Westinghouse A Bankruptcy of Nuclear Proportions

By: STRATFOR

In any given year, a handful of companies file for Chapter 11 bankruptcy in the United States. Rarely, however, does one of these filings reverberate beyond the boardroom and into the realm of geopolitics. Those that do — Lehman Brothers in 2008, or the "Big Three" U.S. automakers in 2008-10 — usually involve hundreds of billions of dollars. But the next big geopolitically relevant bankruptcy may be on the horizon, and the amount of money involved is tiny next to the collapses of the past decade.

Analysis

On March 29, Westinghouse Electric Co., a subsidiary of Japanese conglomerate Toshiba, filed for bankruptcy. The U.S.-based nuclear power company has been building two state-of-the-art nuclear power plants in Georgia and South Carolina, but it has been plagued by delays and cost overruns. The filing sent Toshiba scrambling to cut its losses by March 31, the end of Japan's fiscal year. The Japanese conglomerate ended up writing down over $6 billion on its nuclear reactor business. But Toshiba's troubles don't end there; the firm is also working to sell off a portion of its chip manufacturing holdings.

The U.S. government is worried about what the sale of Westinghouse could mean for the future of traditional nuclear power in the United States and for nuclear power in China, which is keen to learn the secrets of a Western firm such as Westinghouse. The Japanese government, meanwhile, is wary of how Beijing could benefit in the long term, should a Chinese firm acquire Toshiba's semiconductor unit.

A Setback for the Nuclear Renaissance

Even though the current and previous U.S. administrations have supported nuclear energy — and the first new reactor in the United States in two decades started last October — the future of traditional American nuclear power is not bright. High capital costs, climbing operating costs, sustained low natural gas prices and unfavorable electricity markets all limit its expansion. And with the failure of Westinghouse — one of the two major nuclear power firms in the country (the other, GE, is also scaling back its plans) — the picture looks even bleaker.

Westinghouse's plants in Georgia and South Carolina are supposed to feature its new AP1000 pressurized water reactors, which were designed to be both safer and easier to build. The projects, however, have been hamstrung by setbacks and cost overruns totaling some $3 billion for each project. Westinghouse's bankruptcy filing now puts them in limbo. Though there's still a chance the projects will be completed, it's hard to envision Westinghouse, even if it is sold, fulfilling its one-time plan of building perhaps dozens of plants in the United States.

But all hope is not lost for growth in the U.S. nuclear sector. The difference is that growth, if it is to occur, may come not from traditional nuclear powerhouses, which are expensive and inflexible, but from a new technology: small modular reactors (SMRs). SMRs are reactors smaller than 300 megawatts that are, as the name suggests, built in a modular fashion. In theory, they can be manufactured offsite and then assembled where needed, significantly lowering initial capital costs, one of nuclear power's biggest constraints. Installation can also be done as needed, avoiding potential underutilization of capacity and, again, large capital costs, enabling nuclear energy to serve markets that would otherwise be unreachable.

The U.S. Department of Energy has supported the development of SMRs in the past. Two companies, Babcock & Wilcox and NuScale Power, have received federal funding to develop SMRs in recent years. Babcock & Wilcox has since scaled back its operations, but NuScale is forging ahead. The company recently filed plans with the Nuclear Regulatory Commission to deploy SMRs at the Idaho National Laboratory.  

SMRs are promising, but the first pilot plants won't be operational until at least the mid-2020s. And as with any unproven technology, the costs and benefits aren't yet known and won't be for some time. Supporters have proposed public-private partnerships to aid in the commercialization of SMR technology. But given the uncertainty surrounding the U.S. federal budget and the administration's specific plans for infrastructure, it remains to be seen whether SMR technology will be able to get off the ground. Traditional nuclear power plants would be helpful to bridge the gap, and that is where Westinghouse's bankruptcy will be felt the most in the United States. SMRs may provide the clearest path to a future of nuclear power in the country, but it won't be an easy one.

A Motivated Buyer

The shedding of Westinghouse is not the only part of Toshiba's financial restructuring that has been causing waves. As Toshiba's board approved Westinghouse's filing for Chapter 11 bankruptcy, U.S. officials raised concerns about national security. Chinese corporate espionage has targeted Westinghouse in the past, and U.S. officials are worried that a Chinese firm could simply buy access to the secrets it has tried before to steal.

Japan has concerns as well, though they are centered not on Westinghouse but on the sale of Toshiba's semiconductor unit. On March 30, Toshiba's shareholders voted to split off its NAND flash memory unit. Apple, Amazon, Google and several other U.S. firms expressed interest in acquiring it, as did Asian bidders from South Korea. Toshiba said April 7 that it had narrowed the list of bidders down to 10. But the group still includes Taiwan's Hon Hai Precision (otherwise known as Foxconn), with a bid of $27 billion, which could set the stage for a dispute down the road. Should a Chinese company — or even a Taiwanese company with extensive operations on the mainland — acquire the semiconductor business, it would undermine the competitiveness of Japan's tech sector relative to China's in the long run.

The timing couldn't be much better for Beijing, which is making semiconductor mergers and acquisitions the focal point of its overseas mergers and acquisitions strategy in much the same way it focused on oil and natural gas in the mid-2000s. On March 28, Tsinghua Unigroup, China's largest chipmaker, finalized $22 billion in funding from the China Development Bank and the National Integrated Circuit Industry Investment Fund to build up the country's semiconductor sector and push for global mergers and acquisitions. Tsinghua Unigroup is serious about growth; in January, it announced plans to build a $30 billion fabrication plant in Nanjing. Such growth would pose an existential threat to the semiconductor industries of Japan and South Korea, and the sale of Toshiba's semiconductor business to a Chinese company would only make such a scenario more likely.

None of these potential concerns about the fallout from Toshiba's corruption, mismanagement and financial problems is surprising. The United States has always had an interest in the sale of nuclear-related technology, and Japan's tech sector has long been one of its most important and most competitive industries. But the struggles of Toshiba and the demise of Westinghouse are a rare instance in which a corporate breakdown has important geopolitical consequences.

"A Bankruptcy of Nuclear Proportions is republished with permission of Stratfor."

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