Toshiba's future: Nukes and NANDs
TOKYO - Toshiba Corporation shows no sign of letting up in its aggressive investment spree under new president and chief executive officer Atsutoshi Nishida, who took the helm of the Japanese electronics giant nearly a year ago.
Toshiba has announced big investment plans in succession recently, including the US$5.4 billion purchase of Westinghouse Electric Co from British Nuclear Fuels PLC, which provided it access to Westinghouse's US-based civilian nuclear-power unit, and the 600 billion yen ($5.44 billion) construction of a new computer-chip plant in Mie prefecture, central Japan.
Toshiba also announced recently that its overall capital investment for fiscal 2006, which ends in March 2007, will hit a record high of 644 billion yen, up about 39% from fiscal 2005. Of this amount, 354 billion yen will be spent in the chip business, up 22% from fiscal 2005, mainly to boost the production of NAND flash memory chips, in high demand due to their use in digital cameras and MP3 players.
But Toshiba's investment spree will continue beyond fiscal 2006. The company's new medium-term business strategy, unveiled last Thursday, calls for 2.040 trillion yen in spending over three years from fiscal 2006. This amount is nearly double the 1.132 trillion yen the company invested during the previous three-year period.
In the face of increasingly tough competition from its US and South Korean rivals, Toshiba plans to invest about 1 trillion yen - half of the total investment money earmarked under the medium-term business strategy - to beef up its semiconductor production capacity, especially for NAND flash memory chips. The spending could be pushed higher than planned if semiconductor demand rises further. Toshiba invested 660 billion yen to boost its semiconductor production capacity during the preceding three years.
In early April, Toshiba announced it would link up with US firm SanDisk to construct a plant to produce NAND chips in a bid to catch up with market leader Samsung Electronics of South Korea. The investment cost of about 600 billion yen is to be equally shared by the two firms.
The new NAND chip-fabrication facility will be the fourth of its kind in Japan for Toshiba. It will be built at Toshiba's main factory in the Mie prefecture city of Yokkaichi. With construction to begin in August, the new facility is scheduled to go on stream in the fourth quarter of 2007. Even with the new facility, Toshiba will be unable to meet demand and is expected to build its fifth domestic NAND chip-fabrication facility outside of Yokkaichi as early as 2007.
The global market for NAND chips is growing sharply, in a stark contrast with single-digit annual growth for the chip industry overall. US research firm Dataquest predicts the global market for NAND chips will grow to about 2.7 trillion yen in 2008, nearly double the 2005 figure. Unlike dynamic random access memory (DRAM) chips, NAND chips can retain data even when electrical power is turned off. The NAND chip market is also being driven by booming demand for tiny portable music players such as Apple Computer's iPod Nano.
Toshiba is the world's second-largest maker of NAND chips, but is trailing far behind market leader Samsung. According to US market-research firm iSuppli, Samsung cornered a 53.4% share of the global NAND flash memory market in 2005, followed by Toshiba with 22.1% and another South Korean maker, Hynix Semiconductors Inc, with 12.8%.
Samsung and Hynix were the top two leaders in the DRAM market, which Toshiba bowed out of in 2002. According to iSuppli, Samsung captured 30.1% of the global DRAM market, followed by Hynix with 16.6% and Micron Technology Ltd of the US with 15.5%. The highest-ranked Japanese DRAM maker is Elpida Memory Inc, a joint venture between electronics giants NEC Corp and Hitachi Ltd established in 1999. Elpida was ranked the fifth DRAM maker in 2005, with a 7.2% market share.
Japanese makers were once in the driver's seat in the overall semiconductor market in terms of sales and became the target for fiery protectionism in the United States. Excessive dependence on Japanese computer chips even raised national-security concerns in the US, but their horsepower has significantly weakened in recent years. Japanese makers took more than half of the global semiconductor market in the late 1980s, but their combined share has slipped to about 20%, largely because of the absence of aggressive investments.
Last year saw Japanese chipmakers sink further on the ranking. According to iSuppli, Intel Corp, Samsung and Texas Instruments Inc retained their No 1, No 2, and No 3 positions by semiconductor sales in 2005, respectively. The three companies all saw their sales outpace the growth in the world semiconductor market, which increased 4.4% from 2004 to $237.3 billion. Among other Japanese companies, Renesas Technology Corp slipped from the No 5 to the No 7 position in the ranking, and NEC Electronics Corp fell from No 8 to No 10.
Although Toshiba moved up to the No 4 position from the previous year's No 7, backed by booming sales of NAND chips, the Japanese maker is also expected to face tougher competition this year and beyond. Hynix and other DRAM chipmakers also have entered, or are entering, the fast-growing and lucrative market for NAND chips. US firms Intel and Micron Technology have teamed up to challenge the Asian companies' dominance of the NAND chip market. Intel and Samsung each plan huge amounts of capital investment worth 700 billion yen this year. With its new 2 trillion yen investment plan, Toshiba has made clear it is determined to die hard in what is widely seen as the Japanese electronics firm's last bulwark.
Toshiba announced recently that it posted a whopping rise in annual net profit, buoyed by robust demand for NAND chips - its cash cow - although prices fell sharply in the January-March quarter in response to a market glut. Group net profit for the fiscal year ended March 31, 2006, surged 70% to 78.2 billion yen from 46.0 billion yen a year ago, beating its own projection of 65 billion yen. Yearly sales rose 9% to 6.34 trillion yen. Looking ahead, Toshiba expects to post a group net profit of 90.00 billion yen for fiscal 2006 on sales of 6.60 trillion yen.
Meanwhile, the electronics maker also said it plans to introduce a plan aimed at heading off unsolicited takeovers, becoming the latest major Japanese company to bolster its defenses.
Under the new medium-term business strategy, Toshiba has set fiscal 2008 targets of 7.8 trillion yen in group sales, compared with 6.34 trillion yen in fiscal 2005, and of over 5% in operating income margin, versus 3.8% in fiscal 2005.
Last June, then-Toshiba president Tadashi Okamura, who now serves as chairman, tapped then-senior managing director Nishida as his successor, believing he was the best-qualified person to go on the offensive after years of retrenchment and steer the company through its new growth phase.
Toshiba's interest-bearing debts totaled 2.2 trillion yen in fiscal 2000, which ended in March 2001, after the burst of the information-technology bubble. But the debts shrank to less than 1 trillion yen in fiscal 2005 amid improving business performance. Toshiba's free cash flow - the amount of cash that a company has left over after it has paid all of its expenses, including investments - stood at 198 billion yen in fiscal 2005, providing the firm with greater latitude in embarking on aggressive business expansion.
The firm expects its free cash flow to go into the red, to the tune of 200 billion yen, in fiscal 2006, but swing back to the black in fiscal 2007 and post a surplus of nearly 300 billion yen in fiscal 2008, the final year of the new medium-term business strategy. Borrowings will rise in the short term because of a concentration of large-scale investments this fiscal year, such as the Westinghouse acquisition. But such debts will likely be repaid over the medium to long term by cash flows generated by Toshiba's operations.
In addition to the purchase of Westinghouse and the joint construction of a new computer-chip plant with SanDisk, Toshiba sought - but failed - to acquire a majority stake in NEC Electronics from its parent NEC early this year, according to industry sources.
Toshiba's new medium-term business strategy includes about 300 billion yen for the purchase of Westinghouse. Toshiba's purchase of Westinghouse signaled its firm resolve to make nuclear energy one of its pillars along with computer chips and electronics. By acquiring Westinghouse, Toshiba would become the world's No 1 nuclear-power company, with a 28% share of the global market, surpassing AREVA of France.
By purchasing Westinghouse, Toshiba outbid Japanese rival Mitsubishi Heavy Industries Ltd by as much as 200 billion yen. Although a top official of Mitsubishi Heavy Industries described the Toshiba bid as one based on a "lunatic calculation", Nishida has claimed that it is an "appropriate" price worked out after full consideration. With many construction plans for new nuclear-power plants emerging in the US and Asia, especially China, Westinghouse is looking to win a number of contracts.
The Nihon Keizai Shimbun, Japan's biggest business daily, reported recently that four companies - Japanese trading firm Marubeni Corp, Fluor Corp of the US, and two others - will take stakes in Toshiba's $5.4 billion acquisition of Westinghouse. The paper said the companies, which also include Shaw Group Inc of the US and Japan's Ishikawajima-Harima Heavy Industries Co Ltd, will invest a total of about 300 billion yen ($2.6 billion) in the buyout of the US power plant arm of British Nuclear Fuels Ltd. Toshiba, which will keep a roughly 51% stake, is asking Marubeni and Fluor to take stakes of about 20% each, while Shaw and IHI take stakes of about 5% each, the paper said, adding that more companies could also join.
Toshiba has apparently opted to form the alliance to spread potential risks and also to ease fears in the US that a business related to national security is now in the hands of a foreign company, although Japan is the staunchest US ally in Asia. Toshiba still harbors a bitter memory of the US anger - and sanctions - in the late 1980s over its subsidiary Toshiba Machine's sale of computer-guided multi-axis milling machines to the Soviet Union in violation of regulations of COCOM, the Coordinating Committee for Multilateral Export Controls.
Meanwhile, Toshiba is taking an early lead in the format war over next-generation DVD (digital versatile disc) players. In mid-April, it launched two models of video-disc players for the next-generation high-definition DVD format in the US, a key market, after their debut in Japan in March. Toshiba began sales of the world's first commercially available next-generation DVD player in Japan, ahead of the Sony Corp-led group that is competing with the Toshiba-led camp for new global DVD standards in the $24-billion-a-year home-video market.
The industry's investment trend
Toshiba is not alone among Japanese electronics makers in significantly boosting capital expenditures, however. Eight major Japanese electronics makers, including Toshiba, are planning combined capital expenditures of about 2.8 trillion yen for fiscal 2006, up 27% from the previous year, in a bid to raise output of such key products as flat-panel television sets and semiconductor chips. The planned increase in investment is expected to give an additional boost to the Japanese economy - now on track to log its longest expansion since World War II in November - because a large portion of the planned investment will be made domestically.
Sharp Corp, the leading maker of LCD (liquid crystal display) TVs, will invest 194 billion yen in fiscal 2006, up some 30% from fiscal 2005, to boost its LCD panel output. Matsushita Electric Industrial Co, which leads the market for plasma display panel TVs, has earmarked 81.5 billion yen, also up some 30%, to enhance its PDP output. Fujitsu Ltd will raise its semiconductor-related investments by 50% to 140 billion yen. Sony has earmarked 170 billion yen, up 21%, for such investments to prepare for the launch in November of its next-generation game console, the PlayStation 3. Hitachi Ltd will increase its overall capital investment by 33.3% to 530 billion yen, mainly to boost output of hard disk drives and PDPs. Mitsubishi Electric Corp plans capital investment of 120 billion yen, up 7.4%, and Pioneer Corp, 54 billion yen, up 33.9%.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economics. His e-mail address is [email protected].
Hisane Masaki is WSN Editor Japan.