Record fine is least of Toshiba’s problems

November 18, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

A record fine would be the least of Toshiba’s problems. The scandal-hit Japanese group may face a ground-breaking penalty from the securities watchdog, the Nikkei newspaper reported on Nov. 18. The mooted 7.5 billion yen ($60 million) charge would be embarrassing – and far outweigh the 91.2 million yen just levied by the Tokyo Stock Exchange – but have limited financial impact. That leaves Toshiba free to face its real challenges.

Toshiba’s first headache is operational. First-half results reported on Nov. 7 showed the conglomerate crashing to an operating loss of 90.5 billion yen, with profits down in all its divisions. And ominously, Bernstein analysts say, competition is intensifying in NAND flash memory: long the most valuable bit of Toshiba’s empire.

The second problem is reputational. The drip-drip of bad news has kept coming. Lawyers and governance experts rounded on the group’s 300 million yen lawsuit against five former executives as a half-hearted, token gesture. And the stock exchange has just rapped the group for failing to disclose previous charges at its U.S. nuclear unit, Westinghouse.

So Sept. 7’s restatement of years of past profits, erasing 155 billion yen of net income, was not the inflection point it might have been. Since then the stock has lost 18 percent and the cost of insuring Toshiba debt against default has almost trebled.

Toshiba is not going to go bust. It is backed by big banks, who in September extended 400 billion yen of new credit to the troubled firm, and by government arms like the Japan Bank for International Cooperation. Moody’s, which downgraded the company post-results, still judges it investment-grade, mostly because Toshiba occupies a “significant position in the economy and society”.

President and Chief Executive Masashi Muromachi has already sold some ailing units, such as an image-sensor business bought by Sony, and is shutting other lines of work, like the production of white LEDs. He has also said Toshiba could lay off staff in home appliances, televisions and computers.

But investor confidence remains at rock-bottom, and recent results show how financially draining Toshiba’s weaker businesses are. Muromachi needs to articulate a bolder plan, follow through on more restructuring as quickly as he can – and try to avoid more embarrassments.

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