Last spring, Toshiba disclosed to its shareholders that there were some accounting irregularities, causing it to delay its earnings report for the first quarter.

These accounting irregularities made investors nervous, but not panicked enough sell their holdings. Officials at Toshiba explained the accounting irregularities included hiding some losses during previous years, and they would need to restate earnings as soon as possible. At that time, company guidance pointed to a small profit for the current fiscal year. The updated earnings report was postponed several times, and finally released during third quarter.

In the final report, Toshiba disclosed the company suffered more than 200 billion yen in losses over the last five years. It added that a massive restructuring was necessary to keep the company afloat. Toshiba did not offer any additional information, causing the media to speculate and report on what little information was distributed.

After the global recession in 2008, Japanese electronics companies fell on hard financial times. They were no longer the leaders in the global arena, and needed to make drastic changes to survive. Sanyo was sold to Panasonic and Panasonic closed several divisions throughout the company, including the plasma display division. Sony and Sharp have had their ups and downs over the past few years and Sharp needed financial support due to the huge losses from its LCD division. Hitachi, the main competitor for Toshiba, pulled itself out of the muck by selling its unprofitable disc drive business (this was a drag on earnings). The company reorganized everything from cables to tape circuits, and is now profitable.

Hitachi’s rise to a profitable company did not sit well with executives at Toshiba. Their recovery was slower than Hitachi’s; while Toshiba was posting losses, Hitachi reported profits. That’s when the accounting irregularities were born. A couple of presidents asked their senior divisional vice presidents to become creative and put the company in a positive light. Some creative accounting (illegal accounting) procedures put it back in the black. Toshiba reported a profitable year and its stock price remained steady. Unfortunately for Toshiba and its shareholders, not too many company officials knew the extent of the fraud. When the bottom fell out, the stock priced dropped instantly. Shareholders suffered huge losses, and several investors from the US and Japan immediately filed lawsuits against the company.

The new executive committee at Toshiba is planning to sue three former presidents and vice presidents who were instrumental in the accounting deceit. The prosecutor’s office is also looking into bringing charges against these three.

Toshiba is now in survival mode. It plans to eliminate or sell many divisions within the company, and lay off a substantial amount of the workforce. This survival plan may look good, but I think it is like the Dutch boy who put his finger in the dike to stop the flood. The scandal cannot be covered up now or swept under the rug. As more news breaks about it, the harder it will be for Toshiba to recover.

Dominique K. Numakura, This email address is being protected from spambots. You need JavaScript enabled to view it.

DKN Research,

DKN Research Newsletter #1538, Dec. 13, 2015 (Micro Electronics & Packaging)

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Headlines of the Week

1. Yasukawa Electric developed the first servomotor with a built-in amplifier of GaN power semiconductor. It has a higher efficiency in a smaller size.

2. Fuji Film released a lens series “FUJINON HF-XA Series” for machine vision cameras. They have wide range capabilities with high resolutions up to 3Mp.

3. Seiko NPC (Subsidiary of Seiko in Japan) 11/27 Has developed a new non-contact magnetic line sensor module with 50 dpi resolution. It can read fine magnetic ink pattern clearly.

4. Rohm's small power wireless modules has received the world's first authorization “Wi-SUN Profile for Echonet Single-Hop Han” of Wireless Smart Utility Network.

5. Sony agreed to acquire the CMOS image sensor facility in Kyushu from Toshiba for 19 billion yen. Some 1,100 employees will move to Sony in March.

6. Toppan Printing developed a biomass base polyethylene sheet. It reduces carbon dioxide 30% compared to the traditional blue sheet, with higher reliability.

7. DISCO developed an LLO (laser lift off) equipment high bright LED with vertical construction. It is effective to increase the process yield.

8. NEDO made a new conversion rate record of 22.3% for CIS base photovoltaic cell. It is 0.3 point higher than the former record.

9. Sekisui Chemical developed an intermediate film as the self-luminous layer of the head-up displays for automobiles.

10. TIT developed a regulation system for solar power generators. It stabilizes the power supply, reducing the risk of power outage.

11. Tohoku University (Japan) developed a silk-based electrode that is friendly on human skin. A venture company was founded to generate new business with medical applications.

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