The Struggle For NTT

Government bureaucrats are pushing for an AT&T-like break-up; normally reticent Japanese shareholders are furious at management for the stock’s nosedive in a strong Tokyo market; and the Recruit scandal, which brought down the last government as well as his predecessor, humbled the world’s second largest telecom. Haruo Yamaguchi’s predicament may have one bright side for U.S. technology firms-more orders.

September 1 1989 by Chief Executive


An avid gardener, Haruo Yamaguchi, 64, likens his management philosophy to his cultivation of roses: ensure the soil is rich and keep harmful insects away. The former telephone linesman who became president and chief executive last year will need industrial strength insecticide. The Ministry of Posts and Telecommunications (MPT) is pressuring Japan‘s main network operator to promote more competition, something which ultimately is inimical to NTT’s long-term financial interests. The Recruit scandal, involving a shares, for-influence scheme, is merely a cudgel forMPT bureaucrats. Long before the event was brought to light, the government had sponsored studies and made noises to the effect that Nippon Telegraph and Telephone is simply too big and too powerful.

NTT’s size is awesome. Its market capitalization at $185 billion is bigger than those of IBM, GM and AT&T combined. Its March year-end 1989 assets reached $87.5 billion with operating revenues of $44.2 billion, 3 percent ahead of last year’s figure. Since privatization in 1985, the stock went from blue chip to buffalo chip. In April 1985, a single share fetched ¥1.6 million ($11,200), jumped to ¥2.4 million, and has since dive-bombed to ¥1.5 million ($10,345). Normally patient Japanese investors (as long as the gains are forthcoming) made last June’s annual meeting anything but a polite tea ceremony.

The coup de grace came in December 1988 when Dr. Hisashi Shinto, NTT’s chairman, resigned following the disclosure that profits from the sale of Recruit Cosmos Co. shares had been deposited into his bank account. Shinto, who had built a reputation as a turnaround CEO in the 1970s with Ishikawajima-Harima Heavy Industries, was an esteemed figure among faceless executives -a sort of Japanese Lee Iaccoca cum Jack Welch.

Picking up the pieces is, by contrast, a reserved consensus-builder who is pursuing two almost contradictory goals: maximizing shareholder value and promoting telecommunications competition (as a hedge against possible divestiture). By law, N7-7′ is precluded from selling and making a proftit on its services outside of Japan. Since it has no manufacturing arm, it is busy reaching out and touching telecom suppliers overseas to help it with its aborning integrated services digital network (ISDN), and expanding services. With overseas purchases rising from $19 million in 1982 to $330 million last year, NTT is one Japanese company that isn’t contributing to trade friction.

In response to a complaint by Motorola, the two countries have recently reached an agreement that may lead to the opening of the cellular phone market in Japan.

Having spent most of his career on the engineering side of telecommunications, Yamaguchi joined the Ministry of Communications (the forerunner of NTT) in 1948 and spent his first 15 years developing cable wire technology. He says he wishes to internationalize the company further and develop joint venture and R&D relationships (something that NTT has been aggressively pursuing) with more U.S. and European firms. Editor JP. Donlon talked with Yamaguchi during a recent visit to New York C70)

 

You became President of NTT at a time when everything seemed to be going well: It was a popular company with a sky high stock price. Today, circumstances are very different. What happened?

I became President in June of last year, at which time NTT was rated very high because the effects of privatization were about to appear.

Then the Recruit scandal surfaced. Dr. Shinto and two directors, one of whom had retired by then, were involved in this scandal, which tarnished NTT’s image.

Many people in our society have since criticized NTT harshly and severely. We lost a great deal of trust and confidence. During this time most of my energy had to be spent coping with this situation.

It had also been only four years since the privatization of NTT, a prime transition for us. We had taken measures to reform the organization of NTT internally. We had originally planned four stages of reorganization. But in order to make the transition more efficient, we wanted to reduce these four stages to three, which was very difficult.

As we look back at the past year, it was one of dramatic change and suffering for us. At our June annual meeting, there were many questions from stockholders about the scandal and our involvement. I had to respond with what sort of measures we took to cope with the situation. NTT’s stock had also fallen, and there were many questions about that, too. But now that the stockholders meeting is over, we feel that the worst is behind us.

Since April of this year I have been touring Japan, visiting our 250,000 employees, and meeting with more than 5,000 leaders of our local organizations. I’ve been telling them that five years ago we had a very good start as a private company. We were then faced with this unfortunate scandal and as a result, we lost our trust. The first thing we have to do at this point is try to recover the trust of customers at the earliest possible time. To do this we need to provide the best possible services to the customers.

Did the fact that you are very close to Dr. Shinto-he was your mentor-affect you strongly when the events of December and March took place?

Dr. Shinto was with NTT for seven years. He joined NTT when it was still a state-owned corporation, and he became president after it privatized. He was extremely forthcoming and active as a businessman, and he would deliver his judgment looking at various, wide-ranging things. He was always thinking of the future when he made decisions. At the same time, he really did not care how things were done. This was different from the way we did things at NTT. I really learned from him how to do business. Under his leadership, NTT went through this dramatic transformation and this was looked at with admiration at home and abroad.

In the midst of this change, the scandal took place, and I had to succeed him as president. The shock of this experience is beyond words. I was not, however, shocked about Dr. Shinto himself as a person, but because of the way the scandal affected NTT.

In light of recent events, have you changed your strategy?

There has not been any change. However, one of the directors who was implicated in the scandal had a role in the marketing of NTT. Because of this, we feel we should become a little more passive in terms of marketing or sales activities in the future.

What are the opportunities for U.S. companies in NTT’s push to develop ISDN?

Most of NTT’s work on ISDN will be completed by the beginning of 1990. However, not only the construction of ISDN itself, but the systems to be used with this ISDN service will have to be built at the same time. This includes switches, transmission equipment and terminal equipment. U.S. firms could be contributors in every one of these areas.

NTT has already purchased switching equipment from Northern Telecom and most recently, optical transmission equipment from AT&T.

What other things are you most urgently looking for that could be supplied by Western firms?

The only remaining area with direct regard to ISDN would be customer terminal systems. Unfortunately, I don’t think you have a commercialized ISDN terminal available in this country. We don’t have one available in Japan, and they don’t have one in Europe. Everywhere in the world, people are still in the process of developing ISDN terminals that are less expensive and can provide good quality. Until we actually see the commercialized product, we won’t be able to say which suppliers will supply these terminals.

Last year, NTT bought 3330 million worth of equipment from U.S. suppliers. This is roughly 3 to 4 percent of total NTT procurement. Do you expect this percentage to rise?

It’s important to note that although the fact that this 3 or 4 percent figure seems to be extremely low, total purchases of NTT include all the items that NTT has.

It also includes those items that U.S. companies are willing to sell, and those that they have shown little interest in selling. No matter how much we tell the U.S. companies that we would like to buy from them, some companies aren’t interested in selling to us at all. When you talk of NTT’s total procurement, that includes high-tech items as well as paper goods used in our offices, and clothes and shoes used by our workers. Instead of looking at NTT’s total procurement, it is more meaningful to look at communications facilities which U.S. companies want to sell very much. In those terms, I think that the U.S. share has been as high as 10 percent.

We have bought from as many as 350 U.S. companies, both big and small. Increasing the U.S. share of NTT’s total purchase will require a great deal of effort on the part of both U.S. companies and NTT, in that we have to let U.S. companies know what we want to procure. If we are not going to do anything about this, if we just sit back in an idle way, that percentage will not rise automatically.

How can U.S companies better market their goods or services to your firm?

Most of the American companies that want to sell to NTT know already what they need to do. There is one thing that we are emphasizing: instead of just trying to sell products to us, U.S. firms could work together with us in the R&D stage. This would lead to further sales to NTT.

Potential users are concerned that ISDN will mean expensive network changes that will offer them little in return. Contel, a U.S. company, for example, said existing private data networks offer superior capabilities to larger users than will ISDN. Is NTT focusing perhaps more attention on technical excellence in developing its ISDN rather than the immediate needs of users?

That is one way of looking at the situation. But I predict that in the future, the technology of this sort of service will grow dramatically. So I have to start constructing this basic infrastructure as soon as possible, taking into account what the future requirements and needs would be. In that sense, we have to expedite work on the construction of ISDN because we are sure that in the future, the demand for these services will be there.

Bell Canada, for example, has yet to make a profit out of ISDN. Is NTT making money from its INS 64 or its INS 1500.

For INS 64 we have 3,000 to 4,000 customers. With this number of customers we can’t even expect this service to be profitable at all. It’s only a year since we started INS 64, and we just started INS 1500, so we are not that concerned about profitability at this stage. What we are looking at is many years ahead.

Technical standards are often used as a clever ploy by one country to keep another country’s manufacturers or service providers out of its market. Do you not fear that Europe and possibly the U.S. may develop ISDN standards that are different from those you are developing?

In the past we didn’t have any world standards; they had to be set by different countries. However, since ISDN standards are being deliberated in international firms like CCITT, it will be possible for us to achieve a common world standard. I think every country will comply with that standard.

It is said that while Americans invent, Japanese adopt and perfect. Is this changing?

After World War II, Japanese technology was at a very low level and U.S. and European technology was much higher. We had to try and catch up. Rather than trying to become creative, we thought the fastest way was to try to master their technologies.

So in the past, we tried to attain the level of those ahead of us. In the future, we will not have that objective. No one really knows what the future of technology will be. Unless we are creative, we won’t be able to make any progress.

Where are you placing great hope or emphasis in new technology?

We know that we have to come up with new switches and new transmission equipment using the materials currently available. But as far as new materials are concerned, I don’t know what will be invented. So I think that’s the area toward which we can direct high expectations.

Isn’t an AT&T-like breakup of NTT inevitable?

Why do you think it will be?

Political pressure, competition, and the fact that all large organizations, no matter how well they are run, eventually develop hardening of the arteries.

At the time when NTT was going to be privatized, it was stipulated that NTT’s organization would be reviewed in five years. This is the fifth year. There is discussion going on in the Ministry of Post and Telecommunication’s Advisory Council. But what they are discussing is not just the possibility of breaking up NTT, but the overall situation concerning NTT: its structure, the regulatory framework, things like that. So they are not just looking at the possibility of divesting NTT.

Assuming divestiture also entails deregulation enabling NTT to market its services and set its own rates, wouldn’t this be an advantage for your shareholders, who have taken a beating lately?

In Japan we don’t really think that divestiture would mean deregulation. The reasoning behind the possible divestiture is that NTT is too big. It is most desirable to have NTT and other companies on an equal footing with each other so that they can compete.

In recent years there has been much talk of an “uneven playing field” in U.S./Japanese relationships, and criticisms saying the Japanese government backs private business ventures and gives them special breaks virtually assuring their success, while in the U.S., business receives none of these special privileges. This is why some U.S. businessmen argue that Japan has become such an economic power. How do you characterize present U.S./Japanese business relations, and where are they going?

Japan was able to achieve this much economic power because these companies were able to learn a great deal by the experiences of U.S. firms and other industrialized countries. At the same time, Japanese managers have put a great deal of emphasis on R&D, which has also contributed to this much economic power.

We should not forget the fact that in many cases, Japanese managers try to look at long-term rather than short-term or short-cycle profit. Somehow it seems that in the U.S., it is difficult for companies to invest long term. I do not mean all U.S. companies. But in many cases, they say that they have to recover their R&D costs quickly. If we are investing a great deal of money for the development of new products, for instance, they say that this kind of development expenditure is too large.

With Japanese companies, even if they have to make a red figure investment, if they think they will be able to recover that cost and profit in the long term, they will take that risk. This is the major difference between the two countries.