presentation by Gerhard Fasol, at the Industry Association of Japanese telecom and networking equipment makers, Friday November 27, 2008, 15:00-16:30
Presentation was fully booked several weeks before the talk, attended by about 100 managers and executives of Japan’s telecom equipment makers, and included also the Vice-Minister/Secretary of State of Japan’s General Affairs Ministry, which is responsible for telecom regulation in Japan.
Opaqueness of Japan’s SNS was a point of discussion at the Next Context Conference. When you use Japan’s social network systems, instead of portrait photographs and real names in Western SNS, in Japan you’ll find that most people use phantasy names and pictures of churches, cats, airplanes, clowns and cartoons instead of passport photographs. Japanese people prefer to keep there privacy intact in this and several other ways. For example mostly you cannot join Japan’s SNS unless you are invited in by a friend, and you can’t join unless you live in Japan (verified by your Japanese mobile email address).
Looks like Western SNS will have difficulties to thrive in Japan’s SNS unless they make some adaptations of their Western functionality for Japan – or unless Japanese people change their preferences.
A few days ago the New Context Conference was held here in Tokyo, mainly about social network systems (SNS), top executives including CEO of LinkedIn, Facebook, and some exciting new photo, video conference and e-learning companies discussed market entry to Japan.
Japan’s two markets
Takeshi Natsuno, one of the three key DoCoMo managers who together started i-Mode and arguably started the world’s mobile internet revolution launching i-Mode back in February 1999 gave the keynote discussion. Natsuno shared his very interesting observation, that Japan consists of two markets:
new Japan = people below 50 years age and
old Japan = above 50 years age
…and having managed i-Mode (today: 48 million paying subscribers) for almost 10 years Natsuno-san is certainly one of the best to know. (Natsuno-san’s main job today is to make Japan’s very cute equivalent of YouTube profitable – read more about this in a future issue of our newsletters).
New Japan vs Old Japan in my talk at Stanford University
Actually, you’ll find a similar observation about “old Japan and new Japan” in my presentation entitled “New opportunities versus old mistakes: foreign companies in Japan’s high-tech markets” which I gave some years ago at Stanford University to faculty, students, alumni and silicon valley managers.- (You can view and download the slides of the presentation below.)
Natsuno-san talking at the New Context conference in Tokyo about old Japan, new Japan, the future of the mobile internet, and the mobile industry. Natsuno-san is one of the three inventors of i-Mode.
Download Gerhard Fasol’s lecture slides presentation at Stanford University
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Nomura CEO, Kenichi Watanabe, today gave a presentation about the acquisition of the former Lehman Brothers operations in Europe & ME, Japan, Asia (ex-Japan) and in India.
Europe and ME:
Equities and investment banking operations (approx 250 people)
Fixed income staff (approx 150 people)
approx. 1100 people
approx. 1500 people
three subsidiaries, in total approx 2900 people
LB Services India, IT, Global servicing
LB Financial Services India, research services
LB Structured Finance Services, Capital Markets Support and Analytics
Nomura is strong in mutual funds (74.2% of business) Lehman is strong in hedge funds (56.8% of business)
Nomura is strong in retail
Q&A (there was an extensive Q&A session), selected questions were:
Question: Could the Lehman acquisition be seen as a “reverse takeover”, ie Lehman people taking over Nomura?
Answer: any kind of takeover, foreign staff taking over, new hires taking over, long term employees taking over is ok for Nomura, if it makes the customers, shareholders and employees happy.
Question: how does Nomura plan to cover the acquisition costs, how does Nomura plan to become profitable, and could there be cuts in headcount?
Answer: we will right-size in each business area according to the necessities in each business area, and in some business division we are hiring and increasing headcount.
Question: what about highly paid “talents” and high bonus payments? Could there be friction with existing Nomura employees?
Answer: Nomura already has several thousand employees with about 50 or more nationalities, and some are paid more than the CEO of Nomura, so we are already familiar with this situation. Currently Goldman-Sachs CEO and top executives have announced that they will not receive any bonus payments. We will hope that this will be understood in our company as well.
Question: Will the acquisition mean an end to lifetime employment and bring the introduction of performance based payment?
We must make sure that we satisfy our clients, we will focus to deliver the services our clients need.
SANYO suffered from Niigata Chuetsu earthquake of Oct. 23, 2004
Panasonic attracted to SANYO’s battery and energy technologies
On November 7, 2008 Panasonic (“Ideas for Life”) and Sanyo (slogan: “Think GAIA”) announced that they entered negotiations which can potentially lead to an acquisition of Sanyo by Panasonic to form one of the largest electronics groups in the world. Sanyo’s market capitalization is currently US$ 3.9 billion and Panasonic’s is US$ 38 billion, combined sales are about US$ 110 Billion.
The Niigata Chuetsu earthquake of Oct. 23, 2004 caused an estimated total of US$ 30 Billion in damages, damaged Sanyo’s semiconductor factory and contributed to large losses at Sanyo. As a consequence Daiwa Securities SMBC Co, Sumitomo Mitsui Banking Corporation and Goldman Sachs hold preferential shares in Sanyo with voting rights corresponding to 70% of outstanding shares. The current global financial crisis contributes to the potential acquisition, since Daiwa, Sumitomo-Mitsui and especially Goldman Sachs are motivated to sell their preferred shares when contractually possible, and it is also these three financial institutions which will have strong influence on whether this transaction will take place. Goldman Sachs is reported to have said that the price will decide.
Annual revenues of Japan’s electrical groups:
Panasonic and Sanyo combined (red curve in the figure below) will be one of the largest electrical groups globally. Note that Japan’s electrical groups showed strong growth from FY 2003.
Annual operating margins of Japan’s electrical groups:
Panasonic’s high operating margins helped Panasonic to reach a position of financial strength, enabling this acquisition. Expect more acquisitions by Japanese electrical companies.
High margin (> 5%) vs low margin (The figure below shows that there is a clear differentiation of Japan’s electrical groups: Mitsubishi Electric, Sharp and Panasonic have high margins – above 5%.
The other electrical groups (Fujitsu, Toshiba, Sanyo, Hitachi, Sony and NEC) have chosen a low-margin path (margins below 4%).
There is a clear gap (4% to 5%) separating these two fields. Panasonic’s margin will suffer with a Sanyo acquisition – expect Panasonic management to bring Sanyo up to Panasonic margins.
Globalization of Japan’s electronics groups:
With 36.8% of sales outside Japan, Sanyo is more globalized than Panasonic. NEC, Fujitsu and Mitsubishi Electrical still have much way to go to globalize.
New entrant challenging Japan’s mobile incumbents Docomo and KDDI and SoftBank. A discussion between Dr Sachio Semmoto and Dr. Gerhard Fasol
Dr Sachio Semmoto: one of Japan’s most successful serial entrepreneurs
eMobile is Japan’s newest & fastest growing mobile operator, focused on mobile broadband – currently at HSDPA speeds up to 7.2 Mbps and HSUPA/EUL upload speeds up to 1.4 Mbps from Nov 20, 2008 (possibly upgraded to 5.7 Mbps from 2009) covering all major urban areas of Japan. Read an exclusive interview with eMobile’s founder and CEO, Dr. Sachio Semmoto below. eMobile‘s start is a resounding success: subscriber numbers will soon reach 1 million, and in October 2008, eMobile could attract 102,500 new subscribers – three times more than market leader DoCoMo (32,700) and two times more than KDDI (46,700). eMobile‘s market share is growing. eMobile was founded by Dr. Sachio Semmoto on January 5, 2005, and obtained the 3G spectrum license after a tough “beauty show” from Japan’s General Affairs Ministry on November 9, 2005 – almost exactly 3 years ago. At that time the Ministry gave new 3G spectrum licenses to three companies, however eMobile is the only one which actually built a new 3G network – the two other licensees returned their licenses to the Government unused.
Dr. Sachio Semmoto has very kindly agreed to an exclusive interview for our newsletter – read Dr Semmoto’s interview below. We are very grateful to Mr Takashi Igarashi of eMobile for his help and assistance in producing the interview. Dr. Semmoto is an extremely successful Japanese multi-entrepreneur. He is one of the co-founders of DDI (today part of KDDI), he founded the ADSL provider eAccess, and in 2005 he founded eMobile. Read Dr Semmoto’s interview about eMobile below.
In September 2008 eMobile attracted three times more new users than NTT-DoCoMo, and two times more new users than KDDI. eMobile will soon reach 1 million subscribers.
Dr. Sachio Semmoto co-founded DDI (today part of KDDI), he founded ADSL provider eAccess and in 2005 he founded eMobile. He is Chairman and CEO of eMobile. Read Dr. Sachio Semmoto’s interview below.
Dr. Gerhard Fasol: Your company’s main product are 7.2 Mbit/sec data connections at about YEN 6000 (US$60, EURO 50)/month without any usage limitation at all – even if your subscribers upload or download enormous amounts of data including Skype and VOIP, or watch or upload movies all-day you do not reduce such users connection speed, and you do not charge extra.
In Europe such totally unlimited data subscriptions do not exist to my knowledge – in addition most European telecom operators exclude VOIP or Skype from mobile data subscriptions – they even talk about “unfair usage” in their subscriber contracts. European telecom managers tell me that unlimited data subscriptions are impossible because of network capacity limitations and high electricity costs etc.
What is it the “secret” that enables eMobile to offer unlimited data plans – without any usage restrictions at all?
Dr. Semmoto: We at EMOBILE have successfully developed and constructed a low cost, but high quality mobile network from scratch, based on leading-edge 3.5G/HSDPA technology base stations. HSDPA technology improves the usability of spectrum and network performance. We also have rich experience in fixed broadband markets like ADSL through eAccess, our group company.
Our “secret” is very simple:
1) high usability of network based on state-of-the-art technology, competitive low cost construction and operations, and
2) operational know-how from fixed broadband market (through eAccess).
Incumbent carriers offer flat-rate data service only because competition forced them to. We believe we have great competitive advantages against incumbent carriers.
Dr. Gerhard Fasol: What were the main difficulties you had to overcome to start eMobile?
Financing. We are a completely independent venture company with no financial support from big corporations. We won the confidence of international qualified financial institutions like Goldman Sachs, and Temasek of Singapore, and succeeded to attract funding as large as 3.6 billion US$. This was before our business launch, therefore all we had to show to investors was just our business model and our management team, and our plans for a successful future business.
Dr. Gerhard Fasol: What was the most surprising experience for you building a new mobile operator from scratch?
1) We were very fortunate that we could complete full funding back in 2006 for the following 5 years until 2011, before the current worldwide financial crisis
2) We won a business license and spectrum allocation from the government in 2005 after a tough beauty contest.
Dr. Gerhard Fasol: I remember the Japanese government wanted to have three new mobile networks and gave three new licenses, and your eMobile was the only company which actually succeeded to build a new network from scratch as desired by the Government (SoftBank acquired Vodafone including Vodafone’s license, and returned the new license to the Government and IP-Mobile could not find the finance) – congratulations!
Dr. Semmoto: You are completely correct. Softbank and we were fighting against each other for 15MHz in the 1.7GHz band. But the government had not decided the number of licensees initially, that means it was possible that only one company would win the whole 15MHz. As a result of the beauty contest, Softbank and we were both qualified and won 5MHz each, and the other 5MHz was reserved for additional allocation.
Dr. Gerhard Fasol: One of the key issues for telecom operators is often said to be to “avoid becoming a dumb data pipe”, i.e. to avoid commoditization and ever decreasing ARPU. What is your strategy that your company and your network does not become “a dumb pipe”, a commodity?
We are confident in providing “a pipe”. It is a pipe but a GREAT pipe, mobile broadband service, and it is what customers are willing to use. I believe other Japanese mobile carriers are “too intelligent”, too far from real customer needs. High speed, flat-rate mobile broadband data is in itself a differentiated service. We will maintain competitiveness by continuously upgrading our data service from 3.5G to next generations (HSPA+ and LTE).
Dr. Gerhard Fasol: Assuming an ARPU of YEN 5000 for 1 million subscribers we can calculate that eMobile has sales of about YEN 60 Billion for 2009, i.e. about US$ 600 Million. Is eMobile profitable now or if not, when do you expect eMobile to become profitable?
We expect to achieve 85 billion yen (about US$ 850 million) revenue with an accumulated subscriber number of approx. 1.4 million by the end of March 2009. eMobile has not turned to profit as of today. Under our projection we expect eMobile to break even on an annual EBITDA basis in fiscal year ending March 2010, then break even on net profit basis in fiscal year ending March 2011.
Dr. Gerhard Fasol: Your investors will expect eMobile to show profits and growth. In which areas do you like eMobile to grow? Are you planning to bring your experiences in the world’s most advanced market to other markets – international growth of eMobile? What is your long-term growth strategy for growth?
eMobile plans to acquire 5 million subscribers by March 2012, and assumes Japanese mobile penetration to grow to over 100%. In line with our corporate mission of “providing a new and more efficient broadband life for all”, we focus on the Japanese mobile broadband market, which has more than 100 million subscribers. We consider that the whole broadband market will be the mobile broadband market in the future. As for further expansion into other markets, eMobile started a data card bundling service with the UMPCs (Ultra Mobile PC) in July 2008. UMPC is a type of PC that very much relies on internet connection. As we provide high-speed, reasonable-priced mobile internet connection environment, we have already built a win-win relationship with the PC market. Therefore, our strategy will always focus on mobile broadband. Meanwhile, we firmly believe that we will create a brand new potential market following the growth of PC and smart phone market. We do not have a plan to go to international markets for the moment.
Dr. Gerhard Fasol: Many people think that Japan has the world’s most advanced mobile phone market. Do you agree? And why do you think Japan could achieve this?
I dare say, NO. Mobile phone rates in Japan have not been declining regardless of rapid market growth for the past decade, due to lack of competition. ARPU has not been declining much for a decade before new licenses were permitted in 2005. After Softbank and EMOBILE’s entry into the market for the first time after 1994, ARPU started to decline. The nominal undiscounted voice call charges of approx. 40YEN/min. are high and quite stable. Data speed was slow just before we started our business and, as I stated above, Japanese incumbent mobile carriers are emphasizing “value added services” too much. Penetration rate remains 80%, ranking as low as 50th globally.
Japanese mobile phone manufacturer lost their international market because Japan adopted non-standard technology, PDC, in 2G.
We need to introduce more competition, standard technology and “big-boned” telecommunication. When I say “big-boned” telecommunications, I don’t mean additional “added value” services, but the essentials of telecommunications: connection and transmission with reasonable price and high speed.
Dr. Gerhard Fasol: Many countries have decided to use one single radio technology path: GSM and in parallel 3GSM / UMTS. Japan and US on the other hand take the view today that the government should not pick technologies, and you find several competing radio technologies in Japan: wCDMA, CDMA2000, PHS, now soon Wimax. What do you think is better for a country: one single radio technology without competition, or a “technology shoot out” like in Japan, where companies compete in a pretty free market with different technologies?
Competition among technologies is not bad in itself, but the most important thing is that those technologies are worldwide standard and adopted by many operators. When Japan adopted an internationally isolated technology, like PDC for 2G mobile, its market would became “Galapagos Islands” (ie local Japanese products cannot be exported to other markets, and products from other markets cannot be imported, creating beautiful but dead-end product lines). In this sense, I doubt the future of CDMA2000, PHS and WiMAX because major worldwide operators are going to GSM/W-CDMA/LTE as the mainstream technology.
Dr. Gerhard Fasol: for many years I have been puzzled by the fact that so many fantastic mobile services, handsets, i-Mode, mobile commerce have been developed in Japan, but there has been almost no success by Japanese companies (and foreign companies) to build a global business based on these technologies. For example, Japanese companies build fantastic mobile phones, but have no sales success outside Japan. If Japanese mobile phone makers would ask you how to succeed to sell Japanese made mobile phones outside Japan, or if DoCoMo would have asked you how to succeed with iMode outside Japan, what would your advice be for them?
The reason why Japanese mobile phone makers have no success outside Japan is simple. They were based on non-standard technology, PDC (which is Japan’s 2G standard, which was not used in any other country outside Japan. Still today, more than 10 million PDC 2G mobile subscribers remain in Japan). DoCoMo’s i-mode is also a closed business model. Both cases have “non-openness” in common. Broadband data service is more like “Internet” and needs open service, open business models and open technology.
Dr. Gerhard Fasol: On the other hand, DoCoMo tightly controls most aspects of mobile phone handsets – which makes the production very expensive, and many handset producers have stopped making phones for DoCoMo: Mitsubishi, SONY-Ericsson have stopped, and SANYO sold the handset division to Kyocera. What do you think is the future of DoCoMo’s model of controlling mobile phone specifications? And what is eMobile’s handset strategy? Do you want to accept as many handsets as possible on your network, which seems to be SoftBank’s strategy?
We emphasize standardized technology and open business models. It is not our strategy to control mobile phone specifications too much by committing the purchasing numbers, and by subsidizing developing and manufacturing costs because this would lead us to lose cost competitiveness. We are willing to adopt high-quality, worldwide standard and state-of-the-art handsets.
Current trends in handsets are in two directions: simple phones and smart phones. Firstly, Japanese incumbent carriers have to change their strategy to place more emphasis on customer retention, therefore, the shipment of handset is decreasing in Japan. Both carriers and phone makers cannot support heavy product costs therefore the retail prices are increasing. Customers choose simple and easy-to-use handsets. Secondly, mobile broadband requires more open, multi-function handsets like smart phones.
Dr. Gerhard Fasol: What do you think mobile communications markets will look like in 10 years from now? What is your vision for the industry?
the mobile market will become more data-focused, furthermore, broadband focused, which we already have experienced in the fixed telecommunication market (from narrowband data/voice to broadband internet). We will see through these mega trends and we will enforce our competitiveness in order to create brand new markets.
NSG Pilkington CEO, Stuart Chambers, CEO of NSG Group, press conference on October 16, 2008
NSG Pilkington: Nippon Sheet Glass acquired Pilkington in June 2006
On February 16th, 2006, Nippon Sheet Glass‘ offer for the 80% of Pilkington plc it did not already own, for US$ 3.14 billion in total, was accepted by Pilkington’s share holders and the acquisition was completed in June 2006. At the 142nd Annual Shareholder Meeting on June 27th 2008, Stuart Chambers was appointed Representative Executive Director, President and CEO of NSG Group.
NSG Pilkington CEO Stuart Chambers: Four critical factors for Japanese corporates making major international acquisitions
Here some essential points of Stuart Chambers’ presentation, entitled “Four critical factors for Japanese corporates making major international acquisitions”.
The four critical factors in the title are:
Integration (share holders and customers demanded integration, because the value of the combined NSG + Pilkington after the acquisition must become bigger than the sum of its parts -> must change HR management, and board)
Repaying debt -> senior management must understand the balance sheet
Identifying growth opportunities for the future (glass for solar energy)
From the outset the aim was not to create a Japanese company with overseas subsidiaries, but to create an international company, headquartered in Japan and listed on the Tokyo Stock Exchange. Therefore the greatest changes needed to be made in Japan.
NSG Group corporate governance: new Board structure
NSG Group changed from an exclusively Japanese Board, to a new Board structure:
Board of Directors: 12 (7 Japanese + 5 non-Japanese) and
Executive Officers: 23 (11 Japanese + 12 non-Japanese)
These changes were necessary in order to retain non-Japanese management talent from leaving the acquired company after the merger.
The Board structure was changed from the traditional Kansayaku (Corporate Auditor) structure to a Board with Committees.
HR management changes from internal promotion according to time served in each job level to the international practice of combining internal and external hiring according to capability and demonstrated performance ignoring age as a factor.