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?
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.”
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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NEC (formerly the Nippon Electric Company) is comparable to NTT in many ways. It has a well-established IT services business in Japan, but in the US and Europe the company is better known for its line of office electronics.
It too is feeling the effects of a damp economic climate on its home turf. In the past year, NEC’s sales in Japan have fallen from $17.1 billion to $14.6 billion. “IT investment in Japan [will be down] 2% to 3% compared to the previous year,” explains Toru Miwa, vice president of international sales and business operations. “In Japan, it’s very difficult to get more business.”
Like NTT, it has a concerted plan to address this with international expansion: NEC aims to grow overseas sales to 25% of all revenues by 2013. And like NTT, cloud computing is a crucial component of that plan. “We are very [eager] to make our cloud services competitive internationally,” says Miwa.
In October 2010, the company announced plans to invest $1.2 billion in cloud computing infrastructure to support services in locations including the US, Western Europe and China.
Unlike NTT, though, NEC is not pursuing international growth through acquisition. Instead, it is focusing on a series of strategic partnerships in each of its target markets.
Despite its size, NEC does not have the capability to enter new markets unaided, explains Miwa: “We have a total of 60,000 systems engineers inside Japan, but outside Japan we have very limited resources. Therefore, we need a partner in each region.”
In August 2010, NEC signed a partnership with Chinese IT services provider Neusoft. Under the deal, NEC will use Neusoft’s data centre to provide application services and systems integration to Chinese businesses, as well as companies expanding their footprint into China. Both NEC and Neusoft will provide support services. NEC has invested 50 million yuan (£4.8 million) in the partnership, only a fraction of its proposed cloud spend.
Miwa says that NEC will announce its infrastructure partners for cloud services in North America, Europe, Asia-Pacific and Africa in the “next fiscal year”. He adds that in all of these regions, its services will be marketed to “local businesses”.
He explains that its cloud services will be targeted at industry verticals and will range from ERP software for manufacturers and payment platforms for financial services to more exotic offerings, such as biometric authentication services for governments (‘matching as a service’, as NEC describes it). Technology partners for these services include SAP, Microsoft and Intel.
Miwa hints that although NEC is not pursuing an acquisition strategy today, it may be willing to acquire select regional partners one day. “Right now, we’re focused on joint ventures and partnerships,” he insists. “But in the future, if the joint venture is working well, then NEC may eventually acquire the partner and its capabilities.”
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Both NTT and NEC have proven track records at home, but according to Ben Woo, an analyst at IT market research group IDC, neither company can assume that what works in Japan will work abroad.
One problem, he says, could be the practice of subsidiaries selling components to one another, common among Japanese conglomerates. In the six-month reporting period to 30 September 2010, for example, NEC’s IT services division made $275 million in revenues from inter-segment sales.
Woo argues that this could make prices uncompetitive for international customers. “There are so many hands in the middle trying to take their piece of the pie,” he explains, “that it eventually becomes less attractive from a cost perspective to the actual end-user.”
Another potential hurdle is the way in which these companies manage their international operations. “They’ve typically installed Japanese executives from Tokyo into foreign countries,” Woo explains. For example, a quarter of NTT Europe’s employees are Japanese and work in senior executive and account management roles.
Japanese managers, he says, may try to apply Japanese business principles in markets where they may not be relevant.
Woo says that NTT’s acquisition of Dimension Data is a step in the right direction, towards becoming a truly global organisation, rather than just a Japanese company abroad: “It will enable NTT to be truly the first Japanese, international IT services integrator that has the capability to take on the likes of HP, Dell and IBM.”
Some analysts have uttered concern about NTT’s ability to successfully merge the two cultures. “There are historical warning signs that must be heeded in such a cross-cultural, cross-industry marriage,” wrote two Ovum analysts when the deal was announced.”
NTT itself has an ignominious track record with foreign acquisitions. At the height of the dotcom bubble in 2000, it paid $5.5 billion to acquire US web hosting provider Verio. Walloped by the crash, Verio lost $777 million in its first year as an NTT subsidiary.
But IDC’s Woo argues that NTT was a victim of circumstance in this case, and he does not believe the Verio debacle will have much bearing on the Dimension Data deal.
Woo is less enthusiastic about NEC’s cloud strategy, however. Even with the addition of local partnerships, he believes that the company will still struggle to makes its name known among other cloud incumbents.
“NEC is recognised around the world as a telecoms and consumer electronics company,” he argues. “It has had many opportunities to make large investments in marketing and repositioning [itself]. I’d hesitate to suggest it’s something they’re still willing to make that investment in.”
Fujitsu is also pouring investment into its cloud computing business. In July 2010, the company announced that it would be spending 25% of all its capital investment (approximately $1.1 billion) on this area. Among other initiatives, some of this money will go towards training and hiring 5,000 ‘cloud’ experts, it said at the time.
But for Fujitsu, the cloud strategy is not necessarily a means to expand its global reach, which is already broader than that of its compatriots. In its most recent financial quarter, Fujitsu’s IT services business brought in revenues of $8.5 billion, approximately $2.9 billion of which took place outside Japan.
According to Roger Gilbert, CEO of the Fujitsu UK, most of Japan’s ICT vendors have not pursued growth abroad because until recently they have not especially needed to. “There’s a lot of temptation for Japanese corporations to focus strongly on their local markets,” he says. “After all, their domestic market is huge and a lot of these companies have dominant positions, which they find hard to replicate outside Japan.”
Fujitsu, by contrast, has pursued international expansion through both acquisition, as in the case of ICL, and partnership, as in the case of its joint venture with German telecommunications giant Siemens, which ended in 2008 when Fujitsu bought out its partner’s stake.
According to Gilbert, the key to Fujitsu’s international success has been its “franchise model”, in which the Tokyo headquarters allow regional units relative autonomy. This is essential because business practices, such as service level agreements and procurement processes, can be radically different from those in Japan.
Most Japanese companies have failed to realise this, says IDC’s Woo, and their chances of international success are impaired as a result. “Japanese companies have typically used the Japanese market as a proxy for the rest of the world,” he says. “They have had this attitude of ‘We’ve had success in Japan, therefore we can be successful everywhere else’. But Japan is absolutely not reflective of what goes on in the rest of the world.”
With billions of dollars invested in cloud computing initiatives abroad, it is a lesson the likes of NTT and NEC would do well to learn.