Nikkei: Splitting Toshiba means the end of the era of Japan's large industrial groups

Recently, according to Nikkei Chinese website, Toshiba is considering splitting the company into three parts according to its main business, namely infrastructure, devices and semiconductor memory, and then reorganizing it into three companies.

The purpose of the split will be to "create a simpler organization" for each business area, CEO Satoshi Tsunakawa said in a briefing. The management team of each unit will be selected from inside and outside the company: "Each department should be led by a team of experts in their field, making it agile and able to stand out from the competition."

The plan is the result of nearly five months of work by Toshiba's board's strategic review committee, led by independent director Paul Brough, which said in a statement the split "is a first for a major Japanese company of this size and significance and this approach reflects Toshiba's determination to pursue a path that will enhance long-term value for shareholders".

This is the first time for a large Japanese company to split into several listed companies. Later, General Electric also announced that it would split into three listed companies. General Electric is a long-term partner of Toshiba and they have cooperated in the offshore wind power business.

The move is also a response to growing demands from activist shareholders for corporate transparency and efficiency.

Toshiba currently oversees seven business groups, including public transportation systems, water supply and sewage treatment systems, the elevator industry, the energy division that builds thermal and nuclear power plants, the electronic equipment division that makes hard disk drives, and the semiconductor business.

"We are no longer a large industrial group," Toshiba Chief Executive Satoshi Tsunakawa said at a briefing.

Toshiba believes that the value of these business groups can be better valued after being separated as independent entities. Investors tend to be more reluctant to large business groups because they are more difficult to understand from the outside. Large industrial groups have complex organizational structures, lack clear focus and are more difficult to manage.

The demerger is also expected to enable each group to operate in a more dynamic manner, develop its own business strategy, raise capital and achieve higher growth.

Mamoru Hatazawa, the CEO’s deputy, said he was surprised to learn that GE was taking a similar path: “The pace of change is accelerating. When different levels of operations, such as the semiconductor and infrastructure divisions, are within the same large organization, we cannot keep up with the pace of change.”

Toshiba was once the symbol of Japan's industrial conglomerate, with a sales pipeline that included everything from televisions to nuclear power plants, but that era is over. In the past few years, the company has sold units including medical device maker Toshiba Medical, personal computer business Dynabook and computer memory maker Toshiba Memory, now known as Kioxia.

Tsunakawa stressed: "We are no longer an industrial group. Our strengths lie in infrastructure, energy and semiconductors. Restructuring is an important change for the future."

Under the plan, the newly formed infrastructure company will combine infrastructure and energy businesses. It will also include advanced industrial technologies such as the Internet of Things, factory automation, smart grids and quantum computing. Tsunakawa said the new infrastructure company may further streamline its operations.

The Electronic Devices Company will be responsible for the production of semiconductors and hard disk drives. Toshiba produces semiconductors through its subsidiary Japan Semiconductor. The Kitakami-based subsidiary is a major producer of power management chips. Toshiba also produces hard disk drives through its Toshiba Devices subsidiary, which is one of the world's three largest players in the field, along with Seagate Technology and Western Digital.

Toshiba had previously said it would sell its 20% stake in Kioxia, but Tsunakawa now says it will sell its entire stake: "The computer memory business requires a lot of investment. We have decided not to engage in this business anymore."

It is worth mentioning that Toshiba announced on June 10 this year that it had received a report from a lawyer investigating the operation of the July 2020 shareholders' meeting. The report pointed out that Toshiba worked closely with the Ministry of Economy, Trade and Industry of Japan to respond to active shareholders. Because some shareholders were pressured not to exercise their resolution rights, the report believed that the shareholders' meeting "did not operate fairly." If the Ministry of Economy, Trade and Industry of Japan intervenes in the operation of corporate shareholders' meetings, it will become a test of Japanese corporate governance. Toshiba will respond after carefully reviewing the contents of the report. The Ministry of Economy, Trade and Industry of Japan stated that it is "confirming the content." The report pointed out that at Toshiba's shareholders' meeting in July 2020, some shareholders' resolution rights were invalidated or could not be exercised.