Toshiba's future imperiled on nuclear woes, dubious ethics

The future of Toshiba Corp. is imperiled over ballooning costs at its U.S. nuclear unit Westinghouse, which filed for bankruptcy protection last month. Behind a great Japanese brand's fall from grace is a fateful decision to bank on an expensive overseas purchase. And no one had calculated on a nuclear catastrophe.

Price drops in oil and natural gas, as well as beefed up safety regulations that kicked in after the 2011 Fukushima disaster, are chipping away at the appeal of nuclear power.

But perhaps more fateful was Toshiba's corporate culture of chasing big money at the cost of ethics and governance, already brewing as it headed to the 2006 purchase of Westinghouse, according to former employees and observers.

In an embarrassingly unprecedented move, the Tokyo-based company, long synonymous with Japan's modernization, reported financial results this month without an audit. It had earlier delayed it twice. It projected a 1.01 trillion yen ($9.2 billion) loss for the fiscal year ended in March, and warned of "substantial doubt about the company's ability to continue as a going concern."

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It was first in the little things that Muneo Morokuzu noticed signs of what he saw as an erosion of accountability at Toshiba. It hadn't always been that way. During the early decades after he joined Toshiba in 1970, he had been proud of what he called "a spirit of humanity" among the workers.

Toshiba's history goes back nearly a century and a half, rooted in telegraphs and lamps. Its U.S. history spans more than 50 years. One of the company founders, Ichisuke Fujioka, a samurai's son, brought the incandescent light bulb to Japan, forging an alliance with General Electric, and came to be known as "the Thomas Edison of Japan."

People at Toshiba, like Morokuzu, were the chosen of Japan.

But Morokuzu began to see things he found disturbing—like packs of company black limousines during outings to golf courses. He didn't approve of the use of company money for such personal pleasure. He was aghast, watching managers waving from their limousine windows to the other workers.

"It's a problem when the border between your own purse and the company purse becomes blurred," Morokuzu, who specialized in the nuclear fuel cycle, and retired in 2006, told The Associated Press.

He still believes nuclear power is viable, if operated with smaller reactors criticized as inefficient and expensive but, he believes, are easier to control, given the lessons of Chernobyl, Three Mile and Fukushima.

Toshiba's strategy of setting ambitious profit targets, under the banner of "chuh-ren-jeeh," or "challenge," came in the years around the 2006 Westinghouse deal, Morokuzu recalled.

"I feel so sad. The brand has been tarnished. I hope Toshiba can pull together," he said.

In 2015, Toshiba acknowledged it had systematically doctored its books from 2008, spanning the rule of three presidents. Inflating profits was carried out not only on one or two projects but across the board, according to an investigation of the scandal by a panel of outsiders set up by the company.

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It had been with great fanfare that Atsutoshi Nishida, Toshiba's then chief executive, announced the $5.4 billion acquisition of Westinghouse from British Nuclear Fuels in 2006. Other high-profile Japanese buyouts in the United States, like Sony Corp.'s purchase of Columbia Pictures and Mitsubishi Estate Co.'s snapping up Rockefeller Center, in those days had gone sour, raising questions about the ability of Japanese managers to deal with overseas businesses.

The Westinghouse deal was immediately criticized by analysts and the local media as overpriced.

"I'd like to make this the first success story," Nishida confidently told reporters then.

Meanwhile, Toshiba was struggling to differentiate its products in consumer electronics. The television business faced stiff competition from low-cost Chinese manufacturers and high-end Korean brands. Demand for its personal computers fell in the face of formidable Dell, Apple and Hewlett-Packard of the U.S., Acer of Taiwan and China's Lenovo.

Last year, Toshiba sold off its household appliance business to Midea Group of China, although the Toshiba brand has continued. It is now looking for a buyer of its mainstay memory-chip business.

If Toshiba survives, it will likely be left with infrastructure operations, such as railways, power systems and factory automation—and ironically nuclear power as it still needs to maintain and decommission reactors.

Toshiba has been involved in the design of 17 reactors in Japan, including two at Fukushima Dai-ichi plant, whose reactors sank into meltdowns after the March 2011 tsunami in northeastern Japan.

Auditors questioned its reporting on the acquisition of CB&I Stone & Webster by Toshiba's U.S. nuclear unit Westinghouse. Four nuclear reactors Westinghouse is helping to build in South Carolina and Georgia are behind schedule and billions of dollars over budget.

Koichi Okamoto, professor of sociology at Toyo Eiwa University and governance expert, who has researched Toshiba's problems, believes its downfall came mainly because of misguided management, including practices he says verged on power harassment. The goals had become unrealistic, and no one was stressing ethics, he said.

"If leaders at the top start violating compliance, then no one can stop them. So bosses shouldn't talk about profit too much because that is already understood," he said, noting that Toshiba had become obsessed with putting up the numbers. "Big or small, companies like that will eventually go down."

The best workers began to quit Toshiba, adding to the lack of governance, as only those who went along remained, said Okamoto, who believes nuclear power can be a good business with proper leadership.

Toshiba now faces 18 lawsuits in Japan, filed by banks, individuals, overseas investors and other parties for investment damages stemming from faulty management and accounting, totaling 32 billion yen ($290 million).

Toshiba, in turn, is suing Nishida and two subsequent presidents, for damages over their responsibility in the scandal. There has been no ruling.

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One former Toshiba engineer, who spoke to AP on condition of anonymity because of his continued involvement in the nuclear business, said his colleagues had been skeptical about the Westinghouse deal, seeing it as a dangerous bet.

Nishida's background was not in nuclear engineering but he was too confident, he said, when the deal in fact carried huge pitfalls, especially at the acquisition's exorbitant price.

Once the costs started mounting, management kept getting more desperate, trying to force a success and things spiraled out of control, he said.

Masashi Goto, another former Toshiba engineer, says the strategy to focus on computer chips and nuclear power was revved up to a higher level by Nishida's successor Norio Sasaki.

Sasaki was more familiar with nuclear power than was Nishida but he was reputed to be a workaholic, who despised challenges to his authority and surrounded himself with what Goto called "yes-men," the Japanese for lackeys.

"He never listened to people," Goto said, adding that management had banked on nuclear power as delivering stability to balance the drastic fluctuations in its chips business.

Over the years, Toshiba had boasted a reputation as a company of well-bred moderates who favored harmony over risk-taking, recalled Goto, a nuclear containment vessel expert, who visited all the Westinghouse offices while at Toshiba.

The other engineer, who asked for anonymity, agreed, and said Sasaki had a tough, aggressive character unusual for the gentleness that pervaded Toshiba, although he added he empathized with Sasaki for how the Westinghouse deal had gone awry.

Even before Fukushima, the costs of reactor building had zoomed over stringent safety regulations that first came after the 2001 9.11 terrorist attacks in the U.S., the engineers say. Such precautions were initially shrugged off in Japan. But they were taken seriously in the U.S.

The nuclear business had a special star position within Toshiba, especially under Sasaki, and Goto acknowledged he felt bad that workers at sections unrelated to the nuclear business are losing their jobs over recent cost cuts.

Satoshi Tsunakawa, the current Toshiba president, has apologized repeatedly, acknowledged the Westinghouse purchase was a mistake and promised Toshiba will not take on new overseas nuclear projects.

It was all because management clung to the dream of a nuclear "renaissance," even as the rest of the world gradually turned sour on nuclear power, said Goto.

With a sad laugh, he compared reactors to bed-ridden patients, who must be cared for and properly buried, a giant task that Japan, and the world, will be stuck with for decades.

"Even after Fukushima, Toshiba management did not have the wisdom to change course," he said.

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