Can Okamura Recharge Toshiba?


By Irene M. Kunii When Tadashi Okamura took over as president and chief executive of Toshiba (TOSBF) two years ago, he had ambitious plans to revive the ailing chip and computer manufacturer. After all, the timing looked auspicious. The battered Japanese industrial electronics sector had just started to emerge from its slump thanks to a jump in spending on information technology. He appeared to be off to a good start -- until the global IT downturn hit, dampening demand for chips and devices, as well as the cell phones and notebook computers that Toshiba is known for.

That took a heavy toll on Toshiba's earnings in the business year that ended in March. The company posted a net loss of $2.1 billion, its largest loss ever, on sales of $45 billion. It was a major comedown from the

previous year, when Toshiba netted $801 million on revenues of $50 billion. As a result, Toshiba's ranking in BusinessWeek's IT100, a global list of the top tech firms, fell to 317 this year, from 254 in 2001.

Okamura isn't running scared, though. On the contrary, he's decidedly upbeat. He recently told reporters that Toshiba is back on the road to growth thanks to painful cost-cutting and plant closures. Another boost comes from the spurt in sales of flash memory chips, LCD panels, DVD players, and notebooks PCs. Toshiba's results for the first quarter of its latest fiscal year, announced on July 30, appear to back up his claim. Although Japan's second-largest chip maker posted a loss, it nonetheless managed to beat expectations: Its net loss narrowed to $157 million, down from a loss of $279 million in the same quarter a year ago, while sales grew 2.2 percent, to $10 billion.

DESTABILIZING FACTORS. Despite tough market conditions, Okamura remains confident that Toshiba will meet its targets for the current fiscal year. "We're going to turn a profit this year because we pulled out of DRAM [dynamic random access memory chips] and streamlined operations," says Okamura. He forecasts that the company will move back into the black by netting $192 million on sales of $49 billion, up 8% over the previous year. That might help attract more investors to the stock. The shares, which trade in Tokyo, closed at 412 yen, or $3.45, on Aug. 8, down from around $10 when Okamura took over in June, 2000.

At that price, most analysts would rate the shares a buy -- or at worst a hold. Yoshiharu Izumi, senior analyst with JP Morgan Securities Asia in Tokyo, rates Toshiba "market performer", and has a

target price of about $5 per share on the stock. Yet most analysts are also extremely cautious about recommending Toshiba, worrying that two destabilizing factors that could freeze its recovery in the bud: the strengthening yen and a decline in the U.S. economy.

Much of the recent demand for chips comes from companies that are rebuilding inventories depleted during the 2001 slump. If the U.S. economy takes another dip, cautions Izumi, "Toshiba's PC, cell phone, and semiconductor businesses will be negatively affected." And that, he adds, would hurt its full-year earnings.

Still, Okamura has been speeding up a restructuring program that could help offset the bad economic news. One year ago, he started merging Toshiba's manufacturing operations. By March, 2004, he will have reduced the company's 21 domestic plants by 30%. He's also in the processing of reducing the number of employees in Japan by 12%, to 127,000, over the same period. To boost profitability, Okamura will reduce Toshiba's total assets by nearly $7 billion through the sale of stocks, real estate, and other holdings. "Toshiba is finally changing, and this will help it survive," points out Akira Minamikawa, senior analyst with WestLB Securities Pacific in Tokyo.

STRONG TIES. The most important change at Toshiba occurred in 1999, when then-president Taizo Nishimuro decided to abandon DRAMs, a commodity market where competition is cutthroat. "If we hadn't quit DRAM three years ago, we'd be bankrupt now," admits Yoshihide Fujii, vice-president of Toshiba's semiconductor operations. That has enabled Toshiba to concentrate on its strengths, like the "flash" memory chip, which retains data even when the electricity is switched off. Flash memory is gaining popularity as a portable storage medium for digital cameras and MP3 players.

Toshiba also is forging strategic alliances in order to improve its business. The most important one is with Sony (SNE), for whom it has developed high-end microprocessors and mixed signal chips that go into the consumer electronic giant's PlayStation game consoles. Currently, Toshiba is manufacturing the microprocessor for PlayStation 2, as well as more than 50% of the chip sets that go into DVD players and recorders from all manufacturers. Plus, it's already at work on next-generation devices for PlayStation 3. "Our strategy is to focus on the high end, and come out with products that others can't copy," says Fujii. That could turn out to be a winning strategy for Toshiba -- if the struggling U.S. economy and the rising yen don't intervene. Kunii covers Asian business from Tokyo


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