Increased sanctions on Huawei should benefit Japanese ICT (Information & Communication Technology) companies NEC and Fujitsu, yet both seem to be struggling after years of restructuring, says the Nikkei. They were at the core of what used to be known as the Den Den Family – suppliers to Japan’s former Ministry of Post and Telecommunications, now NTT. However their telecoms business seems to be undermining rather than helping their restructuring efforts.
“Fujitsu is no longer a manufacturer, because of its shift to IT services, and NEC has lost its strengths in technology, they are no longer globally competitive”, says an NTT executive. NTT was not using Huawei for its DoCoMo mobile network business anyway, so this will not be a source of new business.
Years of restructuring with little result
NEC started an early retirement program in Japan for employees over 45 in 2018, with 2,170 employees leaving at the end of the year. Fujitsu also transferred some of its Japan based employees who are not in customer facing divisions to customer facing divisions, resulting in 2,850 people leaving the company by March 2019.
Both companies have sold off businesses in areas such as semiconductors, smartphones, PCs and internet service provision. Compared to 2000, when both achieved operating income of Y260bn, NEC’s revenues have dropped 42% and Fujitsu has fallen by 25% and operating income has fallen by half or more. Employee numbers have dropped by 29% at NEC and 30% at Fujitsu.
Neither company have achieved operating profit margins of over 5% since 2000, despite repeated restructuring. Market capitalization is down 80% for NEC and 73% for Fujitsu.
The new president of Fujitsu, Takahito Takada, recognises that there are still issues that need to be resolved, domestically and overseas. His predecessor Tatsuya Tanaka had also tried to increase operating income but delays in restructuring in Europe meant this was not achieved. NEC has also repeatedly missed profit targets.
Reluctance to merge, difficulty in partnering for 5G
Both NEC and Fujitsu have been focusing more on developing IT systems for private and public sector clients, and telecoms is becoming more peripheral to the business. There are moves afoot to integrate the optical transmission equipment business of both companies into one unit that is globally competitive, involving the Japanese Ministry of Economy, Trade and Industry, the Ministry of Internal Affairs and Communications and NTT. However, given that NEC and Fujitsu have always been competitors, and have never integrated any of their businesses before, there is a strong reluctance on their part to proceed. Furthermore, NTT itself says if the result of such a merger is continuing high prices, then this will not be viable.
Even though NTT was the first in the world to introduce 3G, Fujitsu and NEC did not capitalise on this or for 4G, and were outstripped by Huawei. The question now is whether they can catch up with 5G. Both are seeking partners overseas – NEC with Samsung and Fujitsu with Ericsson. Previous partnerships like this for 3G and 4G, with Alcatel-Lucent, Siemens and Nokia did not bear fruit. NEC is hoping to get business from Rakuten’s entry into mobile phone services, setting up a communication network with US startup Altiostar Networks.
Unable to compete with Google or Microsoft in IT services
Even in the core business of IT systems, with Industry 4.0, AI and IoT, Fujitsu and NEC do not seem to be showing any signs of new growth sources. Amazon is eating into their cloud offerings and it is difficult to compete with the massive R&D budgets of companies like Google.
NEC is trying to get away from reactive, passive IT system building based on customer requests. They are investing in anticipation of customer needs, in areas such as food waste reduction, building a demand and supply platform to ensure more accurate forecasts.
Fujitsu is aiming to become more competitive by shifting new business creation out of Japan. It has set up an AI HQ in Vancouver. This is an attempt to escape from the model it has relied on in the past, of developing hardware in Japan and then selling it overseas.
Both companies are also having to compete with Google and Microsoft or startups for talented IT people. NEC introduced a system this year to recruit outstanding researchers with a starting salary of $93,000.
Europe, Middle East, Africa
NEC and Fujitsu diverge in their strategies for the Europe, Middle East and Africa region. Fujitsu has been cutting employees in EMEA (or as they call it EMEIA – including India). This is happening particularly in Germany and the UK where it could be argued it is overweight, thanks to the legacy of the acquisition of ICL in the UK and the joint venture with Siemens. It announced in the past year it will close the factory in Augsburg, Germany – the last remaining computer factory owned by anyone, in Europe.
NEC, on the other hand, has grown in the region. They acquired Northgate Public Services in the UK and KMD in Denmark in 2018. They are also proactive in Africa, looking at getting involved in Japanese development aid projects.
The market in developing countries could be where NEC is a strong alternative to Huawei, whereas the investment in AI in Canada suggests to me that Fujitsu is still pursuing its dream of being a leader in AI and supercomputing, taking on North America.
For more content like this, subscribe to the free Rudlin Consulting Newsletter.