Toshiba Chip Unit Is Back; Rivals Loom

Toshiba America Electronic Components Inc. in Irvine shows how consumers are driving growth for technology companies these days.

It sells memory chips that go in digital music players. It designed chips for Sony Corp.’s PlayStation video game console. And it has big hopes for fuel cells, a power device that could replace batteries in wireless phones and other gadgets.

The company, the Americas’ chip and display screen arm of Tokyo-based Toshiba Corp., has seen sales rebound after restructuring a few years ago. Toshiba also is benefiting from a stronger market that’s lifting many tech companies.

The unit counts estimated yearly sales of $1.3 billion.

After years of decline, sales grew around 50% in 2004, according to Stephen Marlow, executive vice president of Toshiba America Electronic Components. He said he expects a compounded annual sales growth rate of 25% through 2008.

“We are very upbeat,” Marlow said. “We’re much more flexible. We have grown substantially.”

Still, questions remain about how robust this turnaround is,and whether Toshiba can completely shed its rap as another sluggish Japanese tech company. Rivals have been more aggressive, according to market watchers.

“We are doing our best to be as nimble as possible,” Marlow said.

The Irvine unit has 125 workers locally and 500 worldwide. It is one of four Toshiba units with headquarters in Orange County. The others are the laptop computer business in Irvine, the office equipment business, also in Irvine, and the medical scanners unit in Tustin.

All told, Toshiba employs more than 1,300 people in OC, making it the largest foreign-owned company here.

Chips: 70% of Sales

At Toshiba America Electronic Components, chips make up about 70 cents of every dollar of sales. Liquid-crystal and other display screens make up most of the rest.

The company’s strength is in flash memory chips, which have proven lucrative with the growing popularity of digital music players, cameras and memory sticks.

The company’s products hinge on continued growth in consumer electronics. For now, consumer electronics are driving overall tech growth as corporate spending remains tepid.

“It’s moving dramatically to the consumer,” Marlow said.

Toshiba wasn’t in much shape to tap growing consumer demand a few years ago.

After the tech bust that started in 2000, Toshiba took a big hit in one of its key markets: dynamic random access memory chips, a staple in computers and networking gear.

In 2001 alone, DRAM sales fell more than 60% industrywide.

“We were in a survival mode,” Marlow said. “Our markets collapsed. We had to aggressively address our business strategies.”

A year later, the company exited the DRAM market, selling its wafer plant to Boise, Idaho-based Micron Technology Inc. for $250 million.

Toshiba also quit the color TV picture tube market, which now is dominated by Chinese producers.

With the downturn and business sell-offs, revenue at the Irvine unit fell by 70% from 2000 to 2003.

Sales and marketing were streamlined. The company cut its workforce by 40%.

Toshiba bet on flash memory and flat-panel screens for consumer devices,a move that paid off.

“There is vindication that we picked the right markets to stay in,” Marlow said.

Toshiba was the No. 4 chipmaker in the world in 2005, up from No. 7 a year earlier, according to El Segundo-based market tracker iSuppli Corp.

Toshiba’s total chip revenue grew 7% last year to $9.4 billion, giving it 4% of the market, according to iSuppli. The three ahead of Toshiba: Intel Corp., Samsung Electronics Co. and Texas Instruments Inc.

Stamford, Conn.-based Gartner Group also ranked Toshiba at No. 4, up from No. 7, but put its 2005 revenue growth at a slightly faster rate of 9%.

Still, Gartner analyst Andrew Norwood said the growth came with caveats. Toshiba treaded off the strength of its markets and the weaker performance of others, he said.

“It’s not that Toshiba did well,” Norwood said. “It’s that other people did even worse.”

Fellow Japanese chipmaker Renesas Technology Corp., a venture of Hitachi Ltd. and Mitsubishi Electric Corp., slid from No. 4 last year to No. 6 after sales fell 2%. Switzerland’s STMicroelectronics NV gained just 0.7% in sales, enough to move up a notch to No. 5.

Hynix Factor

Toshiba could have done better considering its place in flash memory, Norwood said. Instead, South Korea’s Hynix Semiconductor Inc. has been gaining on Toshiba and could top it in flash sales this year.

Hynix had the biggest year of growth among the top 10 chipmakers in 2005, Gartner said in its December report. It boosted sales by more than 23% last year, largely on the strength of flash sales. The increase helped propel the company into the top 10.

“They (Toshiba) have not ramped as fast as Hynix,” Norwood said. “They are not as nimble as some of their competitors in the U.S. and Korea.”

Hynix did a better job of switching production lines to flash in anticipation of a shift in demand, he said. Apple Computer Inc. is among Hynix’s customers.

Toshiba isn’t so sure Hynix has been playing fair.

In 2004, Toshiba filed a complaint against Hynix in federal court in Texas. The complaint claimed Hynix infringed on four Toshiba patents for flash memory. The company reportedly filed a similar case in Japan.

Marlow said he couldn’t comment on the dispute.

Toshiba makes some of its flash memory via a venture with Sunnyvale-based SanDisk Corp.

Competition is set to intensify.

Intel and Micron have joined forces to form a company, IM Flash Technologies, to make flash at a handful of plants across the country.

Marlow said he doesn’t see the venture as a big threat until 2007.

Some fret about a supply gut down the road. Demand has outpaced flash supply in the past year. But more production could drive down prices,and profits.

“I have to worry,and we do worry,about supply and demand,” Marlow said.

Toshiba is more than flash.

Marlow points to growth in chips and other electronics for gadgets.

Other Growth Areas

The company is aiming for expansion in sales of chips that drive the processing power of wireless phones. Marlow also sees growth for chips that handle video.

Then there are fuel cells. Marlow is unabashed in his love for them. Regulatory changes are expected to expand demand for these products, which could power increasingly complex wireless phones.

Toshiba’s fuel cells generate power by catalyzing methanol.

Within three years, fuel cells could be the must-have feature on phones, Marlow predicts.

“As much as 10% of the mobile market could be sourced by fuel cells,” he said.

Another growth driver: flat-panel screens.

Flat panels could grow to 40% of the Toshiba unit’s sales in three years, up from 20% now, Marlow said.

That’s with expected growth in flash and other chips, he said.

Handheld devices,phones, music and video players,are seen driving growth for screens.

They’re also becoming more common for vehicles, for movies or maps to help drivers navigate.

For bigger screens, Toshiba has formed a venture with Japan’s Canon Inc. to create a new kind of screen technology called surface-conduction electron-emitter displays, or SEDs for short.

SEDs are billed as showing sharp pictures on 50-inch-plus screens.