30 Mars 2017
March 30, 2017
Toshiba Corp. President Satoshi Tsunakawa bows during a March 29, 2017 news conference in Tokyo about the Chapter 11 bankruptcy filing by its U.S. subsidiary Westinghouse Electric Co. (Mainichi)
With Toshiba Corp. approving its troubled nuclear unit Westinghouse Electric Co.'s decision to file for bankruptcy in the U.S. on March 29, it is worth reflecting on the buildup to this agonizing move by the electronics giant.
Looking back, it appears that the writing was already on the wall by the morning of March 14, 2017. With just several hours to go until Toshiba was due to hold a major news conference later that day, the company's president, Satoshi Tsunakawa, told participants at a Toshiba head office board meeting the following: "At today's news conference, I will talk about Westinghouse filing for Chapter 11 bankruptcy in the U.S."
There were no objections from the other board members. By this point, it was now clear that Toshiba -- which had incurred huge losses through Westinghouse's nuclear business in the U.S. -- was aiming toward putting its nuclear unit into bankruptcy. At the news conference held from 4 p.m. onward later that day, Tsunakawa did not rule out filing for bankruptcy for Westinghouse, stating that "there are several options" concerning the future of its American subsidiary.
The first time that Toshiba's huge financial losses in its U.S. nuclear unit became clear was Dec. 27, 2016. The reason for these losses, which are estimated to be 712.5 billion yen, are huge cost overruns that resulted from significant delays in nuclear plant construction projects in the U.S.
About one week before the announcement at the end of December, Tsunakawa informed six outside directors that Westinghouse had incurred new huge losses, in addition to the 260 billion yen losses -- which had been written off at the end of the business year ending in March 2016. Upon hearing this shocking revelation, Toshiba's outside directors were lost for words.
The severity of the problem worsened as the days went by. The extent of Westinghouse's estimated losses, which had first been calculated at around 480 billion yen, swelled to more than 700 billion yen. Toshiba's main creditor banks were concerned: "Unless your financial situation significantly improves, we cannot keep funding your company." With this kind of pressure emerging from its banks, Toshiba's senior management decided in late January to sell off the main part of its flagship semiconductor business, which had been generating about 70 percent of the company's profits.
However, the decision infuriated Toshiba's outside directors. "Why are you keeping our failing units but selling off the successful ones?" remarked one of the outside directors to the senior managers. As time went by, this particular sentiment became stronger among related parties, and Tsunakawa and his fellow senior executives were under increasing pressure to put Westinghouse into bankruptcy and withdraw from the overseas nuclear sector.
However, with Toshiba having agreed with Westinghouse that they would cover approximately 650 billion yen's worth of debt guarantee money in the event of bankruptcy, the electronics giant knew that putting its nuclear unit into bankruptcy would come at a high price. With this stark reality in mind, one wonders if already fragile Toshiba will be able to cope with the debt guarantee costs that will come with Westinghouse's bankruptcy filing.
Essentially, the tide concerning Westinghouse and the option of bankruptcy turned in February. A team of specialists calculated that by gaining 2 trillion yen through the sale of the main part of Toshiba's semiconductor unit, the company would be able to cover the estimated 1 trillion yen cost of putting Westinghouse into bankruptcy. In addition, Toshiba's group of creditor banks implied that a bankruptcy filing in March would be preferable, as it would enable a fresh start for fiscal 2017. As a Toshiba board member recently explained, "The banks were worried about the financial situation surrounding nuclear power plant construction in the U.S. There was a sense that if we didn't aim for bankruptcy for Westinghouse by the end of fiscal 2016, the banks would lose their patience."
With this kind of stark reality in mind, Tsunakawa officially informed the heads of the banks on March 16 that "Westinghouse will file for bankruptcy in March." Later that month, on March 29, one of Toshiba's board members commented in a relieved manner, "We have finally cut off from our negative legacy." However, with losses associated with Westinghouse filing for bankruptcy expected to be in excess of 1 trillion yen, the financial damage to Toshiba cannot be overestimated.
March 30, 2017 (Mainichi Japan)
In February 2006, then Toshiba Corp. President Atsutoshi Nishida declared to a London audience that his firm would become a world standard-setting nuclear reactor maker. Nishida was there to ink the contract that would make U.S. nuclear technology firm Westinghouse Electric Co. a Toshiba subsidiary, and at the ceremony Nishida looked and sounded ready to take on the world.
Toshiba paid some US$5.4 billion (about 640 billion yen) to acquire Westinghouse. Before the deal was closed, observers had seen past business partner Mitsubishi Heavy Industries Ltd. as Westinghouse's most likely suitor, and projected a purchase price in the 200 to 300 billion yen range. However, Toshiba swooped in and sealed the deal with what could be called a stratospheric bid.
That Nishida plunged ahead with such enthusiasm was down to the Ministry of Economy, Trade and Industry's push to make Japan a major nuclear technology exporter. Japanese reactors were supposed to be literally going places. Global warming countermeasures had emerged as a world issue, and nuclear power appeared to be a promising zero-emission alternative to fossil fuel-fed electricity generation. It was an atomic power "renaissance" in the making, bolstered in Japan by government and industry plans to make it a centerpiece of the country's infrastructure export drive.
When Toshiba bought Westinghouse, Nishida boasted that, by 2015, the firm would be contracted to build or already building 33 reactors around the world. Norio Sasaki, who succeeded Nishida in the president's chair in 2009, upped that goal to 39 reactors by fiscal 2015. Together with Westinghouse, Toshiba pulled in reactor orders in the United States and in emerging nations, and it appeared as though nuclear technology would become the firm's sturdiest and most essential business.
All that began to change in March 2011, when three reactor cores at the tsunami-crippled Fukushima No. 1 nuclear plant melted down, igniting the Fukushima nuclear crisis that continues its slow burn even today. Countries around the world moved swiftly to beef up nuclear safety regulations, and the "zero nuclear" movement gained tremendous public and political traction. It was obvious that the business climate for nuclear power was undergoing a seismic shift, but Toshiba did not adjust its strategy. According to one source with the company, "The firm was internally divided into little plots based on where workers got their start, in nuclear power, or in semiconductors, or whatever. All that they did was play the blame game."
Toshiba's executive ranks, apparently oblivious to Westinghouse's ailing business performance, did not realize the U.S. subsidiary was losing oceans of money until December last year. One power company executive told the Mainichi Shimbun they were shocked to hear a Westinghouse executive brag, "Running our company is really easy because Toshiba never gets involved. Toshiba is a cash dispenser."
In other words, though they paid a premium to acquire Westinghouse, Toshiba's past management teams then abandoned even supervising their new subsidiary, let alone managing it -- a tremendous blunder. And as a result, the entire company now finds itself bogged down and sinking in a vast swamp of red ink.
"That was a decision with very serious problems," said current Toshiba President Satoshi Tsunakawa when asked on March 29 about the Westinghouse acquisition, a bitter expression on his face.
March 29, 2017 (Mainichi Japan)
Electronics giant Toshiba Corp. has approved its U.S. nuclear unit Westinghouse Electric Co.'s decision to file for Chapter 11 bankruptcy protection, during a board meeting held at the Japanese company on March 29. Westinghouse proceeded to file for bankruptcy on March 29, Japan time.
The approval by Toshiba marks the company's move to avoid any further financial risks relating to Westinghouse in the U.S., as well as its total withdrawal from the overseas nuclear business sector.
Toshiba's decision to cut itself off from its subsidiary Westinghouse comes 11 years after the Japanese company bought the latter in 2006. Prior to the bankruptcy filing announcement on March 29, Westinghouse was working on the construction of four new nuclear plants in the U.S. However, following the introduction of stricter safety regulations following the disaster at Tokyo Electric Power Co. (TEPCO)'s Fukushima No. 1 Nuclear Power Plant in 2011, these construction projects became delayed and Westinghouse incurred huge cost overruns, causing Toshiba to post consolidated losses of 712.5 billion yen in the business year ending in March 2017.
With the risk of incurring even more losses in its U.S. nuclear unit, Toshiba has decided to go for a clean break -- a move which was made crystal clear by the Japanese company's decision on March 29 to give the green light to Westinghouse's proposed bankruptcy filing. However, the break will not be that smooth. Even after Westinghouse goes into bankruptcy and is removed from Toshiba's consolidated companies, Toshiba will still need to cover a guaranteed debt bill in the region of 800 billion yen, meaning that total losses could potentially swell to a staggering 1 trillion yen.
Now that Westinghouse has applied for bankruptcy protection, legal procedures for its future movements will start, such as finalizing the amount of debt and mapping out its reconstruction plans, under the supervision of U.S. courts. And once the company has tidied up its contracts and liabilities, it will be in a position to search for new sponsors. Meanwhile, in Japan, Toshiba will completely break away from the overseas nuclear business sector, and focus specifically on the domestic nuclear business including decommissioning projects, as well as on infrastructure projects.
The current situation is probably not what either company expected in 2006 -- when Toshiba bought Westinghouse, and the two companies had bold plans to commence work on 33 nuclear power reactors by 2015. However, the 2011 Fukushima nuclear disaster triggered a slump in global nuclear demand, and by the end of the business year ending in March 2016, Toshiba declared losses of 260 billion yen.