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Losses in PC and components business part of Toshiba cover up _ Tech Channel MEA
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Losses in PC and components business part of Toshiba cover
up
Source: Arun Shankar
Publish date: 25 Jul 2015 Print Email
On 21 July, Toshiba Corporation made public the investigation report on the alleged financial
irregularities from the Independent Investigation Committee. The company announced that it
will analyse and examine the investigation results and recommendations received from the
Independent Investigation Committee, and reflect them in the management practices, as well as
examine measures to prevent recurrences.
The Independent Investigation Committee pointed out the need to look at evaluation of assets
and book impairment of fixed assets including the timing of impairment in the PC business,
Visual Products business, and the Discrete and System LSI business in the Semiconductor
business, and the need to book a valuation allowance regarding longterm deferred tax assets of
the Company and its consolidated subsidiary corporations.
The Company will take necessary procedures for the current financial reports based on the
examination of the accounting procedures for the past financial years including the above
mentioned matters, the report by the Independent Investigation Committee and the results of
selfchecks by the Company, and finalize the amount of impact on past consolidated and non
Top management of Toshiba at the recent July announcement.
Losses suffered in PC, components, and digital business were part of the management
cover up from 2008 to 2014.
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consolidated financial results, and will submit by 31 August. In addition, the Company will
promptly make announcements in relation to correction of past fiscal year results and the
consolidated forecast for the fiscal 2014 once these are finalized. Post the acceptance of the
Independent Investigation Committee report on 21 July, a significant number of top management
executives also retired and were replaced.
In summary, successive top managements at Toshiba devised accounting procedures to cover
additive and mounting losses triggered first by the global financial meltdown of 2008 and 2009,
then by the economic disaster of the Japanese Tsunami of 2012, and running parallel the
disruptive end of the PC and older digital life cycle triggered partly by the Third Platform of
technologies, namely mobility, cloud, social and analytics. The findings of the Independent
Investigation Committee made public on 21 July point to under reporting of losses by successive
managements of the order of ¥151.8 trillion, $1.23 billion, from 2008 to 2014, partly across the
lifestyle products and services business and electronic devices and components business. The
financial year ending 2012 carries the largest irregularity of ¥85.8 trillion, $0.69 billion.
The initial whistle blower of January 2015, Seiya Shimaoka an internal auditor at Toshiba, first
drew attention to the corporate accounting irregularities by asking external auditors to relook at
the accounting records of the PC business. As far back as 2008, Atsutoshi Nishidia, President
and CEO of Toshiba at the time, refused to publish the losses as they had started accumulating
and converted them into a profit statement, according to the findings of the Independent
Investigation Committee, and reported by Financial Times.
The reasons for the business losses in the electronic devices and components and lifestyle
products and services business, can be appreciated by the overall sales model and operating
income margins. Toshiba’s is a story of slender margins, strong demands for technology
innovation, and rapidly changing cycles of business and consumer appetite.
Toshiba’s global business today consists of the five divisions including energy and
infrastructure, community solutions, health care systems and services, electronic devices and
components, lifestyle products and services. The two ICT driven segments including electronic
devices and components and lifestyle products and services, once contributed 53% of total sales
in 2003, with a peak of 57% in 2006, declining to 42% in 2014.
Toshiba’s global business has been close to a flat CAGR growth of 1.6% from 2003 to 2014,
growing from ¥5.44 trillion to ¥6.50 trillion, or $52.5 billion in 2014 at current exchange rates.
Its operating income, that is net sales less cost of sales, has been at a better CAGR of close to 9%
from 2003 to 2014, growing from ¥0.12 trillion in 2003 to ¥0.29 trillion in 2014. But the
operating income margin for the global manufacturer has been slender, increasing from 2.1% in
2004 to 4.5% in 2014. The overall slender operating income margin for the global business has
meant that its business divisions themselves have swung marginally between profit and loss over
the years.
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The operating income margin for the electronic devices and components business has increased significantly from
2.5% in 2003 to 14.1% in 2014. Its sales CAGR has been impressive at 20% from 2003 to 2014. The operating
income margin for the lifestyle products and services business has shrunk significantly from 1% in 2003 to loss
making margin of negative 4% in 2014. Its sales CAGR has been negative from 2003 to 2014. Source: Toshiba
Annual Reports
At multiple IT forums, global research companies IDC and Gartner have pointed to the
increasing disruptive challenges likely to be faced by traditional PC vendor companies. “In
comparison to the last 4050 years, the changes in IT spending today are being influenced by
consumerism, which moves at a much faster pace than business investment cycles. Any
customer facing services and products are more likely to see accelerated changes,” commented
Peter Sondergaard, Senior Vice President and Global Head of Research Gartner, as far back as
2013, at the Gartner CIO Symposium in UAE. “However during the interim period, you are
never going to see a large technology provider suddenly drop off the cliff. And some will
struggle and others will thrive”
“2014 will see the emergence of two IT markets. One of the IT markets is aligned to what is
called the second platform of opportunity of traditional industry, which is stagnating and quite
often declining. And the other is aligned to the third platform industry where there is substantial
growth. The third platform will cannibalise the growth of the second platform in 2014 and
beyond. Spending and value will rapidly shift away from traditional product and service
categories into third platform technologies, services and solutions. Third platform technologies
and solutions will dominate growth in 2014, and beyond,” mentioned Steven Frantzen, Senior
Vice President EMEA, IDC, during IDC’s Direction 2014 briefing.
Toshiba is trying to bring back profitability in 2015 by focussing on three key areas – data
storage, healthcare and energy. It is attempting to revive innovation by an internal programme
called Project Gain, which is an out of the box approach to review productivity processes.
Toshiba’s electronic devices and components business today includes flash servers and storage,
hard disk drives, NAND flash, floating gate technology, discrete and system LSI, 3D memory
production. Production requirements for the Internet of Things including wearables and smart
devices will be part of this business segment in the future. The division will also look at the
requirements of the enterprise. Recent innovations include 19 nm process technology for the 64
gigabit NAND flash memory in collaboration with Sandisk, hybrid storage array for cloud
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platforms, and development of 5 TB HDD. The sales of this division is expected to grow from
¥1.69 trillion in 2014 to ¥2.2 trillion in 2016, as mentioned in the 2014 Annual Report, with year
ending 31 March.
In June 2015, Toshiba and Microsoft announced the two companies have signed a Memorandum
of Understanding to jointly develop solutions for the Internet of Things. Leveraging Toshiba’s
IoT devices with Microsoft’s Azure IoT Cloud infrastructure, Toshiba will deliver sensordata
driven applications in various market segments starting in calendar year 2015. In this
partnership, Toshiba will provide X as a Service Xaas making use of its inhouse technologies
such as ApP LiteTM, invehicle driving recorders, sensors and cloud storage services and
Microsoft will provide IaaS, private line services and advanced analytics as part of Microsoft
Azure.
Toshiba and Microsoft announced they will offer IoT enterprise solutions, starting with the
transportation and logistics market in calendar year 2015, by delivering IoT devices and XaaS,
utilising scalable, costeffective services and technologies combined with better user experience.
Toshiba’s global business today consists of the five divisions including energy and infrastructure, community
solutions, health care systems and services, electronic devices and components, lifestyle products and services.
The two ICT driven segments including electronic devices and components and lifestyle products and services
once contributed 53% of total sales in 2003, and in 2014 the contribution declined to 42%. Source: Toshiba Annual
Reports
Toshiba’s lifestyle product and services business today includes home appliances, visual
products and PCs. The company plans to increase the profitability of the division by focussing
on the business and enterprise segment, security and HDD solutions, and IoT solutions. Recent
innovations include Cinema 4K image quality, Android OS LCD TV, Toshiba Smart Client
Manager, Dynabook Kira with WQHD LCD touch panel, and the Toshiba Direct online
shopping site. The sales of this division is expected to grow from ¥1.31 trillion in 2014 to ¥1.4
trillion in 2016, as mentioned in the 2014 Annual Report, with year ending 31 March.
Earlier in the year, Toshiba and its subsidiary, Toshiba Lifestyle Products and Services Corp,
announced they will undertake a restructuring of Toshiba’s Visual Products business by ceasing
TV development and sales operations in North America and licensing the North American TV
business to Taiwan’s Compal Electronics. Toshiba also announced its intention to transform its
consumer TV business in regions other than Japan, replacing own development and sales with a
brand licensing structure.
However Toshiba still faces the challenge of rebuilding a culture of internal innovation and
creativity that is competitive against the fast changing external disruptive environment, in which
it was once a front runner ten years ago.
