My Gmail translation app decided that the headline to this article in the Nikkei should read “Fujitsu response to nits that cannot hunt.” It was some kind of misreading of “nito“, an old Japanese word for “two hares”- referencing the Japanese saying “he who hunts two hares will not even catch one”. The two hares in this case being the targets of having more than 50% of sales from overseas business and an operating margin of over 10%.
Investment in IT in Japan is booming, and margins are rising, but Fujitsu continues to struggle to make profits overseas, and this is weighing down its share price. Fujitsu’s President Tatsuya Tanaka said when he became President in 2015 that Fujitsu must change shape and characteristics. He was the first President in the post war period (apart from the temporary President Mazuka) to come from a sales background and has strong ties to Toyota, Panasonic and other Fujitsu customers who have been strong globally. Some changes have taken place such as the sale of Nifty – an ISP – to Nojima and the car electronics business to Denso. The mobile handset business has been sold to an investment fund and the PC business to Lenovo. It was decided that in January 2019 Fujitsu will sell off its shares in Fujitsu Components, a company with semi conductor and components factories in Mie Prefecture.
Fujitsu is shifting towards IT services, away from manufacturing with these moves. Free cash flow has improved as a result and investors seem positive towards the restructuring but the share price has not improved. Operating profit overseas is still stuck at 1.7%, compared to overall consolidated profit margin of 4.5%. Overseas business has mainly been the sales of servers and personal computers – both affected by price wars. There has not been so much business in customizing systems, Fujitsu’s main strength. Hideaki Tanaka of Mitsubishi UFJ Morgan Stanley believes Fujitsu should focus on supporting Japanese companies overseas to improve profitability.
Overseas business is still only 36.8% of turnover, and trying to reach 50% is likely to be at the sacrifice of profit margin. Japan’s labour shortage means IT investment is likely to continue domestically. Competitors such as NTT Data and Nomura Research Institute (despite the name, an IT supplier) are both forecasting record high profits this year. “We don’t mind if they stop overseas business all together ” says one foreign securities house.
In fact Fujitsu does seem to be taking an axe to its overseas business, particularly manufacturing, and in Europe, where it has always been proportionately larger than most other Japanese companies. It annouinced that it plans to reassign 5,000 employees across the group on October 26th 2018, mainly from indirect functions such as HR, and accounting, and into professional sales and consulting. The last remaining computer factory in Europe, in Augsburg will be shut down by 2020, potentially affecting around 1,800 jobs. This demotion of overseas business has also resulted in the demotion of executives heading up those businesses, including Duncan Tait, one of the most senior non-Japanese, as Fujitsu has also decided to reduce the numbers on its executive board and move away from a regional to a more country based structure.
IT services account for around 80% of Fujitsu profits but although profit margins are improving, they are still not growing as fast as competitors, such as Nomura Research Institute, whose operating margin improved 0.6% on the previous year to 13.8%. Fujitsu is lagging behind in the development of upstream businesses such as AI and IoT.
Fujitsu also announced that it will partner with Ericsson in the development of 5G – “the era of a single company doing everything by themselves is over” says President Tanaka.
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