FADED GLORY

It took Toshiba 70 years to reach its peak—and just a decade to fall into an abyss

One of Japan’s former tech giants is in the emergency room and struggling to stay alive, saying earlier this month that it doubted its “ability to continue as a going concern.” Its most recent hospital visit was caused by a disastrous acquisition. But its overall health has deteriorated over the past two decades, as it failed to age gracefully into a new global economy.

Sitting beside it are Sony, Olympus, Hitachi, and other Japanese tech conglomerates, sharing memories of glory days long past, when Japan was a global technology leader, as they reckon with the possibility they might be the next one on life support. Japanese government officials stand by, contemplating plans to extend its life. Friends from overseas have flown in too, mainly to make sure they’re on the will and inherit something valuable.

On Monday Toshiba announced it would spin off four business units. All might be for the taking from a company that, in just 10 years, went from being a storied manufacturer of cutting-edge gadgets to a maker of, well, just stuff.

From light bulbs to laptops, a pioneer

Go back eight decades, and Toshiba was at the forefront of technology discovery. Although its roots originate in the late 1800s, when the son of a tortoise-shell craftsman began developing telegraphic equipment, the present-day company was founded in 1939 as part of a merger between two Japanese companies, Tokyo Electric Company and Shibaura Engineering Works.

The companies were the innovators of their day. In 1921 Tokyo Electric invented the world’s first double-coiled light bulb, an innovation that remains in most incandescent bulbs. In the mid-20th century, the merged entity went on to push forward the technology in videotape recorders, television sets, air conditioners, and even mechanized mail-processing equipment.

Toshiba rose to prominence globally in the 1980s and 1990s. During that time, the Japanese government provided cheap loans, subsidies, and limits on competition in order to foster domestic technology giants that could export products abroad.

The company’s peak achievement came in 1985 when it unveiled the T1100, its first mass-market laptop. While Toshiba and other companies had released laptops in the past, the T1100 was the world’s first “IBM-compatible” one, meaning it contained the same or similar components and software to the popular IBM desktop PCs of the day, which had been on the scene since 1981.

The Toshiba T1100 laptop
The Toshiba T1100 laptop (Wikimedia/Johann H. Addicks)

That compatibility helped drive its popularity. Atsutoshi Nishida, the project’s leader, earned approval for the product only by promising superiors he could sell 10,000 units in one year’s time—then an ambitious goal for an unproven product category. But he hit the target, and in effect, paved the way for the modern-day laptop.

“There were a few laptops out before then but they all had compromises,” says John Rehfeld, who helped sell the T1100 overseas. “That’s why Toshiba got off to a fast start. We had a laptop that performed like a desktop.”

The company was also a frontrunner during the semiconductor boom in the eighties. Somewhat inadvertently, Toshiba invented NAND flash memory—a key gut component in almost all modern hardware products. In 1984, a rank-and-file engineer named Fujio Masuoka appeared at the International Electronics Developers Meeting in California to unveil the fruits of his personal side project—a memory chip that could store and retain data without power, serving as a storage alternative to the reigning hard drive.

Masuoka remained unrewarded personally for his discovery, but Toshiba reaped the benefits. The chip went on to power digital cameras, mp3 players, smartphones, and USB flash drives (which derive their name from the memory type). Toshiba remains one of the leaders in NAND flash production to this day.

Toshiba became one of the world’s top laptop vendors in the 1990s and 2000s, while maintaining its lead in NAND flash. Its computers filled the aisles of electronics retailers worldwide—by 2007, the company was responsible for 17.8% of all computer sales in retail stores in the US.

In 10 years, however, three critical factors transformed Toshiba from a tech pioneer to a bloated conglomerate bordering on irrelevancy.

The internet killed the computer

Starting in the early 2000s, thanks to the internet’s growing popularity, more ordinary consumers wanted a computer than ever before. This created an opportunity for lower-end contract manufacturers from Taiwan, like Acer and Asus, to begin selling house-branded laptops and other electric components. Later, Lenovo and a bevvy of no-name brands from China offered rival products at even lower prices.

Toshiba, Sony, and other Japanese companies were once synonymous with sought-after consumer electronics. But nowadays, consumer electronics—even laptops—aren’t any more exciting than a microwave or washing machine. That means consumers usually want the cheapest brand, not the most prestigious one.

The competitive squeeze, coupled with the 2008 recession, caused the company to take a hit on its bottom line. According to its revised financials, revenues from its PC division shrank over 80% between its 2007 and 2015 fiscal years…

…while losses for the division deepened.

In 2010 Toshiba began outsourcing manufacturing of its TVs, and by 2015 it had withdrawn from the non-Japanese market. Last year the company announced it would exit the consumer PC market outside of Japan altogether, instead selling only to businesses. Toshiba’s share of the global PC market dropped from nearly 20% in 1996 to about 5% in 2016, according to research firm IDC.

A major scandal

Microsoft Corp. Chairman Bill Gates, left, and Toshiba Corp. President Atsutoshi Nishida talks during their joint press conference in Tokyo Monday, June 27, 2005. Gates, visiting Japan this week to meet with university students and business leaders, and Nishida announced Microsoft and Toshiba are expanding their alliance to develop high definition DVD players together, cross-license technologies and cooperate in designing new models of mobile personal computers. (AP Photo/Shizuo Kambayashi)
Bill Gates with Atsutoshi Nishida, architect of the laptop that helped make Toshiba in the 1980s, and of the accounting scandal that brought it down 30 years later. (AP Images/Shizuo Kambayashi)

In 2015, an investigation spurred by a whistleblower revealed that the company had overstated operating profits by as much as $1.2 billion over the years of the PC business’s stark decline.

In an effort to please shareholders, then-CEO Atsutoshi Nishida, who had climbed the company’s ranks since his days building the T1100 laptop, set unrealistically high profit targets for that division. This time, however, his pipe-dream numbers couldn’t be met. And rather than risk failing, subordinates cooked the books.

A 334-page report by an investigation committee set up by Toshiba stated that Nishida at times encouraged accountants to fudge the numbers. In January 2009, when an employee told Nishida the PC division would incur an operating profit loss of ¥18 billion (about $203 million then) over a six-month period, Nishida demanded an “improvement” in profit of ¥10 billion, lest the unit face closure. “Do all that you can as if your life depends on it,” Nishida reportedly told subordinates (pdf, p. 245).

 “Do all that you can as if your life depends on it.” 

While the scandal didn’t lead directly to Toshiba’s downfall, it exposed deeper problems at the company, shared by many tech conglomerates in Japan. Managers accustomed to beating out the competition were afraid to deliver bad news to the leadership, who didn’t want to hear it in the first place. As a consequence, this culture stifled Toshiba’s ability to innovate, at a time when it badly needed to. (Toshiba declined an interview request for this story.)

Professor Ulrike Schaede, who researches Japanese conglomerates at the University of California, San Diego, described Toshiba and its ilk as “full of yes men that do things because they think the boss wants them to do it, rather than what they think is a good idea or the right thing to do.” As a result, “everyone’s moving in lockstep in the direction of the bosses, and you don’t get any new ideas.”

A poorly timed acquisition

A major factor in Toshiba’s near collapse has been bad luck.

In 2006 the company paid $5.4 billion to buy Westinghouse, the US-based builder of nuclear power facilities.

Toshiba had no expertise in the area, but at the time, the industry seemed poised to boom. In 2005, the US government announced loan guarantees, production tax credits, and other incentives in order to reinvigorate the nation’s nuclear energy industry. Overseas, Vietnam, India, and Toshiba’s native Japan had also expressed a commitment to boosting nuclear power.

That changed in 2011, when a tsunami caused the disastrous meltdown at Japan’s Fukushima Daiichi plant. After that, Japan closed nearly all of its nuclear reactors, and other countries shunned further investment in nuclear power.

A domino effect took hold amid Toshiba’s nuclear divisions. Chicago Bridge & Iron, which Westinghouse contracted to build four of its reactors in the United States, sold its nuclear construction unit to Westinghouse (paywall) in hopes of bowing out of delayed, expensive projects. Those projects, Westinghouse later discovered, proved even more expensive than it imagined. Saddled with debt and unable to complete its contracted projects in the US, Westinghouse itself filed for bankruptcy in March.

Toshiba’s subsequent write-down from that development came in at over $6 billion (pdf), more than it paid for Westinghouse in the first place. It’s possible it will book a net loss of $9.9 billion (paywall) for the fiscal year ending on March 31, 2017. The fallout has caused the company to consider selling its NAND flash business—its only division with reasonable prospects for survival—and has led it to spar with auditors and delay posting results for its just-ended fiscal year. If it doesn’t do so by May 15, it risks getting delisted.

Whither Japan Inc.?

Last year Taiwanese contractor Foxconn purchased Sharp, another fading conglomerate whittled down to a single successful unit, for $4.4 billion. Sony exited the PC business in 2014, slashed its mobile phone business drastically, and is reportedly mulling a sale of its entertainment unit. Its most profitable business is now selling life insurance. Even Nintendo appeared on the brink of disappearance before Pokemon Go came along.

Experts argue that Japan will remain “stuck in the middle” between US indigenous innovation and cheap Asian manufacturing until companies reform their culture and create products more suited to an internet economy, rather than one built on buying and selling physical products.

“I often say that the Japanese lead an industry when it is in the ‘monozukuri’ phase—where it’s making something tangible,” says William Saito, an advisor to Japan’s Ministry of Economy, Trade, and Industry. “Unfortunately, in every industry except the automobile, Japan will lose this lead to another country.”

For Japan, more destruction is necessary before a revival can take place. A generation of complacent salarymen must retire, and companies must die. In the fiscal year ending in March 2017, zero of Japan’s 4,000 publicly traded companies went bankrupt—a sign not of a booming economy, but one filled with zombies or lumbering giants. Toshiba’s unraveling “sends a strong signal to Japan and the Japanese that there needs to be significant structural reforms in order to become competitive in the new world,” says Saito. “What got us here won’t get us there any longer.”

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