In 2006, Toshiba paid $5 billion  for Westinghouse Electric.

America's premier nuclear energy company,  one of the founders of the industry.

The acquisition and subsequent build of  four new nuclear power reactors ruined them.

A 140 year old company. One of  Japan’s proudest. Now torn apart.

In this video, we look at perhaps the worst  acquisition in Japanese corporate history.

## Beginnings

The modern Toshiba is the  child of a merger between  

two Japanese electrical equipment companies.

The first and more famous  half is Shibaura Engineering,  

founded by the famed inventor Tanaka  Hisashige (田中 久重). Born in 1799,  

Hisashige was a famed engineer and  inventor during the Tokugawa Shogunate era.

He first gained renown at the age of 20  for inventing a cool mechanical puppet.  

Then over a long and fruitful career,  he produced clocks, lamps, bicycles,  

steam engines, fire extinguishers, and more.  He was basically Japan's Thomas Edison.

A few years after the Meiji Restoration,  Tanaka was asked to come to Tokyo to  

help with the country's modernization -  particularly its telegraph network. And  

despite being 74 years old, he founded what  would eventually become Shibaura (芝浦製作所).

After Tanaka died in 1881,  

his adopted son took over. The company at  first expanded thanks to military orders,  

but in 1893 suddenly went bankrupt after  losing an important Japanese Navy contract.

Their creditors the Mitsui Bank bought the  assets and revived them. The new company  

acquired foreign technologies to produce  hydroelectric generators, electric motors,  

and other equipment. These products remain  at the heart of Toshiba's biggest businesses.

Then in 1910, the American General Electric  Company made an investment in Shibaura,  

linking them to their eventual merger partner.

## Tokyo Electric That partner was Hakunetsusha, a lighting company

founded by a young University of Tokyo  professor and former worker at Shibaura.

The company produced Japan's  first domestic light bulbs,  

but struggled to compete due to cost  and intense foreign competition.

So in 1905, they sold a majority share  to General Electric, renaming themselves  

to Tokyo Electric and adopting GE's  innovations like the tungsten filament.

Since the two companies were similar and shared  

GE as a common major shareholder,  a merger made sense. So in 1939,  

the two joined and created a new company: Tokyo  Shibaura Denki, colloquially shortened to Toshiba.

GE sold their Toshiba shares after the  war ended. As the country recovered,  

the Mitsui Group's backing helped  Toshiba access materials to produce  

broadcasting equipment, digital  computers and other electronics.

## The Rise of Toshiba

However, the company's old-fashioned business  practices and bureaucracy weighed on them.

Mountains of paperwork to deal with and a  group of snobby executives who were at best  

uninterested in actually running the company.  It made it difficult to create new products.

When an economic downturn struck  Toshiba hard in the early 1960s,  

the company brought in Toshiwo Doko (土光敏夫)  as chairman. Doko had previously turned  

around a failing shipyard into one of  Japan’s top shipbuilding companies.

Doko is widely beloved for his honesty, hard  work ethic and frugal lifestyle. He donated  

almost all of his salary to charity and his  house didn't even have air conditioning.

The honest and likable Doko rightsized  Toshiba's finances and revitalized its  

businesses. Toshiba became one of Japan's top  conglomerates, offering memory semiconductors,  

consumer electronics and more in addition  to their core power generation assets.

Their semiconductors were  especially formidable. In 1985,  

they won the race to develop and ramp up the  first one-megabit DRAM chip. Two years later,  

they had half of the world's  market share in 1-megabit.

Despite a very public 1987 scandal involving  illegal exports to the Soviet Union,  

Toshiba in the late 1980s was at the top  of its game. But then came the bursting  

of the Japanese real estate bubble  and the lost decades that followed.

## New Blood

Large, storied Japanese companies like  Toshiba faced a shrinking market at home.

And abroad, rising competition  from the Koreans and Chinese  

threatened their traditional positions. Toshiba  and its old guard leaders struggled to compete.

They were not the only Japanese company  dealing with this. By the early 2000s,  

there was a turn towards outsider leaders,  who were seen as bringing fresh perspective.

One classic example is the Sony Group  making Sir Howard Stringer its new CEO  

in 2005. Stringer had came up  through Sony's media business.

And Sanyo that same year made Tomoyo  Nonaka its chairperson and CEO. She was a  

former anchorwoman and journalist with no prior  experience in senior management or electronics.

At the time, Toshiba - particularly  its electronics businesses - had  

matured and were suffering its  own challenges. Thusly in June  

2005 Toshiba appointed Atsutoshi Nishida  (西田厚聰) as their new president and CEO.

## Atsutoshi Nishida

Nishida certainly fits all the  criteria to be an outsider executive.

After first considering a  doctorate in German history,  

Nishida instead decided to join  Toshiba's Iran affiliate. He married  

an Iranian woman and then joined Toshiba's  headquarters in Japan at the age of 31.

Throughout the 1990s, he rose up through  Toshiba's PC business. He first led them  

into the profitable laptop category and  supposedly turned around the division  

twice. He first did so in the 1990s after the  arrival of low-cost PC makers like Compaq.

The second time supposedly came  in 2003, the business again lost  

money and fell into crisis. Nishida had  expected to be made Toshiba's CEO and  

president. But how can Toshiba anoint  someone from a money-losing division?

Determined, Nishida introduced new laptops  and hired Taiwanese contract manufacturer  

companies and Chinese laborers to make  them. By 2004, over 80% of production  

was outsourced, but the PC division returned  to profitability that year ahead of schedule.

By 2005, Toshiba was the world's third  largest notebook PC vendor after Dell and  

HP. The turnaround seemed complete and the  company promoted Nishida to the top spot.

The chain-smoking executive was known for being  

unusually aggressive and willing to  make bold moves. One of those bold  

moves was the fateful 2006 acquisition of  America's leading nuclear energy company.

Nuclear energy. Bold strategy, indeed.  Let's see if it pays off for them.

And now for something completely  different. Let's talk nuclear reactors.

## Westinghouse

Westinghouse Electric Company began as the nuclear  power division of the Westinghouse company.

The elder Westinghouse company is quite famous.  Founded by the legendary inventor George  

Westinghouse, it pioneered Alternating Current  motors and transformers, the electrical kind.

Their nuclear energy division emerged after  

World War II thanks to a military  partnership with the US government.

In 1949, Admiral Hyman George Rickover became  head of the Nuclear Power Branch of the Navy's  

Bureau of Ships. He was a brilliant, pugnacious  and abrasive electrical engineer born in Poland.

That same year, 1949, the Soviet Union  detonated their first nuclear weapon,  

kicking off the Cold War. This Soviet  breakthrough provided the military  

impetus for a submarine with unlimited  endurance and high submerged speed.

Rickover moved heaven, earth, and  government bureaucracy to make it happen.

## The Water-Cooled Design

Rickover and his team began  developing two known reactor  

designs and assigned one each to  a different military contractor.

The three ways to classify a nuclear reactor  are by the fuel they use within their core,  

the moderator material they use to  slow down neutrons inside said core,  

and the coolant they use to cool the reactor core.

General Electric was contracted to develop  a liquid sodium reactor - meaning it used  

molten sodium as the coolant  and graphite as the moderator.

Westinghouse on the other hand was contracted  to develop a water-cooled reactor design first  

created at the Oak Ridge National Laboratory. It  had two water circuits - a primary and secondary.

Water in the primary circuit is pumped at  high pressure through the uranium-powered  

reactor. The water in this circuit heats up,  but does not boil or evaporate due to said  

pressure. The heat is then transferred  from the primary to secondary circuit.

That heat thusly creates steam for  running the turbine - which is why  

we call these "nuclear steam supply systems".

These systems are paired with a turbine generator  that turns the steam into power. The largest  

American vendors of such turbines are Westinghouse  and General Electric. What a coincidence.

This particular nuclear steam supply  system design later received the name  

"pressurized water reactor" or PWR, and  its first prototype went critical in 1953.

Steaming ahead at full speed, Rickover had pushed  Westinghouse to build a modified variant at a  

slightly slower time frame for installation  into the first nuclear-powered submarine.

That submarine, named the Nautilus,  was commissioned in January 1955.

Right off the bat it demonstrated nuclear power's  superior performance. In its first cruise,  

the sub traveled 10x further than any previous  sub. And at far superior submerged speeds.

General Electric's sodium-cooled reactor design  was later installed in a second submarine,  

the Seawolf. However, the potential  explosion risks of the molten sodium  

reacting with the seawater led to a conversion.

Sodium-cooled reactors later fell out of  style. So GE took up a design called the  

"Boiling Water Reactor" or BWR. It  is similar to a PWR in that it uses  

water as the moderator and coolant,  but attempts to simplify the design.

The BWR cuts the number of water circuits  from two to one. Steam is generated not  

in the secondary circuit but inside the  core itself - boiling like a teapot. The  

steam is then directly delivered to the turbine.

As I said, PWRs and BWRs are very similar.  Maybe one difference is that since pressurized  

water tends to carry heat better, PWRs can  deliver roughly twice more power per unit  

volume of core than the BWR. Westinghouse  came to dominate the PWR, and GE, the BWR.

## The Birth of the PWR Power Generation Station

After the Nautilus, Rickover  got involved in developing a  

nuclear reactor to power an aircraft carrier.

This reactor had to be much larger,  

and people recognized its potential value  for generating electricity. But then in 1953,  

the incoming Eisenhower Administration  proposed to abandon that project.

Undeterred, Rickover argued to merge the  carrier project with a civilian power  

project based on a scaled-up submarine design.  The administration was at first reluctant but  

after learning about Soviet and British efforts  to build power-generating nuclear reactors,

they backed the effort as part of  Eisenhower's "Atoms for Peace" initiative.

The result was Shippingport, which  achieved criticality in 1958. It is  

the world's first large-scale nuclear reactor  to generate power for exclusive civilian use.

The UK's gas-cooled Calder Hall started earlier  

but produced nuclear weapons  material in addition to power.

Because Shippingport was a civilian  project, its work, design features,  

and operation were declassified. The plant  hosted hundreds of visitors, many foreign.

Their staff held technical seminars  and training courses. We might call  

it the world's most closely studied PWR.

With that being said, the actual design of  all of Westinghouse's subsequent PWRs descend  

from its second commercial power plant:  Yankee Rowe, which went critical in 1960.

## The Turnkey Years Westinghouse and General Electric soon after

began to aggressively pursue the  commercial power utility market.

The issue was cost. Nuclear  power plants are the biggest,  

most complicated, and priciest items  ever sold in the civilian sector. It  

is hard to imagine them being competitive  with the mature fossil fuels industry.

In 1962, coal plants costed about $110 to  $140 per kilowatt. And even with subsidies  

from the American Atomic Energy Commission  or AEC valued at around $20 per kilowatt,  

Westinghouse's next two power  plants - Connecticut Yankee  

and San Onofre 1 - cost about $153  and $180 per kilowatt respectively.

So to overcome customer reluctance about the  plants' economics and kickstart the industry,  

Westinghouse and GE offered the utilities what  are called "turnkey" terms. It means the vendors  

take on all the designing, building, testing,  and meeting regulations for a fixed price.

They just turn the key over to  the utility customer at the end.  

Such terms are extremely rare in the US  power generation industry. Prior to this,  

they were offered mostly to foreign  utilities unexperienced in construction.

Finally in late December 1963, the Jersey Central  Power utility agreed to a turnkey deal with  

Westinghouse for the Oyster Creek power plant at  about $132 per kilowatt. This broke through, and  

in the next two years about 13 more reactors were  ordered on terms similar to those of Oyster Creek.

Westinghouse and General Electric's willingness  

to offer turnkey terms helped cement the  market dominance of water-cooled reactor  

designs. Alternative designs championed  by smaller companies struggled to compete.

Though General Atomics made a good go of it with  their high temperature gas-cooled reactor design.  

Their effort birthed the Fort St. Vrain reactor,  the first such commercial installation in the US.

The Turnkey Era by all practical  measures ended in 1966, once the  

industry felt that they had proven  nuclear's viability. They returned  

to building and delivering reactors on  the traditional cost-plus contract basis.

The projects initiated during that era were  also profoundly uneconomical. Years later,  

vendors found that actual construction costs  were about 2-3 times higher than the turnkey  

contract prices - inflicting an estimated billion  plus dollars of financial losses on both vendors.

## Rise of the PWR

As I mentioned, the PWR and BWR both emerged  into the market at around the same time.

Westinghouse, Babcock & Wilcox, and  Combustion Engineering championed the  

PWR. The BWR was backed by General  Electric and the American industrial  

company Allis-Chalmers. Not to mention  their foreign license partners abroad too.

Throughout the 1950s and the first half of  the 1960s, they evenly shared the market.  

But starting in 1970, the PWR pulled ahead  of the BWR in terms of world market share.

This is in part due to a scalable,  more compact design that allowed  

designers to produce larger reactors  that output more power at cheaper cost.

A critical development was the wider commercial  availability of enriched uranium. In 1970,  

West Germany, Netherlands, and the  UK signed the Treaty of Almelo.

The treaty distributed gas centrifuge  technology that cut uranium enrichment  

costs and made light water reactors  like the PWR and BWR more economical.

Soon after that, the French decided to  abandon the British-backed gas-cooled,  

graphite nuclear reactor design and adopt a  PWR design licensed by Westinghouse. In 1970,  

the French embarked on a major  PWR construction program.

And then came the oil crises of the 1970s,  which crimped oil imports and supercharged  

nuclear power orders. By 1973, US utilities had  ordered 41 new units. Between 1962 and 1976,  

installed capacity doubled every two years.

## Nuclear Slowdown & Decline

However, this surge in new reactor orders  unexpectedly ended in the mid-1970s.

This can be tied to two major  administrative changes. The  

first of which was Calvert Cliffs. In  1966, the Baltimore Gas and Electric  

company applied for and began work  on a nuclear power plant license.

Several Johns Hopkins scientists in the area grew  concerned about the plant ejecting heated cooling  

water from its secondary cooling loop into the  bay. They argued this would harm the area's  

native blue crab population - the harvest of which  is today worth about $20-40 million each year.

They founded the Calvert Cliffs Commission,  

which took the Atomic Energy Commission to court  for insufficient environmental considerations.

In 1971 the DC Court determined  that the AEC was not immune from  

the environmental reporting requirements  of the National Environmental Protection  

Act or NEPA. AEC halted its work for  18 months to adjust its regulations.

Three years later, criticism of the AEC's  dual role as both regulator and promoter  

of nuclear matters got to such a  point that Congress broke it up,  

reassigning some of its duties to  the Nuclear Regulatory Commission.

These together ended the American nuclear energy  boom. Construction starts petered off after 1974.

New reactors were still being  completed and started up due to  

installations being ordered prior to  1974, but new orders basically ended.

In 1974, there were 197 reactors on order.  But as the build times went on and on,  

utilities could not handle the spiraling  cost plus the uncertainty of whether the  

plant might ever be completed. In the end, over  half of that 197 were eventually cancelled.

And then came the Three Mile Island incident  in 1979. The widely publicized incident  

put the industry - then already in decline - into  a deep freeze that lasted for some three decades.

## The End of Westinghouse

The American freeze on new nuclear power  plants was damaging for Westinghouse.

However the company found work  in foreign markets like France,  

Japan and West Germany. Notably  in France, by 1975 Westinghouse's  

PWR designs had defeated GE's BWRs. By 2000,  the French completed 58 PWRs - their nuclear  

scale-up is one of history's great  capital-intensive industrial achievements.

Then in the 1990s, Westinghouse was  struck by financial scandal - centered  

on its credit subsidiary Westinghouse Credit. This  

subsidiary was formed in the 1950s to  help people finance fridges and stoves.

Then in 1986, that very-boring Westinghouse  Credit subsidiary started issuing aggressive,  

irresponsible loans for overvalued  real estate ventures like hotels.

This credit business lifted  the company's fortunes during  

the good times - growing at 18-20%  each year. Cheap and easy growth.

But then in 1990, the pigeons came  home to roost and they brought a  

lot of poop with them. In the late  1980s, real estate values declined.

And so Westinghouse found itself stuck with  over a billion dollars of underperforming,  

often unsecured loans. Plus another  $1.7 billion of those always-terrifying,  

off-balance sheet commitments.

To save the company, in 1993 Westinghouse brought  in Michael Jordan as their new CEO. Jordan was  

a long-time turnaround specialist who recently  led the Chicago Bulls to the NBA championship.

Just kidding. Michael H. Jordan, born in 1936,  

had served in the Navy before becoming a  consultant. Then he spent a long career at  

Pepsi's international division before joining  Westinghouse as their first outside CEO.

Jordan then initiated one of the  greatest overhauls in American  

corporate history. Westinghouse sold off  their power generation and industrial  

businesses to other companies like Siemens  and transitioned to being a media company.

A series of broadcasting acquisitions followed,  topped off by a ballsy $5 billion acquisition  

of the storied American TV broadcaster CBS in  1995. They even took the CBS name in the process.

As part of this remarkable transformation,  in 1998 the Westinghouse company sold its  

nuclear energy division to the state-owned  company, British Nuclear Fuels or BNFL.

The transaction was valued at about $1.2 billion.  However, BNFL paid less than $100 million in cash.  

The majority of the value was the assumptions of  liabilities. As part of the sale, the Westinghouse  

nuclear division was even allowed to keep the  name. After all, CBS did not need it any more.

## BNFL

Since its founding in the 1970s,  BNFL was a government-owned but  

independently-financed company that made  nuclear fuel and reprocessed spent fuel.

When you reprocess spent fuel, you recover uranium  from it so that you can make more fuel. In time,  

they branched off into nuclear cleanup  and plant de-commissioning services.

In the late 1990s, the company  seemed on the verge of a partial  

privatization. The government was going  to sell some BNFL shares to the market.

So the thinking behind buying  Westinghouse - whose designs  

powered some 70% of the world's nuclear  energy plants then - was to let BNFL  

offer their customers a complete nuclear  energy service from cradle to grave. As in  

from reactor design to fuel to servicing  to recycling and finally decommissioning.

So a year after they acquired Westinghouse Energy,  

they purchased Combustion Engineering and  ABB's commercial nuclear energy businesses.

BNFL also saw the Westinghouse deal as not  only expanding their range of services,  

but also facilitating their ability to do more  business abroad like in the United States,  

Japan, and the emerging market of Mainland China.

However, financial and operational difficulties  darkened the company's prospects. BNFL reported  

2002 losses of over a billion British pounds  due to rising labor costs, spiraling liabilities  

of decommissioning the company's aging Magnox  gas-cooled reactors, and lower electricity prices.

In response, the UK government cancelled  plans to IPO BNFL's stock, brought in a new  

CEO Mark Parker, and in 2003 announced a major  strategy review. That review determined that  

BNFL should not try to design, own, and operate  nuclear sites and just stick to servicing them.

So then on July 2005, the Westinghouse  division, which was then profitable,  

was put up for sale. Many in the media  argued the strategic and economic value  

of keeping the subsidiary, but the  sale nevertheless moved forward.

## The Acquisition

When BNFL bought Westinghouse in  1998, the mood around nuclear was  

at its nadir - still suffering the  fallout from the Chernobyl disaster.

But just a few years later, things had changed.  The BNFL offering attracted inquiries from  

15 viable suitors like General Electric, Shaw  Group, Mitsubishi Heavy Industries and Toshiba.

There was so much interest that BNFL's law  firm conducted a second round of bidding  

to whittle it down. At one time, over 300  people around the world were logged in to  

the virtual "data room", accessing and doing  due diligence on as many as 5,500 documents.

Toshiba and Shaw Group ended up winning  the bid, paying $5.4 billion in total for  

Westinghouse. Considering that BNFL paid  only about a billion a few years earlier,  

it was a fantastic exit. The  transaction closed in October 2006.

## Toshiba's Strategy: A Market Turnaround?

So what was Toshiba's play? Basically,  the nuclear market seemed ready for an  

explosive revival and Nishida wanted to be  at the forefront of the good times to come.

Nuclear seemed on the cusp of another  early 1970s-type breakout. Oil prices  

in the early 2000s were again on the rise due to  various geopolitical crises in the Middle East,  

plus growing demand in emerging economies  like India and the People's Republic of China.

In a 2005 report, the IAEA projected $200  billion of nuclear investment over the  

next 25 years - correlating to a 34-80%  increase in nuclear power generation.

The political winds had changed too. In June  2005, US President George W. Bush visited the  

aforementioned Calvert Cliffs nuclear plant.  He was the first sitting US president to visit  

a nuclear plant since Jimmy Carter visited  Three Mile Island in 1979. During his visit,  

he praised nuclear's safety  and advocated for more plants.

That same year, US Congress passed  the Energy Policy Act of 2005. This  

sprawling piece of legislation had several  nuclear-oriented incentives like tax credits,  

blunted liability claims for potential incidents,  and government help for potential cost overruns.

Later the following year, Al Gore released  the documentary “An Inconvenient Truth”,  

which widely publicized the issue of global  climate change due to fossil fuel carbons.

Broad public support developed for  so-called “Green” non-carbon energy  

sources. And nuclear seemed to catch some of that.

## Toshiba's Strategy: Taking Leadership

Now, Toshiba had already been in the  nuclear energy industry for a while.

When Japan first adopted nuclear energy in the  1960s, Toshiba and its rival Hitachi were major,  

almost complementary players in that  market. One would provide the Nuclear  

Steam Supply System, and the other, the turbine.

But almost all the Nuclear Steam Supply Systems  were Boiling Water Reactor designs originated by  

General Electric. If you recall, the BWR  is the second most popular design in the  

world - its biggest difference being that it  has one water loop rather than the PWR's two.

Toshiba, Hitachi, and General Electric  even collaborated to create the Advanced  

Boiling Water Reactor design, one  of the first Generation III types.

There are two ABWRs in Taiwan, the Lungmen Nuclear  power plant in the north. First begun in 1997,  

the plant was never finished and remains  profoundly unpopular here in Taiwan. For  

that reason, it is unlikely to ever be completed.

Anyway. In these cases, Toshiba was  the secondary partner behind General  

Electric. So in acquiring Westinghouse  - the leading designer of the dominant  

PWR nuclear design - Nishida felt  that Toshiba can step forward as  

the world's leading nuclear power company  and grab a larger slice of a growing pie.

There was also a substantial  China growth angle. At the time,  

the Mainland Chinese only had two operating  nuclear plants, but were proposing to build  

a dozen more new nuclear plants by 2020  at the potential cost of $50 billion.

Here, I would like to note that as of  February 2023, Mainland China has 55  

nuclear power plants in operation, producing 57  gigawatts of power. A remarkable achievement.

The Chinese government decided to adopt  the PWR design. Presumably, Toshiba felt  

it can benefit from this by acquiring  Westinghouse - the leading PWR designer.

Toshiba announced ambitious goals in the coming  years. In 2005, Westinghouse had $1.8 billion  

in revenue. They wanted to triple that over the  next ten years, winning 33 reactor orders by 2015.

## Take a Risk The upside was great, but so was the downside.

Nishida was shelling out a whole lot  of money here. Mitsubishi was one of  

the final bidders, and they murmured in a  later interview that Toshiba was overpaying.

Ominously, Toshiba's intended financial partner  - the trading company Marubeni - pulled out.

It forced Toshiba to bring in the American  company Shaw Group for 20%. But in a sign  

of the leverage they had, Shaw got a put option  to force a sale of that 20% share at any time.

Even some of Toshiba's  directors voiced some concerns.

Their senior executive vice president of  nuclear power plants said that it would  

be hard to make back the investment  if Toshiba paid anything more than  

$2.4 billion. They ended up  paying more than double that.

Regardless, Nishida brushed  those concerns aside - saying,  

"Unless we take a risk, we have no future".

The staggering $5 billion price seems especially  difficult to swallow considering that Toshiba only  

made $172 million in profit in the previous year,  2005. The company was not what it had used to be.

In 1997, you might have called Toshiba a  diversified tech company. Half of their  

revenue came from producing high  margin products like flash memory,  

laptop computers and medical equipment. Moreover,  they also made and sold consumer electronics.

But in the years since, Toshiba's  computers and television products  

became uncompetitive. Notably in 2008, Toshiba  withdrew from the consumer movie disc player  

market after the Warner Brothers movie  studio dropped their HD-DVD standard.

By the end of the 2000s, half  of Toshiba's revenues came from  

nuclear power and semiconductors.  It was the ambitious over-expansion  

in the latter - building two new  memory fabs and in 2007 buying the  

Sony fab making PS3 Cell processors  - that sunk Nishida's tenure as CEO.

In April 2009, the company unveiled a massive $3.5  billion financial loss after the Global Financial  

Crisis caused world demand for chips to plunge.  The company was forced to cut nearly 4,000 jobs.

Nishida stepped down as chief executive and  president. However, he remained chairman,  

and used his position to continue  watching over his successor Norio Sasaki.

## AP1000

Critical to Toshiba's success was Westinghouse's  next generation nuclear PWR design - the AP1000.

The AP1000 descends from the AP600, created in the  

1980s. It was originally designed for 600  Megawatts Electrical capacity - a number  

then suggested by the utilities so that  it would be easier for them to add load.

The lessons of the Chernobyl disaster showed the  need for new safety systems. So the AP stands for  

"Advanced Passive". Passive meaning that if  something happens, then the reactor safely  

shuts itself down using natural forces like  gravity, compressed gases and circulation.  

Human operator intervention is unnecessary  for at least three days after the event.

In doing this, Westinghouse also removed a  substantial number of actively powered safety  

systems - claiming a third fewer pumps and a  fifth as many safety piping as with prior designs.  

In theory, this not only made the design safer  but also easier to build, maintain and operate.

In December 1999, the NRC certified the  AP600 design. However in the 10+ years  

since Westinghouse first began work  on that design, some major economic  

changes. Most importantly, the  utilities were deregulated.

With this, the AP600's 4.1 to 4.6 cents per  kilowatt hour cost was no longer economically  

competitive against fossil fuels. So to  achieve better economics, Westinghouse scaled  

up the AP600's size and thus power capacity  to 1000 Megawatt Electrical. Ergo, the AP1000.

Much of the AP1000 design was carried over  from the AP600, so it only took about four  

years for the NRC to certify the design.  Though Westinghouse later had to submit new  

design elements that delayed a final final  approval until 2011. More on that later.

Westinghouse and Toshiba were putting  

a lot of eggs into the AP1000 basket. 175 out  of the prior 180 nuclear reactor projects have  

gone over budget - by about an average  of 117%. 64% of them have seen delays.

The two companies were betting that the AP1000's  simpler design would make it easier to build.  

Moreover, the design was made to be modular.  Meaning that they build the reactor first as  

separate modules in the factory, then ship them to  location where they can assemble them with ease.

If nuclear was to ever be economically competitive  with things like natural gas, then the AP1000’s  

simpler and modular design had to make nuclear  truly simpler and cheaper to build than before.

## The Nuclear Revival?

After the 2005 Energy Act passed, the NRC received  15-26 applications from nine utilities for new  

nuclear power plants in the US. And over the next  few years, four AP1000 reactors were ordered.

Two reactor orders were for the  Vogtle Electric Generating Plant  

in the American state of Georgia. They  wanted to add another two units to the  

two PWR units they already had -  which went live in 1987 and 1989.

Back in 1971, those first two reactors  were estimated to cost just $660 million,  

but cost inflations and overruns continually  inflated estimates to $2.7 billion,  

and then $5.5 billion, and then $7.2  billion and finally to $8.9 billion.

In 2008, the utility Georgia  Power agreed to buy two more  

AP1000 reactors for Vogtle at an initial  cost of $14 billion. These were helped by  

about $8.3 billion in loan guarantees  provided by the Obama administration.

The other two AP1000 reactors were  ordered by the Virgil Summer Station  

in South Carolina. Summer Station had one  PWR Westinghouse unit that first went live  

in 1984 and was constructed at a cost  of about $4 billion today. For a while,  

it seemed like nuclear energy  really was making a comeback ...

## The End of the Revival

Then three developments and  events chilled that momentum.

The first was the American Shale Oil Boom of  the mid-2000s. The emergence of fracking and  

horizontal drilling techniques turned  fossil fuels - and particularly natural  

gas - into a juggernaut. This made it  even harder for nuclear to compete.

Then after President Obama took office, he  promoted and pumped billions of dollars of  

investment into renewable sources with  a particular focus on wind and solar.

Backed by the full might of the Chinese  solar and wind manufacturing juggernaut,  

wind power costs fell by 40% and solar  power, 50%, in the seven years after 2008.

Naturally, utilities chose to install more wind  

and solar power. During Obama's two  terms in office, wind power capacity  

tripled and solar power grew 25 times  over. Nuclear power was left behind.

And finally, the third and most  impactful event was of course the  

Fukushima-Daiichi nuclear disaster in 2011.  Those reactors were BWRs designed by General  

Electric and supplied by both Toshiba and Hitachi.

One can argue that the AP1000's passive  safety systems address the risks of another  

Fukushima - which fundamentally concerned  an extended loss of power. For example,  

the inclusion of a large water tank  on top of the container building that  

would passively dump down into  the reactor core, cooling it.

Nevertheless, the Fukushima incident  spurred a massive new upswell of protest  

from environmental groups who argued that  the AP1000 design lacked proper containment,  

that one-in-a-million events are  more common than previously thought,  

or that it was too soon after the  disaster to approve new plants.

After making the mistake of going too hard into  semiconductors, Toshiba's new chief executive  

Sasaki cut investment into new memory fabs and  led the company back into the industrial sector.

But Fukushima damaged Toshiba's prospects in that  business. Countries like Germany and Switzerland  

canceled their projects, hurting the order book.

That combined with growing tensions  between Sasaki and Nishida spurred  

another leadership change. In February 2013,  

Sasaki stepped down as CEO and president for Hisao  Tanaka. Nishida remained chairman of the board.

## Construction Troubles

In March 2013, construction crews broke  ground on both the Vogtle and Summer projects.

It marked the first American attempt at  building a new nuclear power plant in  

thirty years. If it went well, then a number  of other nuclear power plants in Florida,  

South Carolina and North Carolina might follow on.

Unfortunately, it did not go well. One  of the keys to the AP1000 thesis was that  

its relative simplicity and modularity  made it easier to build at the location.

However, this only pushed the complexity from  the job site into the supply chain. Kind of  

like with the Boeing 787. America hadn’t  built a new nuclear plant in 30 years.

It is no surprise that the suppliers  struggled - surfacing problems Toshiba  

and Westinghouse did not  foresee with their design.

For example, the US manufacturer  Curtiss-Wright Corporation struggled  

to produce the plant's reactor coolant  pumps. It one time discovered that a  

blade inside the pumps had broken off,  forcing two years of design fixes.

The project hit setbacks from the very  beginning. Reuters reported how when  

Toshiba and its construction partners began  preparing the plant's foundation in 2009,  

they discovered that the material used did not  meet code, delaying the build by six months.

Moreover, the NRC closely monitored the builds,  demanding changes to the design - then already  

approved - to handle new situations. For  example, a new standard for the concrete shield  

to withstand a crash by a commercial jet. This was  what delayed the final final approval until 2011.

Internally, relations between the managers  within Toshiba and Westinghouse soured.  

Toshiba management lacked insight into what  was going on inside its own division. The  

Westinghouse guys, perhaps a bit too proud  of themselves over in the United States.

It was so bad that when Toshiba's newest chief  executive Hisao Tanaka took office in 2013,  

he was shocked to find that these new design  changes would cost Westinghouse - and thus  

Toshiba - another $1-2 billion.  Here begins the cost overruns.

## Writeoffs

The hard, but right thing to do would  be to announce these losses. That was  

what the accountants in Toshiba's  various audit committees argued for.

But Hisao Tanaka knew that doing this  would call into question Westinghouse's  

entire value as an asset - and thus lead to  an impairment of Westinghouse's goodwill.

If you recall from your accounting course,  goodwill refers to the intangible asset  

on a company's books after making an  acquisition. You buy a company for $6,  

but their assets are worth $3.  The rest is booked as goodwill.

If you realize the company you  bought is worth less than that $6,  

you got to write it down. A goodwill  impairment like that would blow a hole  

into Toshiba's books and call the company's  entire financial position into question.

Then came yet another financial blow. If you  recall, Shaw Group was Toshiba's partner in the  

Westinghouse deal, but only on the condition of  receiving a "put" option. Or in other words, the  

option to force a sale of their 20% share at any  time. In 2012 Shaw Group exercised that option.

That year, Shaw Group was acquired by the  engineering company Chicago Bridge & Iron.  

Their nuclear power engineering and construction  subsidiary was reorganized as CB&I Stone Webster.

As troubles intensified at the Vogtle and Summer  nuclear projects, Toshiba decided to purchase  

this Stone Webster division in October 2015  from Chicago Bridge & Iron for $229 million.  

In other words, they were getting directly  involved in the Vogtle and Summer plant builds.

Toshiba believed that taking direct  control of the construction would  

improve the module-building work down  in Louisiana, accelerate construction,  

and settle ongoing lawsuits with the  utilities over who should shoulder the  

additional cost. They did no diligence  on Stone Webster before buying it.

## Accounting Irregularities

Toshiba's managers were hiding  a few other problems too.

If you remember from much, much earlier,  

Nishida rose up through Toshiba's personal  computer division. And so the story goes,  

he got the top job because he managed to save  the laptop business from financial ruin. Twice.

The story adds that Nishida achieved the  latter turnaround by investing heavily in  

contract manufacturers. This is true.  However, he also greatly inflated the  

division's profitability using  certain "buy-sell" transactions.

In a buy-sell transaction, Toshiba first buys the  

components for a laptop like the LCD panels  or semiconductors from the supply chain.

They then sell those parts to the  contract manufacturer at a premium  

price, booking a profit from the transaction.

The issue is that Toshiba eventually re-buys the  completed laptop from the contract manufacturer.

Buy-sell transactions are not illegal per Japanese  accounting standards. They can even be quite  

common. The issue is when you manipulate the size  of the premium to artificially inflate profits.

It is likely that Nishida started or pushed the  practice of inflating buy-sell transactions to  

"turn around" the laptop PC division in 2004,  and win the CEO spot. The PC division accounted  

for a third of the estimated $1+ billion  in inflated profits from 2006 to 2013.

But the practice spread throughout the  entire business, including infrastructure,  

TV and semiconductors. One 2011  smart metering project done for  

the utility TEPCO booked some $200  million in overstated profit alone.

When the scandal came out in 2015, it forced  out much of the senior management circle  

including then-CEO Hisao Tanaka, vice  chairman Sasaki, and advisor Nishida.

Afterwards, Toshiba started selling off their  various businesses to raise money. In December,  

they sold their consumer electronics division  

to the Chinese appliance-maker  Midea for about $500 million.

Midea basically just brought the brand so that  they can wear it like some animal skin. Toshiba's  

once-respected line of notebooks PCs no longer  made money and were later shut down entirely.

Toshiba also sold their MRI, X-ray  and ultrasound medical diagnostics  

division - Toshiba Medical Systems  Corporation or TMSC - to Canon for  

$5.9 billion. TMSC had been a major,  steadily profitable business. The sale  

proceeds though were almost immediately  wiped out by the nuclear losses to come.

## Bankruptcy The nuclear debacle just kept getting worse.

Looking back at it, the December 2015  acquisition of the CB&I nuclear division  

was the straw that broke the camel’s back.  After taking direct control of the build,  

Toshiba struggled to find the  right construction workers,  

maintain quality, and build up a global  supply chain after 30 years of cruft.

Worst of all, it pinned Toshiba  - then already reeling from the  

accounting scandal and falling flash  memory prices - with billions in  

liabilities as the delays and costs  of the two nuclear sites accumulated.

CB&I could have helped pay for some of that,  

but instead they got to wipe their  hands clean and walk away scot-free.

Toshiba had to write down the value of  the CB&I Stone and Webster acquisition.  

Then they accused CB&I of artificially  inflating the value of the subsidiary by  

billions to get a better sale price,  and the whole thing went to court.

Behind the scenes, Toshiba's audit committee  kept urging the company to announce the massive  

losses growing inside Westinghouse. The  longer things delayed, the more they owed.

It finally came out in 2016. In April 2016,  Toshiba wrote down the Westinghouse nuclear  

division by $2.3 billion. Though at the  time they still insisted that entities  

in China and India would be buying  AP1000 reactors for years to come.

Then-CEO Masashi Muromachi said at the time of  the announcement: "Regardless of the writedown,  

the nuclear business is progressing  as planned". Sadly it was not.

In December 2016, they announced a  future second write-off of unknown  

quantity. The size of that loss would  not be known until February 2017:  

a staggering $6.3 billion. The shares, already  down over 25% from late 2016, dumped further.

In March 2017, Westinghouse filed for bankruptcy.

A sad end for a legendary American company and  50+ years of history in the nuclear industry.

A year later in 2018, Toshiba sold their  crown jewel flash memory semiconductor  

business - a division that once struck  fear in the hearts of the American  

semiconductor makers - to a consortium  led by Bain Capital for $18 billion.

## Fallout

In South Carolina, the two utilities backing  the Summer power plant had invested $9 billion  

into the venture. But the cost of finishing  the project had ballooned to $25 billion.

A few months after the Westinghouse bankruptcy,  the whole Summer project was canceled in July  

2017, a stunning conclusion. Billions spent for  a plant that won't generate any electricity.

The debacle was dubbed "Nukegate". The utilities  and others involved were immediately smacked with  

lawsuits from all affected parties. It  took a billion dollars to settle them.

The various government authorities initiated civil  and criminal investigations. One of the utilities,  

SCANA, saw two of its executives including its CEO  

convicted for defrauding ratepayers  about the status of the project.

Their stock also crashed - forcing the  parent company to sell itself to Dominion  

Energy in January 2019. That acquisition  was also criticized. Good times all around.

The other utility stayed independent. But  both utilities and thus their rate payers  

will be paying off billions of debt  over the next 12-20 years. And again,  

for something that never delivered power.

As for Georgia, Toshiba and Westinghouse  focused their resources on completing  

Vogtle Units 3 and 4 - aided with a  $3.7 billion payment from Toshiba.  

And I give them full credit for their  dogged determination to finish the job.

And they finished it. Unit 3 began  operations in July 2023. Unit 4,  

April 2024. Together, they cost about $35  billion to build. Some $21 billion over  

budget and 6-7 years late. But Vogtle is  now America's largest nuclear power plant.

## Conclusion

Right now, there are no nuclear reactors  currently under construction in the United States.

Westinghouse's equity is now held by the Canadian  investment company Brookfield Business Partners.

Toshiba is a shell of itself. In 2023, they  got bought by private equity for about $15  

billion. Their remaining businesses are energy,  hard disk drives, power semiconductors, and IT.

They recently moved to cut 5,000 jobs.  They currently employ around 67,000 people.

Nowadays, nuclear is having  a bit of a moment again,  

thanks to AI. But the same economic  challenges of the past forty years  

remain. The builds take too long and cost  too much. Toshiba and Westinghouse stand  

as a monument to what can happen if things  go wrong - as they so easily seem to do.