EU Japan management: what is the value of good management in Japan?

EU Japan management: what is the value of good management in Japan?

EU direct foreign investment into Japan could be 56% higher!

With improved management skills, EU owned business in Japan could be at least € 50 billion high than it is today

Many companies would wish to have a larger business in Japan, and generally the overall amount of direct EU investment in Japan is considered low. We show below that the value of EU investments in Japan could be at least € 50 billion higher than they are today, if some decisions had been taken differently.

We found a way to measure the value of management skills!

We analyzed the EUROSTAT data for direct investments between Japan and EU, and combining the EUROSTAT data with stock market capitalization data of relevant public companies we found a way estimate the value of management skills and management decisions in the EU-Japan direct investment field!

EU Japan management: EU direct investment in Japan is totals about €90 billion. If all  acquisitions of Japanese companies by EU companies had been successful, the total could be €50 billion higher.

The figure above shows the EUROSTAT data for direct investment by EU companies in Japan and vice-versa:

  • the combined total of Japanese direct investment stock in EU (i.e. the acquisition of EU based companies by Japanese companies) in 2012 was about € 152.1 billion,
  • while the combined total of EU investment stock in Japan (i.e. the acquisition of Japanese companies by EU companies) in 2012 was about € 87.5 billion – substantially lower.

The fact of a relatively low EU investment stock is often superficially explained by “Japan is a closed country”, “cultural differences”, “low profitability in Japan”, “Japan is unattractive for foreign investment” etc.

Actually, the figure above shows, that if Vodafone would have been successful in managing Japan Telecom, that Vodafone had acquired, and if Daimler would have been successful in managing Mitsubishi Motors that Daimler had acquired, total EU investment stock in Japan would be at least € 50 billion higher than it is today.

How do we arrive at this estimation?

Mitsubishi Motors value today

Determining the value of Mitsubishi Motors today is straight forward. Mitsubishi Motors is a public company, traded on the Tokyo Stock Exchange (Securities Code 7211), and as of September 10, 2014, the market capitalization is YEN 1197 Billion = € 8.8 billion. If Daimler would have successfully managed Mitsubishi Motors Daimler would today own Mitsubishi Motors with a valuation of € 8.8 billion, and potentially even higher because of synergies.

Estimating the value of Vodafone’s acquisitions in Japan, had it been successful

Estimating the value of the companies Vodafone would own today in Japan, had it been successful in managing the company Japan Telecom it had acquired is more complex.

Essentially Vodafone acquired Japan’s 2nd largest full-service fix-net, internet, data-center and mobile general telecom operating company Japan Telecom (which had been built on railway rights of way, and had been majority owned by Japanese railway companies, before Vodafone acquired Japan Telecom). In about 30 or more separate investment banking transactions (which made investment bankers very happy), Vodafone acquired Japan Telecom, then split the company into several parts, and all parts in the end are today owned by SoftBank. The major transaction was the sale of Vodafone KK to SoftBank, however in total there were about 30 or more transactions.

As of today (September 10, 2014), there are three general telecom operating companies in Japan’s telecom market:

  • NTT Group, (Tokyo Stock Exchange Code 9432), market cap YEN 8025 billion = € 58 billion
    • NTT-Docomo (Tokyo Stock Exchange Code 9437), market cap YEN 8128 billion = € 59 billion
    • NTT-East
    • NTT-West
    • NTT-Communications
    • NTT-Data
    • and 100s more subsidiaries
  • KDDI: (Tokyo Stock Exchange Code 9433), market cap YEN 5655 billion = € 41 billion
  • SoftBank: (Tokyo Stock Exchange Code 9984), market cap YEN 9545 billion = € 69 billion

Therefore, if Vodafone would have succeeded in managing the company Japan Telecom it had acquired, it can be expected that a fictitious “Vodafone-Japan 2014” today would have a market value on the order of somewhere in the range between € 40 billion (KDDI) and € 70 billion (SoftBank). Now, since Vodafone – if it would have been successful and continued to develop successfully until this day in Japan, would not have the Alibaba and Yahoo-Japan, and 1500 other investments that SoftBank owns, nor the dominating market share that Docomo owns in Japan, we can assume that a fictitious “Vodafone-Japan 2014” would have a valuation similar to the one KDDI has today. Thus we conclude that Vodafone if it had been successful in managing Japan Telecom, would today own a business in Japan worth about € 40 billion.

Of course there are many more companies than Vodafone and Mitsubishi-Motors & Daimler, but because of their enormous size, in terms of statistics these companies totally dominate the overall statistics.

Estimating the value of Japan management know-how: € 50 billion in the case of Vodafone and Mitsubishi Motors/Daimler

We argue now, that if Daimler would have known how to manage Mitsubishi Motors correctly, and if Vodafone would have known how to manage Japan Telecom correctly, then today this knowledge would have created value of about € 50 billion in Japan, and the EU investment stock in Japan would be about € 50 billion (56%) higher than it is today.

The pitfalls and traps facing EU companies over managing Japanese companies

Foreign companies doing business in Japan face a number of dilemmas. Maybe the biggest dilemma is a situation which arises, when there is no Japan know-how represented on the Board of Directors of the mother company. This was the case for Vodafone, and it took Vodafone’s CEO and Board of Directors several years to realize that Japan Telecom could not be managed with the same “standard global management methods” as in all other markets. At that time, when Vodafone’s global CEO realized that “Japan is special”, Vodafone removed Vodafone-Japan from reporting to a Singapore-based Asia-GM, and moved Vodafone-Japan to report directly to the CEO, however this was only of many other problems, and also came far too late. NOKIA’s NSN also made a similar move years later, fortunately not too late. Read here for a more detailed discussion of the Vodafone-Japan case.

Another dilemma regularly arises about the management and governance structure of foreign subsidiaries in Japan. There are 100s of ways of organizing the management of foreign subsidiaries in Japan, and “cookie-cutter” approaches usually fail.

There are many more dilemmas, and this article shows, that solving these dilemmas correctly is worth many billion Dollars/Euros in the case of large corporations, and of course also of substantial value for small corporations and venture startups.

With better Japan management know-how, the EU investment stock in Japan could be at least € 50 billion higher:

EU Japan management: EU owned business in Japan could be at least € 50 billion higher with improved management

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Japan iPhone AppStore: 10 out of the 25 top grossing apps in Japan are by companies of foreign origin. Can you guess which?

Japan smartphone game business

Japan is No. 1 globally in terms of iOS AppStore + Google Play revenues, bigger and faster growing than USA

10 out of 25 top grossing apps in Japan are of foreign origin

Japan game market report (398 pages, pdf-file):
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AppAnnie showed that in terms of combined iOS AppStore + Google Play revenues, Japan is No. 1 globally, spending more than the USA. Therefore Japan is naturally the No. 1 target globally for many mobile game companies, and 10 out of 25 top grossing apps in Japan are of foreign origin!

Japan’s iconic game companies created many game categories – this tradition carries over to mobile gaming now.

Building a business in Japan is not trivial

Many foreign game companies have failed and given up. Foreign game companies that have recently given up in Japan include Zynga and Habbo Hotel. EA has given up twice, and is now undertaking the third entry to Japan. To understand some of the key mistakes foreign companies make in Japan, read our blog about why Vodafone failed in Japan.

Lets have a look at the list of top grossing games in the Apple iOS AppStore today. Out of the 25 top grossing games in the AppStore, 10 are by foreign originating companies. Can you guess which these are by reading the list below?

So Japan is certainly not a “closed market”. Actually, it is obvious that Apple does not discriminate in any way against foreign companies in Japan.

Interestingly, neither Nintendo, nor Rovio’s games, such as Angry Birds appear among the 200 “top grossing games” in Apple’s iOS Japan AppStore.

Apple iOS AppStore-Japan “Top Grossing” games ranking – 10 out of the 25 top grossing apps in Japan are by companies of foreign origin

Can you guess which 10 are by companies of foreign origin?

(read the rankings on July 13, 2014 here)

February 4, 2014:

  • No. 1 Puzzle & Dragons by GungHo
  • No. 2 Quiz RPG Witch and black cat quiz (by Colopl)
  • No. 3 Dragon Quest Monsters Superlight (by Square Enix)
  • No. 4 Monster strike (by Mixi)
  • No. 5 LINE Pokopang (by Naver Japan)
  • No. 6 Pro yakiyu PRIDE (by Colopl Inc)
  • No. 7 Tsuri Suta (by GREE)
  • No. 8 Sengoku Enbu (by Sumzap Inc)
  • No. 9 Puyo puyo!! Quest (by Sega Corporation)
  • No. 10 Gunzei RPG aoi no sangokushi (by Colopl)
  • No. 11 Bousou retsuden tansha tora (by Donuts Ltd) (a motobicycle race game)
  • No. 12 Dragon league X (by Asobism Co Ltd)
  • No. 13 Clash of Clans (by Supercell)
  • No. 14 Love life! School Idol Festival (by KLab Inc.)
  • No. 15 Candy Crush Saga (by King.com Ltd)
  • No. 16 LINE (by Naver Japan)
  • No. 17 Dragon poker (by Asobism Co Ltd)
  • No. 18 Gundam Area wars (by NamcoBandai Games Inc)
  • No. 19 Brave frontier (by Alim Co Ltd)
  • No. 20 Chain cronicle. Original scenario RPG. Chencro (by SEGA Corporation)
  • No. 21 LINE Play (by Naver Japan)
  • No. 22 LINE Bubble! (by Naver Japan)
  • No. 23 LINE Disney tsumu tsumu (by Naver Japan)
  • No. 24 World soccer collection S (by KONAMI)
  • No. 25 Hay Day (by Supercell)

Japan game market report

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When did qr-codes start on mobile phones? (in August 2002)

Customized QR code using in-built redundancy to display color and embedded graphics

qr-codes were developed by Toyota subsidiary denso-wave

When did qr-codes start on mobile phones: First mobile phone with qr-code reader was the J-SH09 by SHARP for Japanese mobile operator J-Phone

When did qr-codes for mobile phones start in Japan?

Here is the answer: the first mobile phone with qr-code reader was the J-SH09 produced by SHARP for Japan’s J-Phone mobile operator (today’s Softbank) and came on sale in August 2002 – seven years ago.

More details and more than 100 case studies of qr-code applications in our QR-Code report

Copyright (c) 2013 Eurotechnology Japan KK All Rights Reserved

SoftBank Shibuya flagship store

On September 29, 2006, a few days before the official name change from Vodafone KK to SoftBank Mobile, SoftBank opened the rebranded Shibuya flagship store:

Rebranding the flagship store in Shibuya from Vodafone to SoftBank after SoftBank acquired Vodafone KK and changed the name to SoftBank Mobile
Rebranding the flagship store in Shibuya from Vodafone to SoftBank after SoftBank acquired Vodafone KK and changed the name to SoftBank Mobile

Because of the crowded streets in Shibuya most of the building work was done during the night:

Rebranding the former Vodafone flagship store in Shibuya from Vodafone to SoftBank, after SoftBank acquired Vodafone KK
Rebranding the former Vodafone flagship store in Shibuya from Vodafone to SoftBank, after SoftBank acquired Vodafone KK

More about SoftBank in our “SoftBank Report”

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u-Japan and Japan’s Mobile Phone Industry

Japan telecommunications industry market report 65th edition, data & analysis of Japan's operators, market shares, spectrum & base stations, financials

u-Japan follows i-Japan and e-Japan to take Japan to the forefront of global IT developments

Presentation at the EU-Japan Center for Industrial Cooperation, 12 October 2006

Title: “Japan’s Mobile Phone Industry and u-Japan”

Date and Time: Thursday, 12th October 2006, 17:00-19:00

Location (tentative, please check closer to the date for changes):
Main Conference Room 4F, EU-Japan Centre for Industrial Cooperation, Tokyo

Agenda: u-Japan and Japan as the mobile internet pioneer

Japan’s mobile phone and broad-band markets are about 3-6 years ahead of Europe: new services are typically invented or first brought to market in Japan, 3-6 years earlier than in Europe. Internet in Japan is generally much faster and much cheaper than in Europe. For this reason and because of it’s size, Japan’s telecom markets are full of opportunities for European companies with the right products and the right strategy, and for investors with the necessary knowledge.

Japan’s mobile phone industry is notoriously difficult to understand for Europeans because it’s
market logic is very different from Europe’s, and because the pace of innovation and structural change is much faster, and because of the language barriers.

This talk will explain the driving forces behind recent dramatic changes in Japan’s mobile telecom sector, and will explain new changes that the “ubiquitous-Japan” (“u-Japan”) policy will bring in the near future.

Do you need to know what Europe’s mobile phone and internet markets will look like in 2010 or 2015? – Come to this talk and you will get a good look into Europe’s IT future about 5 years ahead, as well as Japan’s telecom markets today.

Background: Japan – the mobile internet pioneer, and Vodafone’s departure from Japan

Following Vodafone’s decision to end business in Japan and the announcement of the sale of Vodafone-Japan to SoftBank, this author has been asked to brief the Technology Attaches of the 25 EU Embassies in Tokyo on Japan’s mobile phone and telecom sector.

The EU Technology Attaches were particularly interested in the impact on Europe by the termination of by far the biggest ever European investment in Japan. Clearly it is also important to determine, what other European companies can learn from Vodafone’s experience.

Eurotechnology Japan KK has been awarded a contract by the European Union to benchmark Japan’s telecom sector vs EU and make recommendations.

More about Japan’s telecom sector

Read our report on Japan’s telecommunications markets
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Japan’s telecom sector briefing for the European Union Technology Attaches at the EU Embassy in Tokyo

Eurotechnology report on Japan's telecommunication markets

Comparing EU and Japan in broadband

Why did Vodafone quit Japan and sell Vodafone-Japan to Softbank?

Following Vodafone’s decision to end business in Japan and the announcement of the sale of Vodafone-Japan to SoftBank, this author has been asked to brief the Technology Attaches of the 25 EU Embassies in Tokyo on Japan’s mobile phone and telecom sector, mobile internet and broadband.

The EU Technology Attaches were particularly interested in the impact on Europe by the termination of by far the biggest ever European investment in Japan. Clearly it is also important to determine, what other European companies can learn from Vodafone’s experience.

European Union awards project contract to Eurotechnology Japan KK to compare EU and Japan in wireless and fix-net broadband, and to prepare recommendations for EU what can be learnt from Japan

Eurotechnology Japan KK has been awarded a contract by the European Union to benchmark Japan’s telecom sector vs EU, particularly in broadband and make recommendations to the EU how EU can learn from Japan in the telecommunications sector.

More about Japan’s telecom sector: JCOMM report (pdf-file)

Japan telecommunications industry report – Preview an outline:

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SoftBank a small fry?? … writes BusinessWeek

SoftBank and Masayoshi Son

Comparing Apple and SoftBank

Is SoftBank really smaller than Apple Computer?

In my 20 years of business and work between US/Japan and EU/Japan, I am often surprised how Western executives underestimate economic size and strength of Japan and it’s companies – here is another example:
BusinessWeek writes about the SoftBank/iPod phone, and writes that former Apple executives says that Apple’s CEO Steve Jobs wouldn’t normally tie up with a “small fry” like SoftBank

Is SoftBank really a small fry? Let’s check it out:

SoftBank a small fry? Apple vs SoftBank revenues

Softbank + Softbank-Mobile (former Vodafone KK) combined have substantially higher revenues than Apple Computer for financial years 2005 and 2006 - so clearly Softbank is no 'small fry' at all compared to Apple Computer
Softbank + Softbank-Mobile (former Vodafone KK) combined have substantially higher revenues than Apple Computer for financial years 2005 and 2006 – so clearly Softbank is no ‘small fry’ at all compared to Apple Computer

Revenues of SoftBank + SoftBank Mobile (x-Vodafone KK) were on the order of YEN 2500 Billion (US$ 22 Billion) for the financial year that ended March 31, 2006.
Revenues of Apple Computer were US$ 13.9 Billion for the year ended Sept 24, 2005. – So in terms of revenue the new SoftBank Group (including the recently acquired x-Vodafone KK) is almost twice as large as Apple Computer.

SoftBank a small fry? Apple vs SoftBank market capitalization

On May 19, 2006, market cap of SoftBank and SoftBank Mobile combined was about 20% less than Apple's market cap
On May 19, 2006, market cap of SoftBank and SoftBank Mobile combined was about 20% less than Apple’s market cap

Market capitalization of Apple Computer was US$ 54.9 Billion on May 19, 2006. Market capitalization of SoftBank (US$ 28 Billion) plus SoftBank Mobile Corp (US$ 15 Billion) was on the order of US$ 43 Billion.

BusinessWeek took note of my letter and published a correction on May 21, 2006, which you can find here and here.

More about Japan’s telecom industry sector in our JCOMM-Report
More about Softbank in our Softbank report

Note added on August 13, 2008:

When the iPhone was actually introduced to Japan by SoftBank in 2008, Mr Tetsuzo Matsumoto, CTO and Board Member of SoftBank-Mobile and myself were invited by the Foreign Correspondents Club to hold a Press Conference to comment on the iPhone introduction to Japan – you can find the records here.

Preview – SoftBank today and 300 year vision report:

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Vodafone Japan rebranding to SoftBank

Vodafone quits Japan, sells Vodafone Japan to SoftBank

SoftBank replaces Vodafone brand in Japan

Vodafone quits business in Japan having sold all operations to SoftBank

Photographs below show the world famous Vodafone board on Tokyo-Shibuya’s Hachiko-square being replaced by the SoftBank advertisement from June 14, 2006.

SoftBank acquired Vodafone-Japan and rebranded to SoftBank mobile on June 14, 2006
SoftBank acquired Vodafone-Japan and rebranded to SoftBank mobile on June 14, 2006

Cheese phones anyone?… Vodafone “cheese phone” and “car tire phone” posters replaced by SoftBank posters on Tokyo’s Yamanote Line

Vodafone had difficulties to manage the relationships with Japanese mobile phone manufacturers, and as a consequence Vodafone’s pipeline of new mobile phone models dried up, while competitors KDDI and Docomo of course continued to introduce seasonal spring, summer, autumn and winter collections of attractive 3G phones which many special functions such as location services, GPS, color screens, autofocus cameras – functions which at that time were only available in Japan and nowhere else globally.

Since Vodafone had few attractive phones, Vodafone switched to covering old models with cheese, mint ice cream and car tire plastic covers to give them a new outside make-up. Of course this course contributed to the exodus of subscribers from Vodafone to competing customers, which eventually led to the sale of Vodafone-Japan to SoftBank, which turned around the former Vodafone-Japan company within a few months.

Rebranding advertisement boards along Tokyo's Yamanote ring line
Rebranding advertisement boards along Tokyo’s Yamanote ring line. Noteworthy are the cheese, cow, car tire and ice cream bar shaped mobile phone covers, which Vodafone offered because it was short of new phone models, and which did not help to improve Vodafone’s brand in Japan – cheese phones anyone?

Understand Softbank: our report: “SoftBank today and 300 year vision”

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SoftBank rebrands Vodafone Japan

Vodafone quits Japan, sells Vodafone Japan to SoftBank

Speed of the essence: SoftBank loses no time to turn around Vodafone-Japan

Vodafone’s withdrawal also shows, that the values of cross-cultural management skills are often underestimated

SoftBank rebrands Vodafone Japan: Saturday June 10, 2006 was the first time we saw SoftBank replacing the Vodafone brand in Japan – bringing a formal end to Europe’s largest ever investment in Japan.

Vodafone’s withdrawal from Japan is a turning point in more ways than one and has wider implications for Europe (read below).

SoftBank rebrands Vodafone Japan: SoftBank’s brand strategy

Rebranding from Vodafone to SoftBank after SoftBank acquired Vodafone Japan
Rebranding from Vodafone to SoftBank after SoftBank acquired Vodafone Japan

Upper image shows the world-famous Vodafone board on Shibuya’s hachiko square, which has appeared in many movies and TV shows. It will soon be replaced.

Lower image shows one of the first SoftBank advertisements in Tokyo’s busiest commuter railstation Shinjuku showing Sharp’s mobile-TV handset.

The photo demonstrates SoftBank’s brand strategy of partnering with world-famous brands, such as with Apple’s iPod and Sharp’s AQUOS display brand.

Implications for Europe of Vodafone’s withdrawal from Japan

As a European myself, I am looking at the wider implications for Europe of Vodafone’s withdrawal from Japan – and our company was recently awarded a contract by the European Union Government on exactly these issues – as well as others.

Vodafone’s investment was by far the largest European investment in Japan. What is maybe less well known is that Vodafone was dispatching a relatively large stream of managers between several
continents (Europe, Australia etc) and Japan. Several times when visiting the KDDI Designing Center for example I could meet young German Vodafone managers who had just arrived for a management position at Vodafone-Japan, and who were studying the mobile phone handsets in KDDI’s showroom. These expatriates all left within a few weeks of SoftBank taking control of the company.

As a result of these interactions, Vodafone could bring J-Phone’s J-Sky mobile internet service to Europe, which was adapted for European conditions and rebranded “Vodafone Live!”. There would be no “Vodafone Live!” in Europe without Vodafone’s acquisition of J-Phone (including JSky). Vodafone also brought SHARP and Toshiba mobile handsets to Europe.

Apart from the immediate impact on Vodafone as a Corporation, we expect also a more general longterm impact from the strong reduction of Europe-Japan technology exchanges due to Vodafone’s withdrawal from Japan.

Vodafone’s withdrawal from Japan also shows how difficult it is for European telecom firms to succeed in Japan – and for Japanese firms in the telecom sector to succeed in Europe. Our company knows this first-hand from our work for NTT-Communications, and some other Japanese companies. – Read our presentation to Japanese industry associations here (in Japanese language).

Underestimating the importance of cross-cultural management skills and the associated perils

While large US corporations, including INTEL, General Motors, and Motorola have been forced by confrontation with Japan’s competition to completely reshape themselves, this has not yet happened to any large European corporation because of the larger perceived separation between EU and Japan.

Comparing Europe and Japan in telecoms….

Understand Softbank: our report: “SoftBank today and 300 year vision”

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Softbank acquires Vodafone Japan with co-investment from Yahoo KK

Softbank acquires Vodafone Japan with co-investment from Yahoo KK

The Deal seals Vodafone’s exit from Japan

Softbank acquires Vodafone Japan in an approx. US$ 15 billion deal – worth an estimated US$ 83 billion ten years later

SoftBank and Yahoo-Japan acquired 97.7% of outstanding shares of Vodafone Japan (Vodafone KK) in Japan’s largest M&A transaction (the remaining 2.3% are owned by other investors). In a Leveraged Buy-Out (LBO) a consortium of banks extended US$ 9.5 to 10.4 Billion in loans.

Citibank was the lead in this transaction on SoftBank side, but because of the size of this transaction, essentially all major players in Japan’s financial industry were involved – including our company, which advised one of the loan risk assurance companies on aspects of the risks of this transaction.

Softbank acquires Vodafone Japan - outline of the transaction
SoftBank acquires Vodafone KK (= Vodafone Japan) – outline of the transaction

Ten Years later (2016) we estimate that Vodafone-Japan would have been worth approx. US$ 83 billion

We estimate that ten years later, had Vodafone-Japan been successful, would have been worth an estimated US$ 83 billion, a value lost to Vodafone as opportunity cost, and the reward to SoftBank fur the successful turnaround.

For details of our analysis of the value of this company ten years later read:

http://www.eurotechnology.com/2006/03/17/why-did-vodafone-fail-in-japan/

SoftBank’s aim: grow to 26 million mobile subscribers and become No. 2 in Japan

SoftBank announced the plan to return to J-Phone’s growth curve and to aim for 26 million subscribers, which would place the resulting mobile operator on place 2 in Japan.

 After acquisition of J-Phone by Vodafone, growth stopped.
After acquisition of J-Phone by Vodafone, growth stopped.

Japan’s new telecom landscape

Three major players emerge after a sequence of consolidation and restructuring: NTT, KDDI and Softbank/YAHOO. The following figure outlines Japan’s telecom sector in 2006:

Outline of Japan's telecom sector in 2006 and M&A transactions
Outline of Japan’s telecom sector in 2006 and M&A transactions

For more information:
download our JCOMM-Report on Japan’s telecom’s industry

You can find a sequence of similar diagrams explaining the evolution of Japan’s telecom sector in our report on Japan’s telecom sector.

Understand Softbank: our report: “SoftBank today and 300 year vision”

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Vodafone Japan fail: Why did Vodafone lose the opportunity of US$ 83 billion value, and help jumpstart the growth of SoftBank

eurotechnology.com

Vodafone’s opportunity cost of US$ 83 billion, asset write-down by £28bn (= approx. US$ 50 billion) in 2006, and kicking off SoftBank’s meteoric rise

Vodafone Japan fail: learn from the missed US$ 83 billion opportunity in Japan

Vodafone Japan fail: a painful lesson for the Vodafone group, and the jumpstart for SoftBank’s meteoric rise

Don’t fall into these traps: contact us!

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When Vodafone acquired Japan Telecom in a series of transactions, Japan Telecom was a full service fixed and mobile (= J-phone) telecom operator servicing private and corporate customers, competing neck-to-neck with KDDI Corporation (TYO:9433) for the second place in Japan’s telecom sector.

KDDI Corporation (TYO:9433) today (10 August 2016) has a market cap of YEN 8450 billion (= US$ 83 billion), and at the time when Vodafone acquired Japan Telecom, was very similar to KDDI.

It can therefore easily be argued that if Japan Telecom had been managed equally well as KDDI, then there is no reason to believe that Japan Telecom today would not have a market cap of at least US$ 83 billion as well.

Instead, Vodafone sold off Japan Telecom bit-by-bit to the SoftBank Group in a large number of transactions, the biggest one the sale of Vodafone KK (= Vodafone Japan) to Softbank on 17 March 2006 for about US$ 15 billion.

And according to the BBC, Vodafone announced in February/March 2006, that Vodafone would write off (write down the value of Vodafone assets) £28bn (= approx. US$ 50 billion).

The acquisition of Vodafone KK (=Vodafone Japan) by SoftBank laid the foundation for SoftBank‘s meteoric rise to a major global player.

Vodafone Japan fail: Learn from Vodafone’s experience in Japan for your own business

Vodafone Japan failed not for one single reason but for hundreds of reasons, which can be grouped into soft factors (mainly lack of understanding Japan and Japan’s telecom markets and it’s true size) and hard factors (mainly far too low investment) – read more details in our SoftBank-report:

  1. Soft factors:
    • Japan knowledge at HQ, and knowledge at HQ about the specifics of Japan’s telecom sector (or lack thereof).
    • choice of management structure (there were attempts to correct the management structure, however too little and too late).
    • attitude displayed both privately e.g. within the Japanese industry sector and publicly via marketing messages and advertising
    • choice of executives and lower ranking managers and their knowledge and experience in Japan’s telecom sector (or lack thereof)
    • lack of sufficient know-how and experience to manage a large Japanese company, and particular the chain of retail stores
    • lack of management and execution know-how in Japan: tried three (3!!) times to introduce / roll-out 3G services in Japan, and failed every time to attract sufficient subscribers. As a result Vodafone Japan was far behind in 3G introduction. Only after sale to SoftBank, did SoftBank succeed in implementing the transition to 3G
    • too high expectations for profitability and margins from HQ, which were out of line with profitability and returns usual in Japan, and out of line of competitor’s margins at that time. Note that SoftBank turned round the failed Vodafone-Japan company within a few months, and today Japan’s mobile operators Docomo, KDDI and SoftBank enjoy some of the highest profit margins on planet earth.
    • and many more
  2. Hard factors:
    • far too low budgets for infrastructure investment resulting in much lower coverage and network quality compared to competitors NTT-DoCoMo and KDDI/au and TuKa, Willcom and others. As a consequence of far too low investment budgets, Vodafone failed three times to introduce 3G services in Japan. (3G services were not successfully introduced until after the acquisition by Softbank, and after conversion of Vodafone KK to Softbank-Mobile).
    • mobile phone handsets were inferior to the handsets offered by competitors NTT-DoCoMo and KDDI, and TuKa
    • and many more

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Vodafone Japan? Why did it fail and sell to SoftBank? – Detailed answer

Find a long answer in this blog post below, in our other blog posts, and in some detail including statistics and financial data in our Softbank Report.

On Friday March 17, 2006, Vodafone and Softbank announced that Vodafone sells Vodafone KK (the totality of all Vodafone operations in Japan) to Softbank.

It has been reported that on Monday March 20, 2006, Softbank started to move all Vodafone KK staff, furniture and equipment from Vodafone KK’s former headquarters in the top floors of the Atago-Greenhills-Mori-Tower to Softbank headquarters in Shiodome (near Shinbashi). Also Softbank arranged very quickly that essentially all foreign expatriate managers left Vodafone KK – some stayed in Japan working for other IT companies, some returned to European Vodafone divisions, and some pursued telecom careers in USA, India, Bangladesh, or elsewhere.

By total coincidence, I had dinner with a high-level manager of Vodafone KK, of European nationality, at the indian restaurant Moti’s in Tokyo-Roppongi on exactly the same day, the Friday March 17, 2006 a few hours after the sale of Vodafone KK to Softbank was announced.
I asked him: “Which of the following is true:”

  1. Vodafone never did any market research in Japan?
  2. Vodafone did market research in Japan, but the quality was low?
  3. Vodafone did market research in Japan, but nobody read it?

This Vodafone KK (Vodafone Japan) manager’s answer at the indian dinner was (3): market research was done about Japan’s mobile phone market, but the market research was not sufficiently taken into account in the business and strategy planning.

Fact is, that Vodafone KK (Vodafone Japan) took many major strategy and market decisions in Japan, which were not related to the realities of Japan’s market. Here one example. When “rebranding” (=changing the company / product / services names) from J-Phone to Vodafone, this “rebranding” campaign was centered on global roaming, i.e. Vodafone enabled Japanese customers to use Japanese J-Phone/Vodafone mobile phones in a very large number of countries outside Japan as well as inside Japan. This was at a time, when Japan’s mainstream mobile 2G phone system which both DoCoMo and J-Phone used was PDC, while much of the rest of the world, especially Europe used GSM. However, what Vodafone overlooked was, that at that time DoCoMo had about 30,000 roaming customers, out of approx. 50 million subscribers, i.e. only about 0.1% of Japanese mobile phone users used international roaming at that time. Thus Vodafone KK in Japan focused their main nation-wide poster and TV and other media campaign on about 0.1% of the Japanese market (and about 0.02% of Vodafone KK’s accessible market, given Vodafone KK’s approx. 20% market share) – less than a niche. (The reason we know how many roaming customers DoCoMo had at that time, is because one of Vodafone KK’s competitors in Japan engaged our company Eurotechnology Japan KK to analyze Japan’s roaming market, and help our client to develop strategy to better compete with Vodafone KK’s roaming products, which were aggressively marketed, and the core of Vodafone KK’s marketing focus).

Another example was Vodafone KK’s strategic focus on Japan’s prepaid market (find detailed statistics and market shares and analysis of Japan’s prepaid market in our JCOMM report). In 2006 there were about 2.6 million prepaid mobile phone customers in Japan, i.e. about 2.7% of the market, while DoCoMo had about 45,200 prepaid subscribers, i.e. about 0.09% of DoCoMo’s subscribers were prepaid customers. Since the prepaid market in Europe (especially Italy where about 1/2 of the market is prepaid) is extremely important and highly profitable, Vodafone decided on the strategy to focus strongly on the development and growth of Japan’s prepaid market. Almost at the same time however, a national campaign started in Japan linking unregistered and illegally traded prepaid mobile phones to crime, and a law was proposed in Japan’s parliament to outlaw any type of prepaid mobile phones. Thus Vodafone KK found itself on the one hand promoting and investing to develop prepaid mobile phone services in Japan, developing, purchasing (as was the business model in Japan at that time) and bringing to market special prepaid handsets, and organizing national media campaigns promoting Vodafone prepaid mobile phones, while at the same time on the other hand facing the possibility that Japan’s parliament would outlaw these same prepaid mobile phones, and a broad press and TV national discussion on how prepaid mobile phones are linked to crime. The end result was, that instead of outlawing prepaid mobile phones, it was decided to introduce far stricter registration requirements and ID requirements for mobile phones and especially for prepaid mobile phones, and the unauthorized/unregistered sale or transfer of prepaid mobile phones in Japan was made a crime. The end effect for Vodafone of course was a commercial failure of Vodafone’s prepaid mobile phone campaign, in addition to a general decrease of ARPU (average revenue per user).

Instead of focusing on its core business in Japan, Vodafone KK focused management resources, and other resources to try to influence political decisions concerning 2.7% of the market: Japan’s minute and decreasing prepaid market.

Vodafone had many other management issues in Japan, which included recruitment and personality and retain issues of top executives, many kinds of HR issues, management issues at the retail stores, handset planning issues, branding and brand management issues, localization issues and much more.

As a consequence of these and other factors, Vodafone KK’s market share continuously decreased, subscribers moved from Vodafone KK to DoCoMo and KDDI/au, and the financial performance of Vodafone KK deteriorated, in the end convincing Vodafone that the best option was to sell Vodafone’s Japan operations and terminate business activities in Japan.

Vodafone-Japan’s leadership was also chaotic. While normally sending a stream of European Vodafone executives without knowledge of Japan or Japanese language on very expensive expatriate packages for limited periods to Japan, at some stage Vodafone decided to headhunt one of Japan’s top mobile industry veterans, who had just lost a battle for Docomo’s CEO position. This Japanese mobile phone industry veteran after a few weeks asked to be transferred from his executive CEO of Vodafone-Japan position to the non-executive Chairman position and soon after left Vodafone-Japan – clearly it took him only a few weeks to understand the hopelessness of the situation.

You can find further details and statistics, financial performance and market share data during this period in our reports:

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Japan telecommunications industry report – Preview an outline:

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Vodafone in Japan? A dramatic change of Vodafone’s mind?

eurotechnology.com

“Vodafone K.K.’s Tsuda, 津田志郎, seeks growth in Japan, not sale”

However, sale to SoftBank may be the way forward

About one year ago, in an interview with Bloomberg (“Vodafone KK’s Tsuda seeks growth in Japan, not sale“), I mentioned that a sale of Vodafone’s Japan operations to Softbank might be the way Vodafone will go in Japan. This seems to be happening now and negotiations to this effect were confirmed by both Softbank and Vodafone over the weekend.

The potential deal

Although a deal has not been closed yet, it is widely reported that a sale of Vodafone’s Japan operations to Softbank is very likely to be closed within a few weeks. What could this deal look like?

As reported by Bloomberg Vodafone KK’s capitalization at the point of delisting from the Tokyo Stock Exchange was around YEN 1.4 Trillion (= about US$ 12 Billion). Bloomberg mentions estimations by London based analysts who value Vodafone KK in the range US$ 14 to 16 Billion. Of course, if a deal is actually concluded, it might be a complex deal with several components, not just a simple cash price, and any cash value will not be determined by analysts in London, but on the negotiating table between Softbank and Vodafone, and the final deal could be more complex than a simple sale against cash payment.

In any case, this deal – if it happens – promises to become one of the largest M&A transactions ever in Japan sofar in terms of cash value. Vodafone is reported to prefer a cash deal, and Softbank has been reported to consider a leveraged buy-out (LBO) where Softbank will take debt against the to-be-acquired company.

It has also been reported that Softbank seems to be planning to change the name of the resulting company, so the “Vodafone” brand is not likely to survive in Japan.

What is Softbank likely to do with Vodafone’s Japan operations

An acquisition of Vodafone’s Japan operations will be the completion of Softbank‘s march to build a full-scale telecommunications group on a par with NTT and KDDI through a series of acquisitions plus internal growth.

Softbank in this new shape will become a much more serious competitor for NTT and KDDI, which both have succeeded to transform themselves from former monopolies into some of the world’s most advanced telecom operators.

In a sense Softbank is already where DoCoMo and KDDI are working very hard to get to: DoCoMo and KDDI are working hard to build content and transaction businesses (such as shopping, financial services, auctions and music), because pure traffic revenue (ARPU) is driven down by relentless competition.

Softbank is strongly linked to YAHOO-Japan, and YAHOO-Japan demonstrated it’s strength by driving eBay out of Japan – so Softbank is already where DoCoMo and KDDI want to go. All Softbank still needed was a wireless network, and with a Vodafone acquisition, Softbank will have a wireless network much faster than expected.

A Vodafone/Softbank deal will not be a good development for eAccess/eMobile, and eAccess/eMobile is reported to have submitted documents to Japan’s regulatory authorities regarding Softbank’s wireless license. It will be interesting how the regulating government ministry will decide on the regulatory aspects of any Softbank/Vodafone deal. In the past few years Japan’s government has been singularly focused on creating the conditions to make Japan the most advanced IT market in the world, so I think we can
be confident to expect a wise decision – wise for Japan, not necessarily beneficial for particular mobile operators.

What made Vodafone change it’s mind about Japan?

As reported by Bloomberg, one year ago Vodafone had the clear intention to remain in Japan for the next 10, 20, 30 years. What made Vodafone change it’s mind?

As widely reported, Vodafone was loosing market share in Japan’s mobile phone market over the last several years.

With number portability being introduced in Japan from autumn 2006, and with three new operators entering the market during 2006-2007, the competitive environment will become much more severe than it is now, decreasing pure network profitability, while at the same time massive network investments are necessary.

Analysis of Vodafone-Japan’s subscriber numbers shows that early warning signs appeared already in 2002 – 2002 would have been the time for Vodafone to take decisive action to turn the business around in Japan.

More about Japan’s telecom sector: download our JCOMM-Report.

See also: my comments in Der Standard (German language) “Aus fuer Vodafone in Japan”

UPI also quotes us: “Globe Talk: Vodafone’s sayonara problems”

Understand Softbank: our report: “SoftBank today and 300 year vision”

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Wireless internet grows by about 0.5 million/month in Japan

Japan’s mobile internet is a growth market with about 0.5 Million new subscriptions/month – Japan’s mobile internet grows by about one Finland per year, and even more in terms of ARPU!

This growth today is shared almost 50%/50% between DoCoMo’s i-Mode and KDDI’s EZweb.

Vodafone’s subscriber numbers on the other hand have been more or less stable around zero growth.

Growth of mobile internet subscriptions for DoCoMo's i-Mode and KDDI's EZweb combined stabilizes at 0.5 million/month, while Jsky stopped growing after acquisition by Vodafone and renaming to Vodafone-Live!
Growth of mobile internet subscriptions for DoCoMo’s i-Mode and KDDI’s EZweb combined stabilizes at 0.5 million/month, while Jsky stopped growing after acquisition by Vodafone and renaming to Vodafone-Live!

Copyright·©2013 ·Eurotechnology Japan KK·All Rights Reserved·

IP backbone for Japan’s mobile operators

Japan’s telecom operators are investing to build IP (Internet Protocol) backbone networks:

IP backbone networks of Japan's mobile telecom operators
IP backbone networks of Japan’s mobile telecom operators

More: Japan Telecommunications report

Copyright·©1997-2013 ·Eurotechnology Japan KK·All Rights Reserved·

Mobile operators invest US$ 15 billion

Japan’s top three mobile operators DoCoMo, KDDI and Vodafone announced plans to invest about US$ 15 billion during FY 2005 (April 2005 – March 2006):

Infrastructure investments (capex) by Japan's mobile phone operators - Vodafone's investments were systematically reduced and are by far the lowest of Japan's three large operators
Infrastructure investments (capex) by Japan’s mobile phone operators – Vodafone’s investments were systematically reduced and are by far the lowest of Japan’s three large operators

For recent financial data and analysis of Japan’s telecom and mobile sector: Eurotechnology report on Japan’s telecom industries

Find details about SoftBank’s acquisition of Vodafone KK (Vodafone’s Japan company) in our SoftBank report

Copyright·©1997-2013 ·Eurotechnology Japan KK·All Rights Reserved·

Japan’s mobile subscriber data for March 2005

March is the month when new subscriptions peak in Japan. During March 2005 around one million new subscribers signed up for mobile services in Japan, the net gain (new subscriptions minus cancellations) was 930,500. New subscribers were shared as follows between carriers:

DoCoMo: + 480,200 (+ 51.6%)
KDDI/AU: + 436,100 (+ 46.9%)
WILLCOM: + 33,300 (+ 3.6%)
KDDI/TuKa: – 2,600 (- 0.3%)
Vodafone: -7,400 (-0.8%) (previous counting method: -58,400)
Astel: – 9,100 (- 1.0%)

TOTAL: + 930,500 (100%)

Vodafone announced a new method to calculate numbers. Without this new way of calculating, Vodafone’s loss would have been: -58,400

Net growth (loss) of subscribers per month for Japan's mobile operators - Vodafone drops into the red, losing subscribers despite a new way of counting them
Net growth (loss) of subscribers per month for Japan’s mobile operators – Vodafone drops into the red, losing subscribers despite a new way of counting them
Net growth (loss) of mobile internet subscribers (i-Mode, EZweb and Vodafone Live!): since Vodafone renamed Jsky to Vodafone Live!, its rapidly losing market share
Net growth (loss) of mobile internet subscribers (i-Mode, EZweb and Vodafone Live!): since Vodafone renamed Jsky to Vodafone Live!, its rapidly losing market share

Copyright·©1997-2013 ·Eurotechnology Japan KK·All Rights Reserved·

Japan mobile subscriber data for Feb 2005

Japan’s mobile subscriber numbers for Feb 2005 came out yesterday…

DoCoMo is ahead again after a soft period on the strength of services and handsets, and KDDI/AU is still going strong driven by the designer series, good tariffs/discounts, music, WIN etc.

Willcom (the former DDI-Pocket) is strengthening under new management, new name and new campaigns and network upgrades, TuKa is falling back after it’s great “TuKa-S” success… and Vodafone succeeded to stabilize subscriber losses somewhat which is a mild step in the right direction and might be the first indication of Mr Tsuda’s influence…

Stimulated by the needs of our customers, who need to roll out services across the networks in Japan, we have started market surveys, interviewing mobile phone customers of all kinds on Tokyo’s streets in “focus groups”, as we do when required for our customers to get a feel for the market. I always make a point to take part personally in such consumer research, and often do some myself. In the case of mobile phone habits, the first approach at interviewing just reflects back the messages of the commercials and publicity campaigns. Only in-depth interviewing and discussion then reveals the real thoughts which are normally quite different. We learnt a lot about what average Japanese consumers think about DoCoMo, AU and Vodafone, building up a good picture. But the numbers also tell a clear story:

Subscriber net growth/loss for Japan's mobile phone and PHS operators
Subscriber net growth/loss for Japan’s mobile phone and PHS operators

Copyright·©1997-2013 ·Eurotechnology Japan KK·All Rights Reserved·

Eurotechnology Japan in the press: Bloomberg, BusinessWeek, Economist

Eurotechnology Japan KK in the press:

Copyright·©1997-2013 ·Eurotechnology Japan KK·All Rights Reserved·

Vodafone CEO Arun Sarin wants Vodafone to be in Japan for 10, 20, 30 years

eurotechnology.com

Shiro Tsuda, 津田志郎, CEO of Vodafone Japan

Vodafone CEO Arun Sarin wants to stay in Japan for the long term according to Bloomberg

Shiro Tsuda (津田志郎, CEO of Vodafone KK for a few weeks) told Bloomberg that global “Vodafone CEO Arun Sarin wants Vodafone in Japan for 10, 20, 30 years”.

Vodafone recruits Shiro Tsuda, 津田志郎, the No. 1 founding employee of NTT’s mobile division

It appeared that Vodafone KK – with the help of a major headhunting firm – had staged a major success, when Vodafone KK headhunted Mr Shiro Tsuda as their Japan-CEO as of December 1, 2004. Mr Shiro Tsuda was the founding employee No. 1 of NTT’s mobile phone division, which later became NTT-docomo.

Shiro Tsuda quits a few months later

This temporary success turned into an embarrassment for Vodafone KK when a few months later, Mr Shiro Tsuda, resigned from his Vodafone KK-CEO position, became non-executive Chairman of Vodafone KK, and soon after left Vodafone altogether.

About one year after Vodafone-CEO Arun Sarun declared to remain in Japan for 10, 20, 30 years, on Friday March 17, 2006, Vodafone and Softbank announced that Vodafone sells Vodafone KK (the totality of all Vodafone operations in Japan) to Softbank, and terminated all operations in Japan.

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Vodafone’s challenges in Japan: Businessweek and Economist analyze the facts

Vodafone quits Japan, sells Vodafone Japan to SoftBank

Vodafone’s challenges in Japan’s advanced telecommunications markets catch attention

Will Vodafone stay in Japan or give up and pull out?

Vodafone’s challenges in Japan: BusinessWeek and The Economist both analyze and comment on Vodafone’s business situation in Japan, where the mobile internet was first implemented successfully starting in February 1999, far earlier than anywhere else in the world.

Understand Softbank: our report: “SoftBank today and 300 year vision”

pdf file, approx 120 pages, 47 figures 18 photos, 7 tables
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