Toshiba’s startling spiral downwards continues

There was yet more bad news last week for shareholders in one of Japan's most totemic corporate names. Toshiba has reportedly parted company with its auditor after missing a filing deadline for its fourth-quarter earnings.

The delay – Toshiba's third – follows forecasts of over ¥1trn ($9.1 billion) in losses for this business year, the worst-ever results for a Japanese manufacturer. Delisting from the Tokyo Stock Exchange looms.

Until recently, such a dramatic fall seemed unthinkable. Toshiba has for decades been one of the crown jewels of Japan Inc. A potent symbol of the country's manufacturing prowess, the company grew from a maker of telegraphic equipment into a sprawling conglomerate that built about half of Japan's power plants and made everything from laptops and elevators to medical equipment and nuclear reactors.

When Tokyo's streets and businesses began to light up in the late 19th century, it was Toshiba's forerunners that supplied the incandescent bulbs. During the second World War, its factories churned out heavy machinery, radios and generators. As the engines of Japan's "miracle economy" fired up in the 1950s, Toshiba (its name since 1978) was its supplier of reliable electric power. It has for decades been a key part of the Mitsui keiretsu, a set of interlocked companies grouped around core bank Sumitomo.

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The company’s public fall from grace began in 2015, when an investigation into an accounting scandal revealed “systemic” window-dressing and padded profits of 152 billion yen from 2008 to 2014. That revelation cost Toshiba’s boss and half its 16-member board their jobs. It turns out, however, that its problems were only beginning.

Just before last Christmas last year, Toshiba abruptly announced it would write-down billions of dollars at its American nuclear business. The news sent investors fleeing, wiping 560 billion yen off its market value.

At one point, Toshiba was worth less than Sharp, another faded Japanese corporate star, which was acquired last year by Hon Hai Precision Industry, a Taiwanese firm.

Toshiba's most immediate plight stems from a bad bet on nuclear power in America. The company paid $5.4 billion for Westinghouse Electric in 2006, beating out General Electric. But despite confidently predicting that the nuclear business would more than quadruple by 2020, plans for two nuclear-plant projects in Georgia and South Carolina quickly ran aground, beset by demands for new safety requirements and massive cost overruns.

Bad management

On March 29th, Westinghouse filed for bankruptcy. Its parent is desperate to have the loss-making subsidiary off its books but it cannot simply abandon nuclear: Toshiba helped construct the Fukushima Daiichi Nuclear Power Plant and is heavily exposed to the post-2011 Fukushima clean-up and its Pandora's box of liabilities. Decommissioning is expected to take decades and cost at least ¥– widely considered an underestimate.

While Toshiba's spiral downwards partly reflects battered global confidence in nuclear power, bad management played its part, says Nicholas Benes, head of the Board Director Training Institute of Japan, an NPO. Benes, who helped devise Japan's new corporate governance code, notes that though Toshiba boasted four outside directors, key decisions were still dominated by a handful of old men.

“Toshiba is a perfect example of why auditors of committee-style companies have to be totally independent, not chaired by the former chief financial officer, who is essentially auditing his own recent practices,” he says. “This should be – and was – the rallying demand of all investors in Toshiba.”

Privately, investors say government bureaucrats are furious at this mismanagement and the vulnerabilities it has opened up in Japanese capitalism to foreign rivals. Japan wants to keep Toshiba's most advanced technologies – particularly flash memories – out of Chinese hands. America, too, is worried that Westinghouse will go to China, one of the few nations still investing heavily in nuclear reactors. Representatives from the Japanese and US governments met this month to discuss an orderly sale of Toshiba's assets.

Toshiba must now shrink to grow again. It had already sacked hundreds of employees and shed chunks of its manufacturing empire, including televisions and white goods, both to Chinese firms. That was just a taster for the fire sale to follow. In addition to Westinghouse, Toshiba must put its precious chip unit on the block: among the reported bids it received this month was an offer of nearly ¥3 trillion ($27 billion) – again from Taiwan’s Hon Hai.

Even shorn of such assets, Toshiba would still be a powerful company. It supplies motors, engines and control systems to the power, metals, electric, and water treatment industries and makes much of the heavy machinery inside thermal and hydroelectric – as well as nuclear power plants. Then there is its huge and important business making public infrastructure such as railways and air-traffic control systems.

“The individual parts of Toshiba were always more than the sum of the parts,” concludes Jesper Koll, head of Wisdom Tree Japan, a hedge fund.

“It has been among the slowest of all the big Japanese conglomerates to divest its core business.”

Nuclear player

He wants to see it abandon ambitions to be a global nuclear player and focus on its core activities, “which are capital intensive and require skills that Japan still excels at”.

Toshiba still has room to manoeuvre before it starts cannibalising its core businesses, says Seth Fischer, a Hong-Kong based hedge fund manager and a major shareholder in Toshiba Plant Systems, which builds and operates power stations. He estimates it could raise over $4 billion by selling off semi-owned subsidiaries or cross shareholdings.

First, though, is that auditing problem. Parting ways with PricewaterhouseCoopers Aarata, who Toshiba hired only last year, means a replacement must be found – and quickly. If the company misses the TSE’s filing deadline on May 15th, it could be delisted. Toshiba has given few details of its plans or its disagreements with the auditor except to cite – like a bad marriage – “irreconcilable differences”.

Yet, some investors are betting on a happy ending.

A single hedge fund – the Singapore-based Effissimo Capital Management – had snatched up nearly 10 per cent of Toshiba’s stock by the end of March.

Many believe the company can pull out of its deep dive. Casting off the struggling nuclear business and the corporate barnacles that have accumulated over the years will “liberate” the once mighty company, says Koll.

“I believe Toshiba could become great again.”