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TOSHIBA: DIGITAL DREAMS (int'l edition)

Can the tech giant come up with the goods--and revamp its bureaucracy?

Just before accepting a coveted sales job in New York, Toshiba Corp. executive Taizo Nishimuro got shocking news: Doctors in Japan told him he had a degenerative muscular disease that would gradually cost him the use of his legs and eventually kill him. To get to the U.S., and confident no major symptoms would appear soon, Nishimuro kept this revelation secret. Three years later, in 1968, a specialist at Columbia Presbyterian Medical Center told Nishimuro there was a 5% chance the diagnosis was wrong, an admission a Japanese doctor would never make. Finding out entailed a risky spinal exam, but as it turned out, Nishimuro's condition, though serious, could be reversed by arduous surgery. A few days later, a surgeon spent eight hours excising cysts that infested his vertebrae. Although he still walks with a limp, the operation was successful.

Nishimuro's experience with American medicine gave him a deep respect for Western ways. Now 61, Toshiba's president and chief executive officer says his ''enlightening encounter with the Western scientific approach'' helped him develop ''both Japanese and Western mind-sets,'' an appreciation of Japan's reliance on consensus and the Western appreciation of risk-taking.

That ability to see from both points of view has been an important asset for Nishimuro, who has struggled to reinvent Japan's oldest electronics company since becoming CEO in June, 1996. Unlike the 1980s when Japanese corporate leviathans stirred fear and loathing in the world's technology markets, this decade has been dominated by nimble U.S. tech stars. In the hotly contested areas of PCs and microchips, smaller and faster American competitors such as Compaq, Dell, and Intel have scooped up profits while Toshiba and other Japanese companies have languished.

To understand Toshiba's problems is to appreciate how Japan's redoubtable manufacturers have lost their way. Toshiba cranks out thousands of products, from nuclear power plants to toasters to its famed laptop computers. The sprawl of the company makes it difficult for its staff to cooperate and easy for a bureaucratic mentality to take hold. ''We've got good people, but the culture is vertical,'' said Akinobu Kasami, an executive vice-president overseeing research and development. ''We need to loosen up.'' And with huge stretches of its product line under assault from Korea and other lower-cost Asian Tigers, profits are minimal. As Nishimuro painfully acknowledges, Toshiba has few tech winners to propel it into the 21st century.

But Toshiba can still boast of its manufacturing prowess and first-class labs. Under Nishimuro, Toshiba has so far launched such engineering wonders as the handheld Libretto mini-notebook PC, the new digital videodisk (DVD) players that store billions of bits of computer data and generate supersharp video images, and a new line of multimedia desktop personal computers. To help set the standards for new multimedia hardware, Nishimuro has deftly secured alliances with such Hollywood power brokers as Time Warner Inc. That has involved using diplomatic skills Toshiba's gearhead culture traditionally lacked but which come naturally to Nishimuro, thanks to his familiarity with the West. Toshiba has also quickly formed alliances with smaller U.S. companies, such as Geoworks, which created the software for a pocket communicator with a built-in phone and Web browser.

NO AX. Although the jury is still out on these efforts, the new boss is pressing on, hoping to turn such future projects as Internet television systems into lucrative franchises. Yet an even bigger challenge for Nishimuro may be injecting new verve into the cautious conglomerate. Toshiba earned $559 million on sales of $46 billion last year. Thanks to the plunging yen, which has boosted exports, profits should rise 4.4% this year. But those are still paltry compared with margins at U.S. computer and electronics companies, or even conglomerates such as General Electric Co. Toshiba's return on equity of 5.4% also compares poorly with GE's 24%.

Radical surgery, however, isn't an option for Nishimuro. He has eliminated one managerial layer and plans to trim the parent company's 63,400-strong workforce by 5,000 by the year 2000. (The company has 186,000 workers when affiliated companies are included.) But Nishimuro can't follow his Western instincts and ax masses of workers. Radical restructuring to achieve the returns typical of top U.S. companies might ''ruin our whole culture,'' he concedes. ''The easiest thing to do is to eliminate aged middle managers to create a very lean and flat organization,'' he adds. ''But if we did so, we'd eliminate a very essential source of knowledge.''

Nishimuro got his first exposure to Western ways at age 24 when he won a scholarship to study for one year at the University of British Columbia in 1959. Working at a plywood-manufacturing plant during the summer, he became fluent in English. Back in Japan, he signed up with Toshiba. Soon he returned as a sales executive to the U.S., where he acquired the knack of chatting up retailers to push Toshiba audio products. Recalls Tom Yoda, then a sales manager for Sansui Electric Co. and now chairman of Avex D.D. Inc., a Japanese pop-music record company: ''He was one of just a few Japanese executives who did this.''

These days, Nishimuro is counting on the same combination of charm and hard work to turn DVD into a success. When he helped get Toshiba involved in digital videodisks in the early 1990s, he reasoned the move would give Toshiba a commanding position in the optical technology used in a wide range of multimedia products. DVD players could be the VCRs of the digital age, in Nishimuro's view, generating billions in global sales. Hundreds of millions in royalty revenues could flow to Toshiba if its format became the standard. The company could also get a head start on designing DVD into computers, TVs, and other products.

But Nishimuro had long known pulling off such a coup would come only with broad support from the electronics industry, including rivals such as Sony, Philips Electronics, and Hewlett-Packard. He has been relentlessly pushing for such backing since the early 1990s, when as vice-chairman of Toshiba America Inc. he started jawboning entertainment moguls in California and New York for the new technology. He worked particularly closely with Time Warner, in which Toshiba has a $500 million stake. Time Warner was looking for an optical disk that would play two-hour movies with better resolution than laser disks.

In June, 1994, Nishimuro returned to Tokyo and became deputy group executive of the Toshiba skunkworks, formally known as the AD-I division. This group sponsors Toshiba's best and brightest to push Toshiba deeper into systems and services. There, he oversaw the team of 100 engineers that had developed DVD and threw his efforts into winning industrywide support for the Toshiba standard.

STUMBLING BLOCKS. The Toshiba team broke out the sake last year as the electronics and entertainment industries converged on Nishimuro's DVD format. Then the squabbling started. In August, Sony, Philips, and HP proposed an alternative DVD-RAM format for storing computer data. Then, just a few weeks later, Matsushita Electric Industrial, along with Zenith Electronics and Thomson Multimedia, unveiled plans for Divx, a variant player format for DVD. Designed to assuage Hollywood copyright concerns, Divx machines would play specially encoded disks that would become unplayable 48 hours after being first used.

The industry chaos will surely take the fizz out of this year's DVD Christmas sales. The brouhaha could even stifle DVD long enough for new, more powerful technologies to emerge. Clearly, DVD won't contribute as much to Toshiba's profits as had been expected. But Nishimuro and his lieutenants argue that the company has already learned important lessons on how to play in the digital big leagues. Says DVD General Manager Koji Hase: ''Toshiba was used to being a lousy box maker competing on price and volume. This is a cultural change.''

Nishimuro is hoping to extend those lessons with the in-house brain trust, AD-I, that was set up in 1994. The group's mandate is to push Toshiba deeper into multimedia, harnessing the company's dizzying array of manufacturing and lab departments, which often work in isolation from one another. To bypass corporate bureaucrats, the 130-member group has its own $150 million budget for acquisitions, research, and marketing.

Besides DVD, the AD-I team has been behind many of Toshiba's new products, such as the Libretto. The 0.9-kilogram gadget was the first mini-notebook with a Pentium processor able to run Windows 95. Libretto started with a marketing idea, but Toshiba's engineers had to develop a new manufacturing robot to make it, as well as a special tiny hard-disk drive and a new semiconductor that did the work of several chips. Libretto hit Japanese stores last year. AD-I also is spearheading development of a slew of new gizmos--from mobile network computers and personal digital assistants to Internet-based news-filtering services.

While the crack outfit has proved its product-development abilities, its record in the marketplace has been mixed. Besides the problems with DVD, Libretto has been slow to catch on in the U.S., even though Japanese sales are running at 15,000 a month.

A key problem, experts say, is that Toshiba's product-development strengths are rooted in its factories in Japan, where workers, designers, and managers labor side by side. This approach produces products well-suited for Japanese consumers but doesn't easily take into account tastes in foreign markets. In the U.S., for example, Libretto is seen as simply too small. Americans generally have bigger hands, and they have less need for such a tiny unit when they have more office and living space than in Japan. Says Mark Fruin, a business professor at the University of Michigan and author of a 1997 book on Toshiba's manufacturing techniques: ''Toshiba has come to dominate the home market in ways that are hard to imagine, but the problem with this model is that it's hard to take overseas.''

CUTTING EDGE. Nishimuro wants to counteract these parochial tendencies by boosting overseas production from 23% of the total to 36% over the next five years. He also wants to hire more engineers with international backgrounds, cut more alliances with U.S. companies, and recruit some foreigners to its board of directors.

Nishimuro is grappling with these issues in Toshiba's PC business, its biggest source of profits and nearly a fifth of company sales. Since 1993, Toshiba has been the world's No.1 laptop maker, thanks to the company's strengths in manufacturing and such in-house components as chip sets, liquid-crystal displays, hard-disk drives, and CD-ROMs. These help keep Toshiba's notebooks at the cutting edge of technology.

But U.S. companies are beginning to challenge Toshiba's leading position. Margins have fallen sharply since January, when IBM and Compaq shaved $1,500 off top-end models, forcing Toshiba to follow suit. Toshiba's share of the U.S. portable-computer market in the second quarter of 1997 slipped to 17.8% from 24.4%, according to International Data Corp.

Such a slide does not bode well for Nishimuro's ambitions to move from the world's sixth-biggest PC maker to No.3 by 2000. The idea is that if Toshiba salespeople can offer a broad array of desktops and laptops, it will be easier for them to sell more profitable Internet servers and routers as well.

But in the desktop market, Dell Computer Corp., Compaq Computer Corp., and others can now build models to order, handle direct sales via computer, and offer other cost-cutting techniques that are alien to Toshiba. As a result, Toshiba's foray into desktops has so far been a disappointment. Last year, it introduced the Infinia, a high-end multimedia PC for home use. It was the first PC to come with a DVD drive and won rave reviews for its sleek design. But with Compaq and others offering supersaver machines for less than $1,000 and with DVD software in short supply, the machines flopped in the U.S. and Japan.

Toshiba has rebooted its desktop strategy. It is now focusing on the slower-moving corporate market, where margins are better and Toshiba can leverage its reputation and sales channels for notebooks. But even there, Toshiba is having trouble beating low-cost American competitors that invest much less in R&D and supply fewer components in-house. The company is even considering moving the whole desktop operation to the U.S. ''Unless Toshiba USA really becomes a West Coast company centered on the latest technology, I wouldn't expect them to do very well across the board in computers,'' says Fruin.

CHIP CHANGE. While technology such as DVD players and the personal computer are key, nothing is more fundamental to Nishimuro's makeover than the company's sprawling semiconductor business. Last year, it brought in $7.4 billion in revenues but almost no profits, analysts estimate. That's a shocker for Nishimuro. In the late 1980s, when he was in charge of semiconductor marketing, memory chips were Toshiba's biggest money spinner, helping the company achieve record net earnings of $1.1 billion in March, 1990.

But the 1990s have been humbling. Korean rival Samsung Electronics invested massively to take leadership in 16-megabit memory chips. Now, other Korean and Taiwanese companies have invested heavily, making the billion-dollar-plus investments needed for new chip plants much riskier, even for giants such as Toshiba. ''The type of gamble we made then cannot be repeated,'' says Nishimuro.

To buffer those risks, Toshiba has tied up with IBM and Siemens to share the high costs of research and memory-chip plants. And like NEC Corp., Mitsubishi Electric Corp., and other memory-chip giants, it is moving quickly into application-specific and logic chips, which are the brains for such items as video games and portable phones. These products are much less subject to the wild price swings associated with memory chips, but they are unlikely ever to match the windfall returns that memory chips yield in times of short supply. ''Nothing will replace the profits we once generated from chips,'' concedes Nishimuro.

One big hope is to develop an entire computer system on a single chip to power new handheld computers and other multimedia products. Other companies are going after the same prize, of course. But even rivals give Toshiba a chance of succeeding. Says Brian Halla, chairman and CEO of National Semiconductor Corp.: ''Toshiba will be one of the leaders.''

Even if Toshiba's digital yearnings are fulfilled, much of the company will still be adrift. Toshiba's old-line businesses making nuclear power plants, appliances, and TVs and VCRs employ tens of thousands but return little to the bottom line. Toshiba's power-plant unit has not had a new order since 1991, for instance, while consumer-electronics operations have lost money the past five years running.

TOUGH START. Nishimuro is contemplating quitting two or three small businesses a year--something not done since Toshiba exited the audio businesses years ago. More important, he says Toshiba may form joint-venture companies for major businesses that could take them off the books yet avoid the layoffs of thousands. Nuclear power is a prime candidate, as well as white goods such as refrigerators. In electric power, Toshiba already has partnerships with GE and Hitachi, which have helped spread costs. ''But we won't get out of TVs because they're related to computers and liquid-crystal displays,'' says Nishimuro.

While these moves are short of the radical surgery seen in the West, they are extremely daring by Japanese standards. But when it comes to boosting the bottom line, Nishimuro says ''what's probably most important is how to eliminate all those unprofitable businesses.''

That's a bold statement for a corporate leader in Japan, especially since he does not face the kind of intense shareholder pressure to act that a U.S. CEO in a similar situation would feel. Yet it has been a tough start for Nishimuro. He has had to divert much of his time to boning up on nuclear power, railway equipment, and other slow-moving businesses. Worse, he has learned that transforming a company as huge and stodgy as Toshiba takes time. ''Progress hasn't been satisfactory,'' he says.

But Nishimuro has stepped up the pace, turning Toshiba toward fast-growth areas and greater profitability. Challenging tasks for anyone, especially an executive more accustomed to selling than restructuring. Toshiba may never become the kind of nimble player in world markets Nishimuro envisions. But then again, Nishimuro has beaten the odds before in his own life. And he is trying to make his mark on a company that badly needs change.

By Steven V. Brull in Tokyo, with Andy Reinhardt in San Francisco



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