Tue, Sep 02, 2003 page12

• Toshiba urged to close overseas plants

  OVERCAPACITY Industry analysts say that the Japanese electronics maker needs to shift production away from the US and Germany and bring its contracts to Taiwan

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  Toshiba Corp, Japan's biggest notebook-computer maker, needs to close factories in the US and Germany and shift more manufacturing to Taiwan contractors to cut costs and reverse losses in its PC business, analysts said.

  Toshiba said it will unveil plans this month to reorganize its PC business after posting a fiscal first-quarter loss of ?36.8 billion (US$316 million) on July 30. The loss, which was nine times larger than analysts' estimates, prompted the biggest two-day fall in Toshiba shares since October 1987.

  The Tokyo-based maker of Dynabook and Libretto laptops blamed price-cutting by Hewlett-Packard Co and other rivals for a ?6.9 billion first-quarter loss at its PC unit. Toshiba needs to follow Hewlett-Packard, Dell Inc, and other makers by outsourcing more production to companies with factories in lower-cost countries such as China, analysts said.

  "Costs are still too high for Toshiba," said Keiji Iwasaki, an analyst at Shinko Investment Trust Management Co, which manages ?460 billion in Japanese equities including Toshiba shares. "Consumers are attracted to low prices rather than high quality. But Toshiba can't bear to compete on price."

  Hewlett-Packard and Dell have shifted more manufacturing to contractors such as Quanta Computer Inc (廣達電腦) and Compal Electronics Inc (仁寶電腦). The Taiwanese companies are opening more factories in China, taking advantage of cheap labor to assemble boards that connect PC parts, hard-disk drives and other components.

  Toshiba makes 75 percent to 80 percent of its PCs at its own plants in Tokyo, the Philippines, China, the US and Germany, Toshiba spokeswoman Junko Furuta said. The company also buys PCs from Taiwanese makers, including Compal to sell under the Toshiba brand.

  Toshiba should stop making PCs in the US and Germany, focus on making prototypes in its Tokyo plant and increase outsourcing, analysts including Shinko Securities Co's Yoshihide Ohtake said.

  The PC business lost money in each of the two years to March 2003, said Ohtake, who rates Toshiba shares "neutral."

  Toshiba accounted for 3.1 percent of global laptop and desktop shipments in the second quarter, making it the fifth-biggest PC vendor, according to market researcher IDC. Dell, Hewlett-Packard and International Business Machines Corp are the top three, according to IDC, followed by Fujitsu Ltd and Fujitsu Siemens Computers Holding BV combined.

  Laptops account for almost all of Toshiba's PC production.

  The decline in PC prices shows little sign of abating. Dell slashed prices on some products by 22 percent last month, a day after Hewlett-Packard chief executive Carly Fiorina said her company had been "overly aggressive" with reductions in the second quarter.

  PC prices will keep dropping because there is overcapacity among contract manufacturers, causing them to undercut each other as they compete for orders from Dell and Hewlett-Packard, Taiwanese makers said.

  The nation, which accounts for about 60 percent of world laptop production, has more than 15 notebook PC makers that sell to brand-name vendors.

  Some analysts said cost cuts aren't enough for Toshiba to regain profitability in the PC business.

  Round Rock, Texas-based Dell has been able to reduce prices because it doesn't spend much on production or research and development and has kept inventory low, said Hiroshi Yoshihara, an analyst at Merrill Lynch Japan Securities.

  Hewlett-Packard, based in Palo Alto, California, sells printers, toner cartridges and paper to buyers of its PCs, while Armonk, New York-based IBM boosts profit by selling services to PC buyers.

  "US computer makers have a clearly established profit-making pattern," said Yoshihara, who rates Toshiba "neutral."

  "Toshiba has to think about changing the whole structure of its PC business," Yoshihara said.

  Toshiba, which makes products from semiconductors, power-plant equipment and vacuum cleaners to mobile phones, doesn't produce printers, while computer-related services were only 5.7 percent of group sales in the year ending next March.

  "Toshiba can't win in the PC business, period," said Katsuaki Furutachi, who helps manage the equivalent of US$1.28 billion in Japanese equities at Asahi Life Asset Management Co and doesn't own Toshiba shares. "It will probably keep losing money as long as it stays in the business."

  Toshiba's PC unit reorganization may go some way to placating analysts and investors.

  The company will triple orders with Compal to 100,000 a month from this quarter, a local Chinese-language newspaper reported last month.

  Toshiba has also placed new orders with Taiwan's Inventec Co (英業達), raising outsourced production to 30 percent from less than 25 percent, the report said, without saying where it got the information.
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