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TOSHIBA'S DIGITAL DREAMS

A new CEO focuses the tech giant on PCs and multimedia

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. As it turned out, Nishimuro's condition could be reversed by arduous surgery. A few days later, a surgeon spent eight hours excising cysts from 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.

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. Yet with huge stretches of its product line under assault from lower-cost Asian Tigers, profits are minimal.

NO AX. But Toshiba can still boast of its manufacturing prowess and first-class labs. Under Nishimuro, it has launched such engineering wonders as the handheld Libretto mini-notebook PC, new digital videodisk (DVD) players that store billions of bits of data and generate supersharp video images, and a new multimedia desktop PC. To set the standards for multimedia hardware, Nishimuro has secured alliances with Hollywood power brokers such as Time Warner Inc.

Although the jury is still out on these efforts, Nishimuro is pressing on, hoping to turn such future projects as Internet television systems into lucrative franchises. 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. Those are still paltry compared with margins at many U.S. computer and electronics companies. But Nishimuro can't follow his Western instincts and ax masses of workers. That would ''ruin our whole culture,'' he says.

With the options for restructuring so limited, it's imperative that new technologies lift Toshiba's results. When he helped get Toshiba involved in digital videodisks in the early 1990s, for example, Nishimuro reasoned the move would give Toshiba a commanding position in the optical technology used in a wide range of multimedia products.

BRAIN TRUST. 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 Electronics, and Hewlett-Packard proposed an alternative DVD-RAM format for storing computer data. 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. The industry chaos will surely take the fizz out of this year's DVD Christmas sales. But Nishimuro and his lieutenants argue that the company has already learned important lessons on how to play in the digital big leagues.

Nishimuro is hoping to extend those lessons with the company's in-house brain trust, a division called AD-I. The group's mandate is to push Toshiba deeper into multimedia, harnessing the company's dizzying array of manufacturing and lab departments. Besides DVD, the AD-I team has been behind many of Toshiba's new products, such as the Libretto. The 1.9-pound gadget was the first mini-notebook with a Pentium processor able to run Windows 95. Toshiba's engineers had to develop a new manufacturing robot to make it, as well as a tiny hard-disk drive and new semiconductors. Japanese sales of Libretto are now running at 15,000 a month. But in the U.S. the Libretto is seen as simply too small, and sales have been disappointing.

Nishimuro is also grappling with Toshiba's PC business, its biggest source of profits and nearly a fifth of sales. Toshiba is the world's No.1 laptop maker. But U.S. companies are beginning to challenge its lead. Margins have fallen 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 IDC.

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. 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 DVD software in short supply, the machines flopped in the U.S. and Japan.

TOUGH START. While technology such as DVD players and the personal computer are key, nothing is more fundamental to Nishimuro's makeover than the company's semiconductor business. Once Toshiba's top money-maker, last year, it brought in $7.4 billion in revenues but almost no profits, analysts estimate. Now Korean and Taiwanese companies have invested heavily, making the billion-dollar-plus invest-ments needed for new chip plants much riskier.

To buffer those risks, Toshiba is moving quickly into application-specific and logic chips, which are the brains for such items as video games and portable phones. 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. Still, 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, many of its old-line businesses still return little to the bottom line. Toshiba's nuclear-power-plant unit has not had a new order since 1991. Toshiba may form joint-venture companies for major businesses that could take them off the books yet avoid mass layoffs. Nuclear power is a prime candidate, as well as white goods such as refrigerators.

It has been a tough start for Nishimuro. ''Progress hasn't been satisfactory,'' he says. Toshiba may never become the kind of nimble player he envisions. But then again, Nishimuro has beaten the odds before in his own life. And he certainly is making 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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