Toshiba's forced sale of its memory chip unit may end up being the best thing to happen at the flailing company in a while.

At first blush, being nudged into disposing of what's viewed as the crown jewel to cover the cost of its US nuclear debacle looks like a tragedy for the Japanese company and its investors. 

Perhaps not. The timing may be fortuitous, because just as Toshiba's board starts entertaining offers, competitors in China are doubling down on semiconductor factories. That will mean a vast increase in chip-manufacturing capacity, mostly by domestic companies.

For those in the memory business, like Toshiba, the clouds are even darker because, according to analysts at Sanford C. Bernstein, more and more of that funding is going toward these commodity chips, for which prices are acutely sensitive to the balance of supply and demand.

As we've seen with coal and steel, market forces and rationale don't always apply in China. And if you consider President Xi Jinping's goal of developing the nation's chip industry, it's clear that overcapacity is a real possibility.

Unlike coal and steel, however, chip-production technology changes at a rapid clip. This means that not only does output capacity expand fast (because more chips can fit on a single silicon wafer), but manufacturers are locked into an expensive equipment-upgrade cycle just to keep up with competitors.

So far, Toshiba has been able to remain in the race and has outlined a development plan to keep it there. But a loss at its devices and components business last financial year, which came amid a drop in memory prices, shows how much of its sales and income are beyond its own control.

Failure to spend means falling behind in technology, which lowers economies of scale. And with depreciation a large contributor to costs, manufacturers are inclined to keep churning out chips in order to keep generating revenue, instead of dialing down supply to align with demand. This pushes the industry toward losses that aren't easily reversed.

That would be a disaster for any company that doesn't enjoy generous support from a national government willing to sign blank checks. Toshiba is one such company, and it means that getting out of the chip business just as we hit peak memory could end up being a crisis averted.

Source : Times Of Oman