Chip unit sale an omen of Toshiba’s failing fortunes

Will Westinghouse prove to be the straw that broke Japanese pioneer's back?


At a train station used by hundreds of workers at struggling electronics giant Toshiba, an ad tempts staff worried by their employer’s precarious financial position.

“Do you work for ‘that’ electronics company? If so, come and work for us!” screams the ad for Toyota.

The mere fact Toshiba staff are apparently being urged to jump ship by rivals underscores the difficulties faced by the former industrial titan.

Strapped for cash, it is expected the firm will soon be forced to sell off part of the family silver — its key memory chip business, which accounts for around a quarter of its total annual revenue.

Toshiba has been stuck in tortuous negotiations over the sale of the unit, which could raise as much as $20 billion.

Three parties have been vying for the prize: a U.S.-South Korean consortium led by investment fund Bain Capital, Toshiba’s chip factory partner Western Digital of the U.S., and Taiwan’s Hon Hai Precision, better known as Foxconn.

On Wednesday, Toshiba said it had signed a memorandum of understanding with the Bain consortium but that this did not prevent them from talking to others.

Selling the profitable chip division is seen as key to Toshiba’s survival, as one of Japan’s best-known firms battles to recover from multibillion-dollar losses at its U.S. nuclear operations.

It could also face the humiliating prospect of being delisted from the Tokyo Stock Exchange if the sale does not raise enough funds to erase its negative net worth.

The move to sell represents something of a fall from grace for Toshiba, which can trace its history back as far as 1875, when it set up a telegraph factory in the now fashionable area of Ginza in Tokyo.

In the 1930s, the firm manufactured the first Japanese vacuum cleaner, the first fridge and the first washing machine. The washing machine still works today — albeit with an almighty racket.

Toshiba has been involved in the manufacture of an astonishing array of items, from tiny electronic chips to nuclear reactors, with everything from TVs, computers and highway toll gates in between.

But Toshiba is not the only once-mighty Japanese conglomerate to feel the pain of ferocious foreign competition. Household names Panasonic and NEC have been forced into major restructuring, and Sharp was acquired by Foxconn.

Toshiba’s problems stem in large part from what Yasuyuki Onishi, a specialist in the sector, described as its “reckless” purchase of U.S. nuclear unit Westinghouse, which racked up billions of dollars in losses before being placed in bankruptcy protection.

This is the “main cause of the crisis that the group is suffering,” Onishi said.

Those huge losses came to light as the Toshiba group was still recovering from revelations that top executives had pressured underlings to cover up weak results for years after the 2008 global financial meltdown.

Its most recent results, published in August, revealed a loss of $8.8 billion in the last fiscal year, even though it had predicted it would be back in the black this year. But most analysts believe Toshiba is too important to fail.

Tokyo is believed to be unwilling to lose sensitive technology, with security questions swirling over systems already using Toshiba’s memory chips, which are widely used in data centers.

The government also needs the company to take care of the painstaking task of decommissioning reactors at the meltdown-hit Fukushima plant.

Toshiba could end up becoming “just a company that dismantles Japanese nuclear plants,” mused Onishi.

“Toshiba will avoid bankruptcy for now, but it will shrink and end up disappearing,” said the expert.

Masahiko Ishino, an analyst at Tokai Tokyo Research Center, said the sale was designed to help Toshiba meet temporary funding difficulties.

It will “fill in a pothole in the road,” he said, arguing also that the speculated price tag is too cheap.

“The business is a magic hat out of which comes ¥500 billion (of operating profit) every year,” he said.

“It’s like a huge property is being bequeathed. Everyone is trying to get a bigger share.”