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Toshiba: high stakes chip bet comes at perilous times

Activist investors in Toshiba have long called for a turnround. The Japanese conglomerate is betting on chips to give them a much-needed boost. But a drawn-out timetable means future earnings face oversupply risks.

Toshiba will invest about ¥100bn ($870mn) to build a wafer plant to make power semiconductors with the goal of doubling its production capacity by March 2025. Power chips are used in cars and electronics to oversee electricity flow and voltages. Although less sophisticated than those controlling smartphones and self-driving functions, these chips are still crucial components for carmakers.

Toshiba does have a home advantage. Carmakers such as Toyota and Honda rely heavily on local supply chains. Toshiba’s local rival Renesas, which has triple Toshiba’s global market share, already supplies plenty to Japanese carmakers. Toshiba has ample room for growth.

This chip business makes a big difference to the group’s valuation and sales. Chips and storage hard drives accounted for 22 per cent of revenues for the group in the fiscal year to March last year. The chip business Kioxia has been valued at about $20bn, implying Toshiba’s 40 per cent stake could be worth $8bn. Toshiba’s market value is $18bn.

But these power chips also have lower prices and margins than advanced chips, which are crucial for next-generation technologies such as artificial intelligence and 5G. Plus, demand for power chips can vary more, fluctuating on a shorter cycle compared with steady growth for high-end semiconductors. Another risk lies with persistent supply chain disruptions. Japan remains highly vulnerable to supply-side constraints in China. Its reliance on imports from there is about twice that of the US.

Toshiba’s share price has climbed 39 per cent in the past year over hopes of a turnround following mounting pressure from foreign activist investors. These have called for a partial sale of Toshiba’s businesses to unlock value. Anything that dents the value of the chip business would add further support to activist campaigns.

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