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Downfall of Toshiba, a nuclear industry titan

After a day of chaotic communication, a stock sell-off and a $6.3bn writedown that may destroy one of Japan’s greatest industrial names, the Toshiba president’s bow of apology finally came.

Satoshi Tsunakawa’s head nodded for just one perfunctory second on Tuesday. Most assume there will be much deeper, longer bows to come as Toshiba leads investors, customers, employees and Japan as a whole through the country’s first downfall of a nuclear industry titan. 

In a humiliating setback for a conglomerate that had only recently touted its nuclear business as a core growth driver, Toshiba said it would pull out of constructing new plants overseas and focus on providing less lucrative but lower-risk reactor designs and nuclear equipment. 

One investor says the potential downsizing of Toshiba’s nuclear ambitions could make what remains of the company difficult “even for a contrarian investor to consider”. 

It is also a damaging blow to the outlook for the nuclear industry worldwide. Toshiba’s decision to give up on bidding to be a lead contractor on nuclear power plant projects will dramatically reduce its ability to compete with rivals from China, South Korea and Russia, and limit the options for countries seeking to build reactors. 

Toshiba president Satoshi Tsunakawa makes a bow of apology on Tuesday © EPA

As Toshiba was reporting its huge writedown, the French utility EDF, which has also been beset by problems with its new-build nuclear projects, warned of a “challenging” 2017 after being hit by weak power prices and problems with some existing reactors last year. 

Unlike Toshiba, EDF says it is determined to push ahead with its international nuclear new-build strategy, seeing it as a way to leverage France’s historic expertise in reactor technology and diversify away from an increasingly competitive domestic market.

But since 2007, the French nuclear industry has only won one new deal: the controversial £18bn Hinkley Point project in the UK.

“From now on, there are only three major players in the global nuclear power plant market: Korea, China and Russia,” says Michael Shellenberger of Environmental Progress, a pro-nuclear campaign group. “The US, the EU and Japan are just out of the game. France could get back in, but they are not competitive today.” 

Toshiba bought the US-based Westinghouse nuclear business from the British government’s BNFL for $5.4bn in 2006, in the hope of profiting from an upturn in reactor construction that was optimistically dubbed the “nuclear renaissance”.

Instead, the Westinghouse deal has brought Toshiba to its knees.

1. Jan 2006: Agrees to buy US nuclear company Westinghouse
2. Dec 2013: Unveils plan for majority stake in UK venture NuGen
3. Apr 2016: Takes a $2.3bn writedown on Westinghouse
4. Dec 2016: Warns of a further large writedown on Westinghouse
5. Feb 2017: Reveals $6.3bn charge on its US nuclear business

Having lost crucial skills for leading large nuclear projects while construction was largely on hold in both the US and Europe after the 1986 Chernobyl disaster, both Westinghouse and EDF were unprepared when demand returned in the 2000s, according to Colette Lewiner, an energy adviser at Capgemini. 

Coupled with increasingly onerous safety requirements from regulators following the 9/11 terrorist attacks in 2001 and the Fukushima accident in 2011, and ambitious commitments to innovative reactor designs, the skills shortages meant that the costs of new-build projects spiralled out of control.

Toshiba, hit by massive cost overruns and delays linked to Westinghouse’s nuclear projects in the US, is now poised to warn investors that the group as a whole faces uncertainty over continuing as a going concern, say analysts. 

Asked about the roots of Toshiba’s woes, Mr Tsunaka said what analysts have long concluded: “Looking back now, we can’t deny it was the Westinghouse acquisition.” 

The misery for Toshiba is that its failed bet on Westinghouse may now leave the group fundamentally little more than a nuclear business as it is forced to sell off whatever other businesses it can.

Mr Tsunakawa suggested that Toshiba’s options include selling its controlling stake in Westinghouse, but few analysts see an obvious buyer either in or outside the US. 

“They cannot get rid of the nuclear business,” says Kota Ezawa, analyst at Citigroup.

Toshiba is therefore on course for upheaval that will fundamentally change the shape of a group that has spent more than a century at the heart of Japan’s industrialisation. Businesses that have defined Toshiba — most prominently the NAND memory chip business — could now be wholly or partially sold off.

None of Toshiba’s options is attractive. Preliminary figures released on Tuesday show Toshiba is already deeply in negative shareholder equity, and the consequences of that remaining the case by the end of March, and continuing weak internal controls, raise the prospect of the company being delisted from the Tokyo Stock Exchange. 

“The risk of delisting is still very real,” says Hisashi Moriyama, analyst at JPMorgan. 

Punctuating Mr Tsunakawa’s explanation of what had gone wrong at Toshiba were signals that its restructuring decisions are now being led by the company’s biggest bank lenders, Mizuho and Sumitomo Mitsui Financial Group

If its asset sales are unsuccessful, most analysts assume that some form of government intervention is likely, especially since Toshiba plays a specific role in the decommissioning of the stricken Fukushima nuclear plant. 

“Some form of government support will be needed in the future,” says Mr Moriyama. “It may be necessary for Toshiba to partner with Hitachi and Mitsubishi Heavy Industries to survive global competition.” 

EDF, meanwhile, is contending with a government-directed restructuring of the French nuclear industry. 

The company is being pushed by the French state, its controlling shareholder, to rescue former rival Areva by taking over its struggling reactor business that is behind EPR technology. The EPR reactor that EDF is building at Flamanville in France is six years late and €7.2bn over budget. 

The Areva deal — along with the Hinkley Point project and an estimated €55bn bill in the coming decade to extend the lifespan of France’s 58 existing reactors — will add to EDF’s debt load and increase its exposure to nuclear power at a time when the market, at least in developed countries, is shrinking. 

Worldwide, just three reactors started construction last year, and 51 were begun between 2010 and 2016, according to the International Atomic Energy Agency, compared to numbers in the 20s and 30s per year that were common in the 1960s and 1970s.

Mr Shellenberger argues that with so few plants being built, and both Westinghouse and EDF choosing to promote new reactor designs to answer public concerns about safety, it has been hard for companies to achieve cost reductions through repeated construction of similar models.

Ms Lewiner says a new wave of nuclear construction in France, possible early in the next decade, could help EDF gain the experience it needs to become more internationally competitive. 

But with the prices of renewable energy from wind and solar falling fast, and cheap gas unlocked by the shale revolution, it may be increasingly hard for nuclear to compete. 

The IAEA still expects global nuclear capacity to grow, until at least 2030, although it thinks the increase could be just 1.9 per cent over the whole period. Faster growth will depend principally on the pace of demand in China, South Korea, India and eastern Europe: markets where neither Toshiba nor EDF have a particularly competitive advantage.

Hopes of a nuclear renaissance have largely disappeared. For many suppliers, not least Toshiba, simply avoiding a nuclear dark ages would be achievement enough.

Additional reporting by Michael Stothard in Paris

Via FT