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Why Japan's technology giants are betting big on cloud computing

Thanks to a combination of US investment and shrewd industrial policy, Japan enjoyed a post-war boom that took it from the brink of destruction to becoming the planet’s second-largest economy.

Along the way, the ‘Japanese Miracle’ propelled local electronic and engineering brands such as Toyota, Sony and Mitsubishi into major technology exporters and global industry heavyweights.

In IT and telecommunications, however, Japanese companies have been notably absent from the global scene.

This is not for a lack of giants in the space. Japan’s incumbent telco, NTT, for example, is one of only a handful of ICT companies with annual revenues greater than $100 billion. And with $38 billion in sales, telecommunications equipment provider NEC is no slouch.

Despite their size, though, these companies have marginal footprints outside their home market.

NTT, the Nippon Telegraph and Telephone Corporation, was founded in 1869 but did not expand out of Japan until 1996. Today, it derives about 4% of revenues internationally. NEC, best known in the West for its fax machines and projectors, does around 16% of its business on foreign shores.

The exception to this rule is Fujitsu, Japan’s oldest computer maker, which today does about 16% of its business outside the country. Fujitsu is especially well established in the UK, thanks to its 1990 acquisition of International Computers Ltd, an IT services supplier set up by the UK government. Today, Fujitsu is one of the UK public sector’s largest IT contractors.

But if most Japanese ICT companies have resisted international expansion in the past, that now seems to be changing.

Their motivation is simple enough: Japan’s economy has slowed to crawl in recent years, and those companies must look elsewhere if they are to sustain their own momentum.

And now they seem to have found in cloud computing a route into the international markets that until recently they ignored.

NTT and NEC have both made remarkable investments in cloud services, with international expansion their
avowed intent. Fujitsu, meanwhile, is busy arming its overseas IT services units with cloud expertise.

So will cloud computing prove to be the mechanism that undoes decades of isolationism by Japan’s ICT giants? Or has that isolation driven a cultural divide too deep to overcome?

Buying in

NTT is Japan’s largest telco and its predicament is typical. “Growth is not coming from Japan,” explains Weynand Kuijpers, NTT’s European head of strategic alliances and marketing. “We have 60% market penetration there. The only real growth can come internationally, but we were quite late into the game.”

The company does have a global services business, but it is mainly concerned with providing networking services to Japanese companies expanding internationally, Kuijpers explains: “That’s very much the niche we’re playing in at the moment.”

NTT plans to change that, though, and quickly. In a statement of intent, executives in Tokyo recently said publicly that NTT intends to increase its international revenues from their current $4 billion a year to $12 billion by 2012.

But being a “typical telco”, as Kuijpers puts it, and one that is little known outside Japan, means that this will not be easy, he admits. “The biggest challenge that we faced, and are still facing, is brand awareness,” he explains. “In Europe, with all those national incumbents like BT and Deutsche Telekom, it’s a tough game to make yourself known.”

Furthermore, profit margins in its core services are under pressure. “In terms of phone lines and mobiles, it’s all getting cheaper and [the customer] gets more for less,” Kuijpers laments. “We’re placing a lot more bets on new services, and appealing to non-Japanese customers going forward to try and undo that effect.”

Going global

In cloud computing, the company sees an opportunity to sell its network services into an as yet unsaturated marketplace.

It has had some cloud services in place for a while, but NTT’s cloud strategy – and its international expansion – took off in earnest in July 2010, when it announced its intention to acquire South Africa-based IT services and systems integrator Dimension Data for $3.24 billion.

At the time, NTT CEO Satoshi Miura said the new partnership would “create new services and values to succeed in the coming age of cloud computing”. According to Kuijpers, the Dimension Data deal makes NTT a “more complete outsourcing partner”.

Kuijpers also says that more acquisitions in the cloud and IT services space could well follow. In November 2010, Indian newspaper The Business Standard reported that the Japanese giant was once again in acquisition talks with offshore outsourcer Patni Computer Systems.

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