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TOSBF AT A GLANCE

 

 

 

 

 

 

Toshiba Corporation (OTC: TOSBF) is a leading manufacturer of electronics, digital products, and social appliances. With a revenue of $56 billion during the year 2006, the company is ranked 7th in the electronics equipment industry. The three main business units of Toshiba are its Electronic Devices (semiconductors), Digital Products (LCD TVs, HD-DVD), and Social Infrastructure (power plants). Combined, these businesses accounted for 84% of revenue in 2006.

Its diversified offerings means that Toshiba is involved in complex relationships with companies that are sometimes competitors and other times partners. Toshiba's semiconductor division co-developed the main processing and graphics chips used in Sony's advanced video game console, the PlayStation 3. On the other hand, Toshiba's digital products group co-invented the HD-DVD format, which is locked in a fierce battle with Sony's Blu-Ray format for dominance of the next generation media format. Interestingly, Sony is selling the PlayStation 3--which is based on Blu-Ray--at a loss in an attempt to quickly penetrate the format market. In January 2008, Warner Bros. announced it would release high def DVDs in Sony's Blu-Ray format, meaning that roughly 70% of new releases will be in Blu-Ray format in 2008, not Toshiba's HD-DVD format. The two formats are incompatible, meaning that buyers of HD DVD players cannot play movies issued in Blu-ray, and vice versa.

Yet another complicated relationship exists between Apple and Toshiba's NAND flash memory business, which is the second largest player in the flash memory market. Apple's wildly popular iPod--100 million units sold as of April 2007--and upcoming iPhone in large part drive the market for flash memory. At the same time, Toshiba has entered the portable media player market with its own branded player, the Gigabeat, and designs and manufactures Microsoft's attempt to dethrone the iPod (the Zune player).

In addition to selling consumer-oriented technologies, Toshiba also builds large infrastructure products, notably nuclear power generators. Toshiba placed a $5.4 billion bet on nuclear energy by purchasing a majority 51% stake in Westinghouse in early 2006, allowing the company to complement its own nuclear technologies. Increased focus on global warming, rising energy prices, and legislation mandating lower carbon emissions all drive the increased use of nuclear energy, which is among the cheapest and cleanest of all mainstream and alternative energy types. On the other hand, nuclear energy faces significant hurdles of public acceptance, which are often indelibly marred by major accidents such as Three Mile Island (U.S., 1979) or Chernobyl (Ukraine, 1986).

Company Overview

Toshiba resulted from the 1939 merger between Tokyo Electric Company, a company then responsible for electric incandescent lamps and consumer electronics, and Shibaura Engineering Works Co. Ltd, one of Japan’s largest manufacturers of heavy electrical apparatus at the time. The company changed its name from Tokyo Shibaura Electric Co. to Toshiba Corporation in 1978.

During the third quarter of fiscal 2007, economic expansion slowed on a decrease in home purchases, and due to the Subprime lending lending crisis, the firm is uncertain about future sales growth in the U.S. In Europe, however, economic expansion remained robust resulting in overall growth for the Japanese company: sales and operating income rose to $32 billion and $717 million respectively. The semiconductor business, particular in memory, saw healthy growth while the LCD product line experienced a deterioration in income.

Products and Services

Electronic Devices

One of the more important components of the electronic devices segment is the semiconductor business, which accounted for 53% of Toshiba's operating profit in Fiscal Year March 2005.

NAND Flash

Toshiba has entered into a strategic relationship with SanDisk (SNDK), while investing ¥200 Billion ($1.7 billion) in the semiconductor market during FY2005. Over the course of FY07 to FY09, it plans to devote ¥1 Trillion ($8.4 billion) to semiconductor applications, some of which will be used to complete a fifth NAND flash line plant. Toshiba's fourth NAND Flash line is already in the works in Yoakkaichi.

Key competitors in this segment include Samsung Electronics and Hynix Semiconductor, whose semiconductor segments also accounted for over 50% of its operating profits in FY2005.

Cell Broadband Engine Architecture

Toshiba designed the Cell processor in collaboration IBM and Sony, which implemented the chip in its advanced video game console, the PlayStation 3. Toshiba is also responsible for the Sony PlayStation 3 Graphics Processor RSX, and it plans to expand its Oita plant in 2007 to increase the production of graphic chips for the console.

Digital Products

Toshiba manufactures a wide array of digital consumer products, including mobile phones, hard drives, notebook computers, and DVD players. Some key areas in this business are:

Flat Screen Panels

Toshiba allied with Canon to provide Surface-conduction Electron-emitter Display (SED) flat panel screens. It plans to invest ¥180 Billion ($1.5 Billion) in its Himeji SED mass production plant from FY07 to FY09.

HD-DVD

Toshiba's most widely known current project is the High-Definition Digital Versatile Disc (HD-DVD), which a successor to the standard DVD. The format is supported by a contingent of major companies, including Hewlett-Packard, Microsoft, Kenwood, Hitachi, Intel, LG, Samsung Group, Universal Studios, Dreamworks, Warner Music Group, HBO and Paramount Pictures.

The HD-DVD format is locked in a format war with Sony's Blu-Ray Disc. Ironically, one of the major tactics used by Sony to propagate the Blu-Ray format is through its PlayStation 3, for which Toshiba is a key chip supplier. Sony is currently subsidizing the cost of the video game console to the consumer, making it difficult for the HD-DVD format tobe competitive in price (the console plays Blu-Ray movies as well as games). n January 2008, Warner Bros. announced it would release high def DVDs in Sony's Blu-Ray format, meaning that in 2008 roughly 70% of new releases will be in Blu-Ray format, not Toshiba's HD-DVD format. This is a major blow to Toshiba in the format war.

MP3 Player

Toshiba's presence in the MP3 market is noted by its own Gigabeat line and its partnership with Microsoft to design and manufacture the Zune MP3 Player. Toshiba competes against Apple's dominant iPod franchise in the portable music player industry.

Social Infrastructure

Social Infrastructure includes power plants, elevators, and x-ray apparatus among other offerings. Toshiba became the only company able to offer both boiling water and pressurized water nuclear reactors when it purchased Westinghouse, a company known to cater to the nuclear electric power industry. Toshiba is also known to be involved in thermal, hydro-power generation, and fuel cell systems.

Trends and Forces

NAND Flash Memory Price Fluctuation

The Next Generation: Video Game Consoles and DVD Formats

Toshiba hedged its bet for both Sony's PlayStation 3 and Microsoft's XBox 360 by playing a large role in the creation of both HD-DVD (an option for XBox 360) and the Cell Microprocessor, which is the main chip in the newest PlayStation. The success of either or both consoles may greatly influence Toshiba's success in its related business lines.

While Toshiba played both sides of the fence for video games, it is still at the mercy of several forces that are out of its direct control:

• Electronic goods such as video game consoles and DVD players will mature over time, leading to increased supply and lower prices. While Toshiba enjoys relatively higher margins at the beginning of a consumer electronics cycle, margins will likely erode over time.

• Toshiba can do only so much to drive consumer adoption of technology regardless of technological superiority or lower prices. For example, Wal-Mart's or Best Buy's position as leading global distributors of electronics goods may have an impact on the outcome of the video format warfare.

• Finally, consumers purchase electronic components not just solely based on their technological superiority but also based on the available content, which is developed to a large extent by movie and video game studios.

Nuclear Energy

Toshiba placed a $5.4 billion bet on nuclear energy by purchasing a majority 51% stake in Westinghouse in early 2006. The acquisition allows the company to offer pressurized water reactors, a more advanced technology it did not previously have, to complement its legacy boiling water reactors. Westinghouse had been the main contractor for 60% of pressurized water reactor plants in North America and signs point to the U.S. building approximately 200 new nuclear plants over the next 20 years.

Nuclear power is one of the cheapest, most scalable sources of electricity; the cost of generating 1kW unit of electric power through nuclear means is 1.5 cents, compared with 6 to 7 cents for natural gas. Its efficiency has helped to boost its share of worldwide energy supply and accounted for about 7% of all energy produced in the world in 2004, up from less than 1% 30 years ago.

The issue of global warming may further boost the acceptance of nuclear energy, especially if lawmakers pass legislation to mandate lower carbon emissions or carbon trading markets take off. Nuclear energy is the cleanest of mainstream and alternative energies from a green house gas emissions standpoint (see chart below).

However, nuclear power must overcome very significant hurdles of public acceptance, which are often indelibly marred by major accidents such as Three Mile Island (U.S.) in 1979 or Chernobyl (Ukraine) in 1986.

Comparison to Competitors

A diversified global manufacturer of many different offerings, Toshbia competes with a wide range of companies. Two key areas of competition are its semiconductor and digital products businesses.

Semiconductor Industry

Toshiba, like all other semiconductor companies, trail market leader Intel (INTC), which garnered a 12% share in 2006 (versus 4% for Toshiba). The overall industry has seem recent shifts in market share, as Intel's dominance has fallen (12% decline from 2005 to 2006) while Advanced Micro Devices (AMD), ranked fifth behind Toshiba, nearly doubled its market share in a matter of 12 months. Toshiba has see relatively modest market share growth of 12%.

For NAND Flash market in particular, Toshiba ranks second behind Samsung Group and ahead of Hynix. It is in NAND where Toshiba has grown faster (20%) than Samsung and Hynix in Q2 2006. Other relatively minor player such as Intel and Micron may pose threats in the near future, as their respective NAND businesses have grown rapidly. Intel in particular more than doubled its revenue in one quarter and, being the leader of the semiconductor industry, possesses large amounts of capital to fund a strong research and development and build production facilities.

HD-DVD vs. Blu-Ray

The main competitor for Toshiba in the DVD format battle is Sony, which invented the Blu-Ray format. Between April and December of 2006, MarketWatch has reported that Blu-Ray stand alone boxes captured a 48% market share while the HD-DVD reported a 52% share. Because Warner Bros. announced in January 2008 that it will release high definition DVDs in blu-ray format exclusively, roughly 70% of movies in 2008 will be in Blu-Ray, not Toshiba's HD-DVD. This is a major blow to Toshiba and could signal that the format war is just about over.

This format war may ultimately be decided by factors such as actions by major distributors (e.g., Wal*Mart) as well as content providers (e.g., movie and video game producers). Also, Sony is currently subsidizing the cost of its Blu-Ray based game-console-cum-media-center to its consumers, making it potentially difficult for the HD-DVD format be competitive in price (the console plays Blu-Ray movies as well as games). HD-DVD is aligned with Microsoft's XBox 360 as an option sold separately.

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