The handling of Toshiba is exactly the problem Japan faces. Toshiba was in its hey day a mega monster. Now it is a corporation mired in scandal, accounting fraud, the likelihood of negative equity and authorities mustering the banks to throw a life line to a sinking ship.Toshiba has failed on many grounds, most of its own doing. The company has bitten off more than it can chew and can no longer fund its working capital needs for many of its businesses. So despite having a majority of independent directors to show to investors it has outside thinking, the management is reluctant to sell down its cross shareholdings to help find its way out of trouble. It even baulked selling its 30% stake in a cross shareholding to a foreign buyer at a premium because the target didn’t like the idea of majority foreign ownership. Since when does the owner of an asset appease the wishes of the asset?
How can investors possibly think there is the slightest hope of corporate governance commitment if the political power-brokers are steering banks to refinance a company that does not deserve to exist in its current form? The only message it does send is the deep commitment to put share holders at the back of the queue. There seems to be more focus on preventing a former giant from losing face to prevent national embarrassment. Sharp was seen as small enough to be taken over by foreigners. Toshiba’s nuclear business does make its proposition of bankruptcy more daunting but at the same time if the company couldn’t make it work then perhaps it needs new owners to buy it for a song provided they clear ‘security’ checks.
Japan needs to let one of these giants fail to rally others to action. Japan can’t forever be bailing out poorly run zombies. We only need to look at Toshiba’s failed strategy in mobile phone handsets as the type of group think that drove exactly the same decisions to revive its flailing PC business 6 years later.They didn’t do their homework – plain and simple.
Toshiba was struggling in mobile phones much like many other Japanese makers. Toshiba teamed with Fujitsu (surely a lesson in what a poor decision that has been), NEC with Casio and Hitachi, while Sony (albeit teamed with Ericsson until they merged) has had a rear guard action. Sanyo sold its handset business to Kyocera. Mitsubishi Electric just quit altogether in 2008. Japan’s market share in mobile phones globally has slid from 15% a decade ago to less than 3% in 2016. Sony has the highest global share among Japanese brands at 1.7% (Q1 2015).
So despite its failed JV with Fujitsu, Toshiba is expecting the same link up with Fujitsu in PCs will change their fortunes. IBM/Lenovo has quadrupled its share of office PCs by understanding the efficiency of enterprise leases. Toshiba’s 5% share has slowly drifted and Fujitsu’s share has halved.
I once joked soon after the GFC that Apple’s overnight move of 5% was the equivalent of the vanquished Toshiba market cap. Now Apple only needs to move 1% to increase / decrease the shift the equivalent amount of Toshiba’s mkt-cap. When we look at reality, the accounting scandal, the appointment of 50%+ independent directors on the board and the likelihood of having to write down goodwill, the former tech giant faces further woes. Toshiba is in dire need of a ‘crisis’ manager to restore lost fortunes.
I wrote in our previous note, ‘Japan’s Misguided Matryoshka M&A’ on December 9th, that “In the last 25 years, Intel Corp on its own has managed to make 31% more net income than all 20 of Japan’s largest tech companies combined on a currency adjusted basis. That is right. Intel on its own has thumped the likes of Sony, Panasonic, Toshiba, Sharp, Mitsubishi Electric, NEC, Hitachi, Fujitsu, Fuji Film, Konica Minolta, Brother, Nidec, Kyocera, Canon, Olympus, TDK, TEL, Ricoh, Advantest and Nikon combined.”
Toshiba is toxic waste. Yet 14 out of 18 sell-side analysts have a neutral or positive outlook on this technically insolvent company. When Toshiba announced it was laying off 16,000 . Nidec’s President Nagamori offered to hire software, communications and robotics engineers from Sharp and Toshiba to ‘help’. So the best engineers from Toshiba and Sharp could sign up for voluntary redundancy (aka tax effective bonus) and land a job with arguably one of the most profit focused Japanese tech companies, further gutting the ‘best assets’ from the ailing companies.
The only guarantee here is that in several years time nothing will have changed. Toshiba will remain a company lost at sea without a compass.I once described Japan’s old school corporations as modern day versions of the Battleship Yamato. (you can read more about that in the link). Japan’s corporates need crisis managers. Unfortunately in a shame culture the first step to admit major problems is the hardest one to accept because it requires someone to take responsibility.
Government should be sure to remind brittle prided companies and the political classes that Nissan Motor now employs 26% more staff than it did before pending bankruptcy, putting paid the notion that a crisis manager must trade off employment for profit. Simple cost rationalisation, products that consumers desired and effective leadership saved the company. Surely it should be deemed by struggling corporates as a perfect example of successful change.
Toshiba needs to be forced into bankruptcy, broken up and sold. It will be the perfect shot across the bows to force other Japanese corporates to take responsibility for reactive management styles, embrace change and employ best in practice corporate governance. I fear that the regulators and supervisors of the market are missing the point. With 98% of listed companies already employing independent directors to their boards, the market overseers are debating whether to make the appointment of independent directors as ‘mandatory’. I would argue that 98% compliance means a law regulating it is unnecessary. What they should be focused on is the ‘quality’ of independent directors which in Toshiba’s case have made absolutely no progress despite the ‘quantity’.