EPTE Newsletter: Toshiba's Leadership Lies about Profits

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Japan is home for Toshiba, one of the largest electronics company in the world. Toshiba is in the midst of a massive accounting scandal that was brought to light in April, when Toshiba first disclosed some accounting irregularities. Several executives including Toshiba’s chief executive and president resigned, and heads may continue to roll. The company delayed the release of its annual earnings in September, and recently announced several restructuring plans. Part of the restructuring includes the sale of its image sensor business to Sony. The ripple effect of this sale will be felt in the employment ranks as lay offs are eminent, and some low margin businesses that include semiconductor devices and telecommunication devices will be closed.

Toshiba opened its doors more than 140 years ago and offered a wide range of products from light bulbs to nuclear power generators. Revenue for fiscal year 2014 came in at more than 6 trillion yen (about $50 billion), and the number of employees reached 200,000.

Toshiba can be considered a mainstream, conservative company that does not promote themselves using flashy advertisements or any gorilla marketing campaigns. For those who follow the NFL, they parallel the culture of the New England Patriots football team—no trash talking or flamboyant characters, just a good solid team that gets the job done. With that said, Toshiba is not conservative with their approach to developing new products and technologies. They are responsible for introducing new technologies in the electronics arena, and maintain a dominant market share in many segments of the electronics industry.

Personally, DKN Research has done business with Toshiba for more than 35 years, and some of DKN’s responsibilities included electronic packaging. We provided a wide variety of technologies in the field of electronic engineering. Toshiba did not pinch pennies when hiring R&D firms to address and solve various problems encountered with the introduction of their new technologies. Toshiba has maintained relatively large margins with their cutting edge technologies of the final products, and had no problems allocating a budget to cover the engineering research expenses.

Before the turn of the century, Toshiba’s quality requirements set the bar higher and higher for technical capabilities and this spilled over to vendors who were smart enough to utilize the upgraded technologies to generate new business. I can say with much confidence that Toshiba’s push to be better influenced other industries—printed circuits and electronic packaging—to step up their game and become dominant leaders in a global market.

That was in the past. At the turn of the century, Toshiba was just another large electronics company with shareholders to answer to. They could not distinguish themselves from others as they did in the past by generating unique technologies or products (other than flash memory). They dropped in rankings in the global electric and electronics industry, margins were low, and they posted a loss almost every year.

The pressure to show profits at Toshiba probably led to the accounting scandal. This is an illegal activity for publicly traded companies even though Japanese businessmen consider it a minor offense as long as there was not personal gain. Financial markets don’t agree with this, and they punished Toshiba by selling off shares of the beleaguered company. No doubt the company will have to defend many lawsuits from stockholders.

Executives at Toshiba probably didn’t think this one through. This is an accurate statement because the scandal has now claimed the jobs of nine executives. The executives are gone, but the scandal will hover over the company for many years. One bad decision has tarnished the history of the 140 year old company. Will they be able to recover? I don’t know—only time will tell.                                                                                                                                              



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