It's A Shakier Perch For Toshiba's LaptopsLarry Armstrong
For all the recent doom and gloom confronting personal computer companies, there's one niche that has seemed invulnerable. Shipments of battery-powered laptops jumped 35% last year and are projected to nearly double in 1991. So when the U. S. subsidiary of the world's No. 1 laptop maker lays off about 250 employees, as Toshiba America Information Systems Inc. did in the first quarter of this year, something must really be wrong.
Since then, Toshiba's woes have multiplied. In April, the top-ranked manager at its Computer Systems Div., which last year accounted for roughly 45% of the unit's $940 million in revenues, abruptly resigned. The profit picture dimmed in May, when the company slashed prices by as much as 33% to catch up with an industry price war. In June, it fired its exclusive distributor, substituting Tech Data Corp., a wholesaler that it had fired a year earlier. But Toshiba America has a more serious problem: For nearly two years, it has trailed the competition in bringing new laptop technology to market.
No one is writing Toshiba off, of course. In 1990, it passed Zenith Data Systems Corp. to grab the No. 1 spot in the market for battery-powered laptops, with a 21% share of the $3.2 billion business (table). And its research and development resources rank among the best in the world. Toshiba was the first supplier to sell color portables, and through a joint venture with IBM Corp., it plans to make color screens for battery-powered laptops. It's also a leader in use of longer-lasting nickel-hydride batteries. And it's pushing ahead with wireless communications for laptops.
But for now, the company that popularized IBM-compatible laptops five years ago is stuck with an outdated product line. Instead of competing with a handful of companies for a tiny slice of the PC market, Toshiba is now vying with more than 130 laptop makers whose wares account for more than 15% of all PCs sold.
Toshiba's biggest weakness is in notebook computers, compact laptops that slip easily into briefcases. The newest models come with up to 60 megabytes of disk storage and use versions of Intel Corp.'s speedy 80386 chip. But most of Toshiba's product line is still made up of heavy, bulky laptops or notebooks that use slower chips. Many of its products, in fact, still rely on AC power, not batteries. "Toshiba is held prisoner by a horribly out-of-date product line," says Aaron Goldberg, senior vice-president at researcher International Data Corp.
That's hurting sales. The company won't disclose results for its computer operation but says that overall sales for its U. S. subsidiary--which also makes copiers and fax machines--grew only 3% last year, down from 30% annually in the previous four years. Recently departed Toshiba America Information Systems executives say its computer sales for the six months ended Mar. 31 were 70,000 units--down more than 35% from the previous six months and more than 20% below the year-earlier half. That, they say, led to a $20 million to $30 million loss for the period. Kiichi Hataya, president of the Toshiba subsidiary, says that the company was profitable for the full year ended Mar. 31.
In addition, the former executives estimate that as of Mar. 31, inventories of aging products stood at between $80 million and $100 million. To work off extra inventory, in July, Toshiba closed manufacturing at its Irvine (Calif.) plant for two weeks. Now, the executives say, Toshiba's internal projections put its loss for the six months ending Sept. 30 at as much as $50 million. Hataya will only say that because of continuing price wars, profitability is likely to suffer in the short run.
WRONG CALL. The inventory bloat occurred because Toshiba didn't catch the shift to notebooks. Toshiba's American managers had asked Tokyo to design a notebook PC with a hard-disk drive and Intel's 80286 chip back in 1989, only to be told that it couldn't be done. So Toshiba's Tokyo-based designers were badly unprepared when Compaq Computer Corp. announced its LTE 286 that October. Toshiba's 80286-based notebook arrived in February, 1990, but it was substantially larger and slightly heavier than Compaq's. Toshiba didn't release a slimmed-down version until last month.
Toshiba also missed with 80386-based notebooks. It announced a line last November, along with other suppliers. But Toshiba's used a slower version of the Intel chip because executives in Tokyo calculated that faster 80386s would be in short supply. "It was a business decision, not a technology decision, and we probably erred," says Dennis E. Eversole, senior vice-president of the American subsidiary. By the time Toshiba started shipping its underpowered T2000SX last February, other companies--notably Compaq, AST, and Dell--were already delivering the speedier machines. Worse, AST Research Inc. and Dell Computer Corp. were charging up to $2,000 less than Toshiba. In July, Toshiba added the T2000SXe, a notebook that uses a faster version of the 80386.
SHORT LEASH. One reason Toshiba fell behind, say other computer industry executives, is the U. S. unit's strained relations with the parent company. Defections by key American executives in late 1988 and early 1989 led to "a breakdown in the working relationship and communications between the U. S. and Japan," says John E. Rehfeld, one of the computer division's first employees. He eventually became general manager but left in January, 1989, to become president of Seiko Instruments Inc.
Over the years, Rehfeld had built up considerable influence with his bosses in Tokyo. But after he left, the Americans had less say. Unlike rival NEC Corp., which has transferred most design-and-manufacturing authority to its American subsidiary (box), Toshiba continues to design its laptops in Tokyo. And with product development in Japan, Toshiba has sometimes misjudged the U. S. market. For example, it pooh-poohed the need for high-capacity hard disks, which many American consumers require in laptops. "When things sour, all control is pulled back to Tokyo," says David A. Carnevale, senior vice-president at market researcher InfoCorp. "It's the Achilles' heel of almost all U. S. subsidiaries of Japanese companies."
Toshiba executives say their American subsidiary is already on the mend. They concede that they underinvested in engineering and are now spending more. "Last year, I stepped in and insisted on more resource allocation," says Atsutoshi Nishida, the Tokyo-based senior manager of Toshiba's computer marketing outside of Japan. That, he says will result in "outstanding new products." This year, Nishida is allocating his own time to shore up the beleaguered U. S. operations. With the two top Americans at the U. S. division gone, Nishida is spending half his time in Irvine. For that kind of commute, he may need two laptops.
STILL AHEAD IN LAPTOPS Share of U.S. unit sales TOSHIBA 21% ZENITH 10 COMPAQ 10 NEC 9 TANDY 8 SHARP 8 DATA: INFOCORP