiba can probably increase their profitability, he said.

In addition, Osanai emphasized that Toshiba needs to strengthen its management team.

“I think it’s critical for Toshiba to bring a leader who can set a long-term strategy and firmly implement it,” he said.