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Toshiba: Time To Reboot


Not long ago, Toshiba Corp.'s (TOSBF) strengths in advanced technology -- from microsize hard drives to long-lived batteries -- earned it the top spot in the global notebook PC market. While desktop makers were trapped in margin-crunching price wars, Toshiba raked in cash on its sleek alternatives. By 2000, one out of every seven notebooks sold in the world was a Toshiba.

Toshiba's technical lead hasn't lasted, though. Worse, notebooks have become almost as commoditized as desktop PCs. Today, the company has fallen to No. 3 in notebooks as rivals Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ) have beefed up their laptop businesses and outsourced manufacturing to Taiwan and China. For the year ended Mar. 31, Toshiba's $253 million profit, on sales of $49 billion, was dragged down by the PC arm's $193 million loss. "We were proud of our quality, so it was difficult for us [to change]," says President Tadashi Okamura. "That was our mistake."

Okamura aims to correct the error. His plan: Focus on higher-margin products such as advanced memory chips and consumer electronics, while shifting most PC production to cheaper locales. And this time around, Toshiba will cooperate more energetically with partners -- sometimes even rivals -- to develop new products.

The success of Okamura's plan will depend largely on fixing the PC business. His goal is to outsource at least half of Toshiba's PC production to Taiwanese manufacturers, up from about 30% today. Most of the rest of Toshiba's computers will be made at its factory in Hangzhou, China, while output at Japanese plants will be cut by 75%, to 20,000 computers a month -- just 4% of Toshiba's total. While rivals "are concentrating on commodity products," Okamura also hopes to restore Toshiba's premium reputation via features such as TV tuners, longer-lasting batteries, and higher quality audio.

Okamura's reorganization push has reshaped Toshiba's chip division. He shuttered low-margin PC-memory plants while expanding output of higher-margin flash chips used in digital cameras. Last year, Toshiba's chip unit had operating profits of $1 billion, up 85% from 2002. Toshiba chip fabs were also early entrants to China, where the company already runs a research and development center. More recently, Toshiba has taken small stakes in Shanghai's Semiconductor Manufacturing International Corp. (SMI) and TCL Corp., one of China's top producers of TVs and cell phones. Company execs say these alliances should help fuel 15% annual sales growth in China and boost chip sales there from $1.3 billion today to $5.3 billion by 2010.

HIGH-DEFINITION TV

Collaboration is critical. Toshiba's consumer-electronics group developed a new flat-panel TV technology with Canon (CAJ), for instance. The semiconductor unit is working with IBM and Sony Corp. (SNE) on new "cell" chips for games and other gear. With NEC, Toshiba is developing new generation DVD players that can hold the massive amounts of data needed for high-definition television. Once consumers see HDTV, "standard DVD won't satisfy them," says Hisashi Yamada, a top Toshiba engineer working on the player.

Skeptics wonder whether Okamura's plan can cure what ails Toshiba. In PCs, for example, Dell and HP continue to wage a price war. Some experts argue that Toshiba should spin off its chip business so the unit can more easily raise the funds to build new factories without being weighed down by the troubled PC group.

Consumer electronics is only getting tougher, too. European rivals Thomson Corp. (TOC) and Alcatel (ALA) have signed their own deals with TCL, which could limit the scope of Toshiba's China ambitions. The TV business, meanwhile, could get even more competitive with the likes of Dell and Gateway jumping into the fray. "Every major consumer-electronics company is positioning TV as its major product," says Ikuo Matsuhashi, a Goldman Sachs (GS) analyst in Tokyo.

The naysayers make a persuasive case. Still, Toshiba execs are confident this round of restructuring will suffice, and that the chip and PC businesses will perform better under the same roof. Okamura's offshoring plan marks "a very big change in direction," says Yoshiharu Izumi, an analyst at J.P. Morgan (JPM) in Tokyo. That's what Okamura likes to hear. And he's determined to prove he can save the tech powerhouse he runs without tearing it apart.

By Bruce Einhorn in Tokyo


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