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Hot off the Press - News

Toshiba Battles to Revive Slow PC Division
December 29th,2003 By Kiyoshi Takenaka
Nov 15th, 2003

Tokyo (Reuters) - Japan's Toshiba Corp, once the world's largest maker of notebook computers, is seen poised for major restructuring of its PC operations as it struggles to halt the division's flow of red ink and recapture past glory.

But analysts say Toshiba's priority should be on shifting resources to areas where it has a clear advantage, such as hard disk drives (HDDs), as a fierce price battle involving Hewlett-Packard and Dell has made profits in the PC market elusive.

Hit by aggressive pricing by the two industry leaders, the Japanese electronics conglomerate cut the earnings outlook for its PC and PC peripherals division twice in as many months this year, raising investor concerns about its competitiveness.

Toshiba, which held top spot in the notebook PC market for seven consecutive years to 2000, expects the division to post an operating loss of 21 billion yen ($196 million) for the year to March, a stark contrast with its initial forecast of a 22 billion yen profit.

As part of its effort to revive the once vibrant division, it plans to turn its PC business into a separate in-house company on January 1 -- a step industry watchers see as a catalyst for far-reaching restructuring.

"When profits from hard disk drives are stripped away and the real earnings picture emerges, losses at its PC business will be more like 30 to 40 billion yen (rather than 21 billion yen)," said Yoshiharu Izumi, an analyst at J.P. Morgan.

"That would leave Toshiba with no choice but to embark on fresh restructuring steps."

To fend off price competition from HP and Dell, Toshiba said in September it aimed to cut its PC-related work force by 500, increase the ratio of outsourcing to 30 percent from 20 percent, standardize parts and lower the number of production platforms.

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But the moves were seen as insufficient to turn around the PC business and Toshiba President Tadashi Okamura acknowledged it might need to do more.

"Those measures are intended to stop the bleeding, to keep the PC business from declining further. There could be an occasion to announce more radical measures," Okamura told reporters at a reception on December 16.

BITTER PILL
To better compete with HP and Dell, which have pushed it into third place among the world's biggest notebook PC makers, Toshiba needs a complete overhaul of its cost structure, analysts say.

"Drastic measures are necessary," said Hiroshi Yoshihara, an analyst at Merrill Lynch.
"Toshiba needs to raise the ratio of direct sales and production outsourcing to as much as 60 percent from the current 10-20 percent. It may also need to sell some production capacity to contract manufacturers and procure products from them."

Dell's strategy of direct sales to customers, high volumes and low inventory levels enable the No.1 PC maker to slash prices and undercut competitors while making healthy profits.

Another potential move for Toshiba would be to scale back its costly research and development, and outsource PC design, along with PC manufacturing, to overseas manufacturers.
That would be a painful decision for a company that developed the world's first laptop computer in the 1980s and takes pride in its technological prowess.

But it is a step worth considering as technical differences between competing PCs become less noticeable, making price the major differentiating factor, analysts say.

"Nowadays, you can't afford to say you don't need to follow rivals in price cuts just because you offer high-end models," said Yoshihide Otake, an analyst at Shinko Securities.
"You need to be able to offer reasonably attractive PCs at lower prices if you want to make a profit."



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