How Toshiba lost $6 billion

Since its founding in 1873 as Japan’s first maker of telegraph equipment, Toshiba has survived a litany of challenges, from the Great Kanto earthquake of 1923, to having its factories bombed into rubble during World War II, to the drubbing of the Zune music player it co-developed with Microsoft. Now the conglomerate may be undone by four nuclear power plants under construction in the American South. Blown deadlines and budgets at the reactors in Georgia and South Carolina overseen by Toshiba’s Westinghouse Electric subsidiary resulted in the resignation of Toshiba Chairman Shigenori Shiga on Feb. 14 and a 712.5 billion yen ($6.3 billion) writedown on its nuclear reactor business.

That charge to cover cost overruns at Westinghouse eclipses the $5.4 billion that Toshiba paid for the company in 2006. The financial fallout of the nuclear business’s collapse is far greater. To stay afloat, Toshiba says it may have to sell a majority stake in its last remaining crown jewel: its flash-memory business, which makes chips used in smartphones and solid-state disk drives. The company already sold off its consumer electronics and medical equipment businesses following an accounting scandal in 2015.

“Toshiba is being torn apart,” says Amir Anvarzadeh, head of Japanese equity sales at BGC Partners in Singapore. “It’s going to survive, it’s not going to go bankrupt. But it’s the end of Toshiba as a company with any hopes to grow.”

Many investors apparently agree. The company, which had already lost $7 billion in market value over the past six weeks, saw its shares fall an additional 10 percent after the announcement of the writedown and Shiga’s departure. Another worry for the markets is that the huge Westinghouse charge will cause the company’s shareholder equity to drop to negative 150 billion yen for the current year ending in March, according to Toshiba forecasts.

Besides Toshiba investors, there’s another group of big losers: advocates of nuclear power, who had high hopes for Westinghouse, which in 2008 became the first U.S. company to win nuclear power plant construction permits since the 1979 Three Mile Island accident. But the nuclear renaissance Toshiba bet on never materialized, in part because the company couldn’t build reactors along the timelines and within the budgets it had promised. It had anticipated that Westinghouse’s next-generation AP1000 modular reactor design would be easier and faster to execute—just the opposite of what happened. In a briefing after the writedown announcement, Toshiba President Satoshi Tsunakawa said the company may now pull out of nuclear plant construction altogether and only provide equipment and engineering services, which would make it extremely difficult for it to sell nuclear projects to customers. All options are on the table for the nuclear business, including a possible sale of Westinghouse, he said.

“There’s billions and billions of dollars at stake here,” says Gregory Jaczko, former head of the U.S. Nuclear Regulatory Commission (NRC). “This could take down Toshiba, and it certainly means the end of new nuclear construction in the U.S.”

All this is a humiliating turn of events for one of Japan’s oldest businesses, which made the country’s first lightbulb and grew into a behemoth that manufactured everything from washing machines and medical equipment to computers and nuclear power plants.

When Toshiba bought Westinghouse a decade ago, the U.S. Congress had just started dangling loan guarantees and other incentives aimed at restarting a dormant nuclear industry. Westinghouse in 2008 signed deals to build four reactors for utilities Southern Co. and Scana. In a 2015 interview with Bloomberg Businessweek, Southern Chief Executive Officer Thomas Fanning said his utility’s two reactor projects at Plant Vogtle in Georgia were “going to be one of the most successful megaprojects in modern American industrial history.”

To build that megaproject, Westinghouse turned to Baton Rouge, La.-based Shaw Group, a newcomer to nuclear work. Shaw was founded in 1987 by James Bernhard Jr., who paid $50,000 for the assets of a bankrupt pipe fabricator and expanded the company via one acquisition after another. In 2000 he swooped in at a bankruptcy auction and bought Stone & Webster, an engineering company that had built MIT’s campus and many U.S. nuclear plants from the 1950s to the 1970s. Stone & Webster was a shell of its old self at the time of Bernhard’s purchase, but the name gave Shaw new credibility in the nuclear field, helping it win all of Westinghouse’s contracts.

After Westinghouse hired Shaw to handle construction in 2008, it wasn’t long before Shaw’s work came under scrutiny. By early 2012, NRC inspectors found steel in the foundation of one reactor had been installed improperly. A 300-ton reactor vessel almost fell off a rail car. The wrong welds were used on nuclear modules and had to be redone. Shaw “clearly lacked experience in the nuclear power industry and was not prepared for the rigor and attention to detail required,” Bill Jacobs, Georgia’s project monitor, told the state’s public service commission in 2012. Bernhard declined to comment for this story.

In July 2012, Shaw agreed to sell itself for $3.3 billion to Chicago Bridge & Iron, a much larger engineering company that wanted in on the expected nuclear resurgence. Three years later, after seeing little progress, CB&I sold the bulk of Shaw’s assets to Toshiba for $229 million—accepting the significantly lower price in exchange for shedding liabilities related to the projects.

In April 2016, just four months after the deal closed, Toshiba accused CB&I of inflating the worth of Shaw’s assets by $2.2 billion and asked to renegotiate. CB&I balked and sued Toshiba for breach of contract last July. A preliminary decision in December ruled in favor of Toshiba’s request to renegotiate. CB&I has appealed that ruling. “We remain confident this issue will come to a resolution favorable to CB&I,” says Gentry Brann, a spokeswoman for the company. CB&I has argued that at least some of the problems were the fault of Westinghouse and its AP1000 designs.

Besides taking the writedown to reflect its troubled U.S. projects, Toshiba says it will make more “strategic” decisions concerning overseas nuclear operations and will continue mulling the sale of its stake in NuGeneration, a company that seeks to develop a nuclear plant in North West England. As for its plans in India, where Westinghouse was slated to build six reactors, Toshiba said it now intends to supply parts and engineering services for the atomic units but won’t take on construction duties.

And what of the U.S. nuclear renaissance? Westinghouse’s stumbles on the projects for Southern and Scana, the nuclear disaster in Fukushima, Japan, and a flood of cheap natural gas that’s lowered U.S. power prices have made new reactors increasingly expensive and risky. Of the 30-odd applications for reactors that started in the mid-2000s, only the four Westinghouse units have gone forward. In hindsight, that’s a contest Toshiba surely wishes it hadn’t won.

The bottom line: After a bad investment in nuclear reactor construction, Toshiba is taking a $6.3 billion charge and may be selling part of its chip business.

About BloombergNEF

BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.
Sign up for our free monthly newsletter →

Want to learn how we help our clients put it all together? Contact us