What went wrong with Toshiba?
A handful of companies has given Japan a reputation for developing cutting edge technologies and introducing products that are popular around the world. This list includes Sony, Mitsubishi Electric, Panasonic, Nintendo, Hitachi, and Toshiba among others.
But for several years now, Toshiba has been fighting what seems to be a losing battle to retain even a semblance of its past glory. The company was formed in 1939 when the Tokyo Electric Company merged with Shibaura Engineering Works, a manufacturer of heavy electrical machinery.
The list of products the company is responsible for inventing is impressive. These include the world’s first double-coil bulb (1921), microcomputer-based digital controllers (1975), gearless elevators (1981), LCD TVs (1990), and flash memory (1991).
However, a series of setbacks has rocked the company and the latest ignominy that it has suffered is the decision of the Tokyo Stock Exchange to relegate it to its “2nd section” as its liabilities exceed its assets.
Overstating profits had become the norm
Between 2008 and 2014, Toshiba failed to recognise US$1.2 billion in costs. Why would the company want to do that? It seems that the top management set unrealistic profit targets for their various businesses. There was only one way that divisional managers could fulfil these – that was by fraudulently inflating profits and inaccurately valuing inventory.
An independent report into the wrongdoings at Toshiba stated, “Within Toshiba, there was a culture in which one could not go against the wishes of superiors. Therefore, when top management presented ‘challenges,’… employees below them continually carried out inappropriate accounting practices…”
As a result of the rampant accounting malpractices coming to light, two of the company’s top managers resigned. President Hisao Tanaka and vice chairman Norio Sasaki took responsibility for deceiving the company’s shareholders. Both were old-timers who had joined Toshiba in the early 1970s.
Atsutoshi Nishida, who had been CEO from 2005 to 2009 and was working as an adviser when the scandal broke, also lost his job. He had led the firm’s laptop project in the 1980s. Toshiba’s T1100 laptop, introduced in 1985, was a great success as it was the world’s first “IBM-compatible” machines. The laptop had similar functionalities to IBM’s desktops, an attribute that played a key role in its success.
Employees were pushed into falsifying accounting records. Atsutoshi Nishida reportedly told a subordinate to boost profit figures by saying, “Do all that you can as if your life depends on it.”
An acquisition gone wrong
In 2006, Toshiba purchased Westinghouse, a company that specialised in building nuclear power plants. It paid US$5.4 billion, a price that analysts estimated was three times what it was worth. The reason for paying such a large amount? Rival bidders included Mitsubishi Heavy Industries and General Electric and the deal was closed by Toshiba in the face of stiff competition.
At that time, nuclear power was on the ascendant and it was estimated that demand for new plants would grow by 50% by 2020. But the Fukushima disaster in 2011 put an end to the growth of this sector. In that year, a tsunami led to a meltdown at the Fukushima Daiichi nuclear power plant. Consequently, Japan stopped investing in new plants.
Early this year, Toshiba announced that it would take a writedown of U$6.3 billion on its US nuclear business. In 2015, Westinghouse bought CB&I Stone Webster, a nuclear power plant construction firm. A little over a year later, it turned out that CB&I Stone Webster was worth several billion dollars less than its stated value. At the time of the company’s acquisition, the liabilities associated with completing four nuclear power plants in the US had not been taken into account.
Taking responsibility for this loss, Toshiba’s chairman Shigenori Shiga resigned.
Selling businesses to stay afloat
Apart from its nuclear business, Toshiba is active in semiconductors, elevators, air conditioning and several other areas.
The company has said that it will sell the jewel in the crown, its semiconductor business. Toshiba recently announced that it has reached a “mutually satisfactory” arrangement with Innovation Network Corporation of Japan (INCJ) for the sale.
Several global heavyweights including Taiwan’s Foxconn, South Korea’s SK Hynix, and Broadcom were interested in the acquisition. According to an earlier report, Broadcom had bid US$23 billion for Toshiba’s semiconductor unit, the highest among 10 contenders.
But Toshiba has said that it would like the sale to be made to a Japanese entity so that the technological innovations that the company has made can stay in Japan. It is also confident that INCJ will do the most to ensure that Toshiba’s employees are retained in the organisation.
The sale may not proceed very smoothly as Western Digital, Toshiba’s joint venture partner, says that the semiconductor business cannot be sold without its consent. In response, Toshiba has initiated legal proceedings and is seeking US$1.1 billion in damages from Western Digital.
Corporate governance issues at the root of Toshiba’s problems
The top-down culture at Toshiba has played a large part in its downfall. The fact that an accounting fraud of a magnitude of over US$1 billion could go undetected for six long years says a lot about the governance issues in the company. However, the accounting scandal alone has not led Toshiba to the position that it currently is in.
Its multi-billion dollar acquisitions in the nuclear plant area have gone horribly wrong. Some of its problems can be attributed to bad luck. The Fukushima disaster was a big blow to nuclear plant manufacturing companies. But the losses emanating from the excessive amounts paid for the Westinghouse acquisition and the subsequent takeover of CB&I Stone Webster are of Toshiba’s own making.
Can Toshiba bounce back? Although it still makes motors and control systems for various industries and also manufactures heavy machinery that goes into thermal and hydroelectric plants, many of its businesses have been sold or are in the process of being hived off.
The company itself has expressed the possibility that it may be unable to stay in business. In April this year, it issued a statement that said, “There are material events and conditions that raise substantial doubts about the company’s ability to continue as a going concern.”