Toshiba, Hit by Financial Scandal, to Spin Off Flash Business

The corporation is under high pressure due to financial scandals, and the flash business would be better insulated if it were an independent company.

Toshiba, which invented NAND flash memory in the late 1980s that is now being used in virtually all servers, smartphones and tablet PCs, is being forced to spin off a highly profitable section of its IT hardware business due to serious problems impacting its financial future.

The Japan-based conglomerate revealed Jan. 27 that its flash memory business will be spun off into another business entity so that it will have "more operational flexibility and stronger fundraising ability," market research firm DRAMeXchange, a division of TrendForce, said Jan. 27.

The process will be completed by March 31, Toshiba said.

'More Advantages' in the Long Run

DRAMeXchange said it believes this move will provide Toshiba's flash memory business more advantages in the long run that will benefit the Toshiba-Western Digital alliance in the forms of expansion in NAND flash production capacity and increased efficiency in storage product development.

This move also could be seen as Toshiba's way of safeguarding its prize business jewel. The main corporation is under high pressure due to other financial scandals, and the flash business would be better insulated from them if it were an independent company.

The New York Times reported Jan. 27 that in December, Toshiba warned it was preparing to write off several billion U.S. dollars because of out-of-control expenses at its American nuclear subsidiary, Westinghouse. This followed Toshiba's admission in 2015 that it had inflated its earnings by $1.2 billion over seven years—a scandal that company investigators connected in part to Westinghouse nuclear-project managers, who they said had disguised faltering revenues and cost overruns, the Times reported.

Toshiba is expected to make public the extent of its write-downs sometime in February. Analysts believe they could amount to $4 billion to $7 billion, enough to put Toshiba's future at risk. Banks have indicated they will keep lending money so the company can pay its bills, but without that lifeline, Toshiba, a 140-year-old business, could face bankruptcy.

"Toshiba wants to put its [flash] memory business in a more stable financial position," said Sean Yang, research director of DRAMeXchange. "Facing mounting operational and competitive pressure, the spun-off entity will be more effective in raising cash to stay afloat or expand."

Toshiba-WD Own 35 Percent of NAND Flash Market

Currently, Toshiba and Western Digital together represent 35 percent of the global NAND flash output, according to DRAMeXchange. The leading supplier, Samsung, is at 36 percent, while the Micron-Intel camp and SK Hynix account for 17 percent and 12 percent, respectively.

From the financial angle, Toshiba's latest fiscal quarterly report shows that memory sales roughly made up around 15 percent of the company's total quarterly revenue. However, up to 50 percent of the company's operating margin for the period also came from the same source. This means that memory has become the main profit driver for Toshiba.

The DRAMeXchange research firm focuses on memory, storage and the consumer electronics industry, including PC DRAM, mobile DRAM, server DRAM, NAND Flash, SSDs and smartphones.

Chris Preimesberger

Chris Preimesberger

Chris Preimesberger is Editor of Features & Analysis at eWEEK, responsible in part for the publication's coverage areas. In his 10 years and more than 3,500 stories at eWEEK, he has distinguished...