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Why Toshiba Is Clamming Up
Forget licensing — the electronics giant is keeping innovations out of rivals’ hands
There’s
an eerie silence these days in the elevators at Toshiba Corp.’s
36-story Tokyo headquarters. A sign pasted on the door of every car
reads “Quiet Please,” and employees either whisper or hold their
tongues as they shuttle between floors. Why the prohibition on chatter?
Toshiba wants to make sure outsiders don’t overhear any secrets.
It
fits nicely with a campaign by new Chief Executive Atsutoshi Nishida to
keep key technologies close to the vest. As a Toshiba executive for two
decades, Nishida watched promising innovations become commodities as
the company licensed newfangled memory chips, hard drives, and other
ideas to rivals. Without a stable but low-growth business in power
plants and infrastructure, Toshiba might have seen its last days. “Now
is the time for us to think about our survival,” Nishida says.
So
six months after taking the helm at Toshiba, Nishida is hoping to end
the vicious cycle of tech commoditization. His plan boils down to
guarding the technologies that help the conglomerate distinguish its
products from rival offerings. The strategy won’t apply to everything,
but it will mean select innovations, such as next-generation memory
chips, hard drives, and batteries that were developed in-house will
stay in-house. And Toshiba has a message for anyone who dares piggyback
on its patents without permission: See you in court.
That thinking
stands in stark contrast to the way the high-tech industry operates
today. Most companies try to persuade others to adopt their
technologies, then reap the benefits of their innovation through
licensing fees. While Nishida is a believer in some open standards to
help new products spread, the share-the-wealth model often drives
margins down near zero — as hordes of low-cost manufacturers in China,
Taiwan, and elsewhere jump in. Indeed, Toshiba has been a beneficiary
of this system, earning decent royalties during the past decade from
both its DVD and flash memory technologies. But those licensing deals
haven’t ensured profitability: The peak years for royalty payments on
DVDs have coincided with the company’s leanest period. So Nishida says
Toshiba will now do better by keeping its smartest innovations to
itself and charging more for its own products that include them.
A
few years ago, Toshiba was too preoccupied with getting its house in
order even to consider such a strategy. It has missed its profit
targets in four of the past five years, spurring layoffs of 20,000
employees — 11% of its workforce. Today, though, brisk sales of
semiconductors and electronics have Goldman Sachs Japan Ltd. ()
forecasting profits for Toshiba of $762 million — 66% better than the
company’s estimate — on sales of $51 billion. Next year, Goldman
expects the company’s earnings to jump an additional 30%.
A lot of
Toshiba’s innovations will be largely invisible to consumers. Its
research engineers, for instance, are working on smaller, denser, and
less power-hungry flash memory chips that are expected to hit the
market next year. In the past, Toshiba would have sold that technology
to other chipmakers. But this time, says Nishida, Toshiba will make the
new chips by itself — although they’ll probably end up in devices made
by other companies. Similarly, Nishida says Toshiba will be the sole
manufacturer of hard drives with a technology that can boost capacity
by up to a third, and of a new type of battery for gas-electric hybrid
cars that can be recharged in just a minute or so.
LEGAL ACTION
Other
Toshiba innovations will be immediately recognizable. In 2007 the
company expects to market Toshiba-branded cell phones, music players,
and other gadgets powered by refillable fuel cells that convert liquid
methanol into electricity. Also in 2007 — just in time for the Beijing
Olympics — Toshiba hopes to open a $1.8 billion factory making
high-definition flat-screen TVs using a technology it developed in
conjunction with Canon Inc. () that uses less power and delivers a
sharper picture.
Toshiba is backing its strategy with action. On
Sept. 29 it took a long-simmering dispute with Korea’s Hynix
Semiconductor Inc. to the U.S. International Trade Commission in
Washington. Toshiba says Hynix owes it hefty royalty payments for flash
memory chips, which Toshiba invented — but Hynix says Toshiba actually
owes it money. One big reason for the stepped-up action: The chips are
the semiconductor industry’s fastest-growing sector. Toshiba is laying
out $1.9 billion this year to triple flash output by next March, and it
doesn’t want others to benefit from its research. “Toshiba will
increasingly sue rivals in patent rights cases that can’t be settled
with negotiations,” says Taisuke Kato, who heads Toshiba’s
intellectual-property division.
It’s a hardball strategy for a
company that has been lax for years about its most valuable assets. And
it could well be effective even when secrets are picked up in elevators.
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