Mark Bernardini | Toshiba casts doubt on its ability to stay in business

Toshiba, a stalwart in Japan’s postwar rise as a global industrial giant, warned Tuesday that its disastrous foray into nuclear power had left substantial doubt over whether it could stay in business in its current form.

In a filing in Japan, Toshiba said losses associated with Westinghouse Electric, its troubled nuclear power arm, had created “substantial uncertainty” over its ability to continue as a going concern. It said it hoped a sale of its microchip business, its crown jewel, could alleviate that uncertainty — though the sale could mean a foreign purchase in what has long been a core Japanese industry, inviting potential political opposition.

The announcement was the latest development to arise from Toshiba’s problems with nuclear power. Westinghouse already faced substantial cost headaches when it acquired a U.S. construction company in an effort to control expenses. Instead, the deal saddled it with further liabilities. Westinghouse last month filed for Chapter 11 bankruptcy protection.

A sale of Toshiba’s chip business, while offering it a lifeline, would take away its most successful business — and, more broadly, would represent a shift of a major technology away from Japan, depending on the buyer.

Nearly 40 years ago, an engineer at Toshiba invented the technology behind its chip business. That innovation would become one of the critical building blocks of the modern electronics industry.

Called flash memory, after the flash on a camera, the chips have become an essential part of smartphones and other gadgets and have proved a profitable technology for Toshiba, one of industrial Japan’s stodgiest names.

Foxconn of Taiwan, a manufacturer with big operations in mainland China, is among the bidders — all foreign — that could pay billions to buy the business. It is a remarkable turnabout for Japan, a country that controlled the majority of the market for many kinds of microchips a generation ago, and where companies have frequently banded together to rescue flailing domestic rivals rather than let them fold or be acquired by foreigners.

The Toshiba sale is still in its early stages, and the identities of the bidders have not been made public, but people with knowledge of the process say as many as a dozen companies from the United States, South Korea and Taiwan have approached Toshiba with proposals. Toshiba has not said exactly how much of the business it will sell, but even a minority stake is expected to be worth several billion dollars.

Toshiba’s microchips, a type known as NAND flash memory, are seen as a more valuable asset than TV screens. Japan — despite having pioneered liquid crystal displays — has lost most of its market share in screens to South Korea and China.

Samsung of South Korea has overtaken Toshiba in NAND, but Toshiba remains the world’s second-biggest producer, with a global share of just under 20 per cent, according to market research groups. Analysts say its technology, commonly used in smartphones and USB drives, remains at the cutting edge.

Ceding even partial control would be painful for Toshiba, which created the first NAND chips in the 1980s.

Yet Toshiba sees little choice. It wrote off more than $6 billion in February connected to Westinghouse nuclear reactor projects in the U.S., leaving its balance sheet perilously thin. Its auditors have refused to certify its latest finance statements, a sign that they believe its business remains on a shaky footing.

President Satoshi Tsunakawa apologized again for the problems Tuesday but said he did not foresee a need for any dramatic revisions in the earnings report. He called the auditor’s decision not to approve it “truly regrettable.”

Tsunakawa told reporters Toshiba’s executives have given up pay and were making other cost cuts, including selling a majority stake in the memory chip operations. Apart from its embattled nuclear segment, Toshiba’s other operations are healthy, he said.

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