Change Management in an Economy of Speed

Change management in an Economy of Speed

APO Study meeting June 23, 2004 Hyderabad India

Risaburo NEZU Fujitsu Research Institute

Growth of high- and medium-high-technology exports, annual average growth rate, 1992-2001 or closest available years Japan Italy Switzerland Norway High- Manufacturing Sweden technology France Denmark industries Germany Australia OECD Spain New Zealand United States Korea EU Slovak Republic Austria Portugal United Kingdom Canada Netherlands Belgium Finland Ireland Greece Turkey Mexico Poland Czech Republic Hungary Iceland 40 30 20 10 0 0 10203040

*OECD total excludes Czech Republic, Luxembourg, Korea and Slovak Republic. Czech 93-, Slovak 97-, Korea 94- 1 Source; OECD, STAN database, May 2003.

<#> Share of semiconductor in the ％ world market 60

30 US Japan 20 Europe Asia (Except Japan) 10

1 85 87 89 91 93 95 97 99 200 Gartner/Data Quest 2

Japanese position in international trade （％） 14 12 US 10 Canada 8 Mexico 6 Japan Germany 4 China 2 0 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02

Source; US Department of Commerce 3

<#> Value-chain of IT equipments

-Integrated approach VS Modular approach - US Fabless (silicon valley) and Foundry (Taiwan) - Japan does everything at home. profitability 【Structure of value chain】 After-sales, R&D, D&D Service, Support

Procurement Logistics

Manufacturing

TIME 4 Source: Nikkei Business July 8, 2002

ComparisonComparison ofof IndustryIndustry StructureStructure (( METI)METI)

・ US and Asia realized high profitability by focusing on the areas of strength ・ Japan marked low profit as it spread its resources to all fields - As a result, Japan was driven into a vicious circle of low investment and poor competitiveness

IndustryIndustry structure structure Design Houses

Japan USA Asia

Semiconductor Intel Samsung TSMC ( foundry ) Hitachi Fujitsu

NEC IBM Software Microsoft

Computer Sun Microsystems Network cisco Lucent Matsushita Sony Digital Motorola Samsung Appliances

<#> Semiconductor product mix (2000) JPN US Europe Korea

100% Mos memory 80% Mi com. Logic 60% Linear 40% Digital CCD 20% OPT 0% Discrete HIC IBM INTEL Fujitsu Micron Hitachi Philips Toshiba Infenion Hyundai ST micro Samsung

6 Source: Semiconductor Industry Research Institute Japan

Procurement of components from Taiwan

Total of top 10 Total of top 5 $100M Companies Companies

350

300 US

250 US JPN EU

200

150

100 JPN 50

0 EU 95 96 97 98 99 '00 '01

Source:adapted from Ministry of Economic Affairs ( Taiwan ) 7

<#> US Trade in IT products

(millions of Dollars) 2001 2002 2003

Exports of goods, balance of payments basis, excluding 718,712 681,874 713,761 military

Computers, peripherals, and parts 47,555 38,553 39,928

Semiconductors 45,066 42,235 46,158

Telecommunications equipment 27,874 22,208 20,748

Other office and business machines 2,894 2,023 1,924

Imports of goods, balance of payments basis, excluding 1,145,927 1,164,746 1,263,170 military

Computers, peripherals, and parts 74,001 75,150 76,522

Semiconductors 30,422 26,015 24,608

Telecommunications equipment 24,632 23,135 24,766

Other office and business machines 4,864 4,468 7,136

Source; US Department of Commerce 8

Shares in the global server market (2002)

HP Dell IBM Sun Microsystems NEC Fujitsu Hitachi Gateway Siemens Solectron Flextronics Acer Quanta Others

2.92.4 the volume of 3.44.4 8 3.4 14.1 87.5 4.6 41.3 shipments

2.2 Brand 31.1 18 15 6.13.4 16.7 2.42.2 2.9

0% 20% 40% 60% 80% 100%

9 Source; The Semiconductor Industry News, 26 November, 2003

<#> Shares in the global mobile phone market (2002) Nokia Motorola Samsung Siemens Sony Ericsson LG Electronics Alcatel Panasonic Mobile Communications Kyocera Phillips Others Flextronics Hon-Hai Solectron NEC the volume of 29 5.3 16.7 4.3 6.9 5.3 4.7 11.4 6.4 5.5 4.4 shipments

2.9 2.7 Brand 35.8 15.3 9.9 8.1 5.5 9.8 3.1 2.8 4.1

0% 20% 40% 60% 80% 100%

10 Source; The Semiconductor Industry News, 5 November, 2003

MarketMarket reorganizationreorganization inin SemiconductorSemiconductor fieldsfields

Memory (DRAM)

ＤＲＡＭ Two top companies were integrated into globally competitive System ＬＳＩ one. Others withdrew from the market. (1999) Joint 2002 investment in kind ・Appointing former president

ＤＲＡＭ of Japan TI to CEO. (April 2003) transfer of business ・ System ＬＳＩ Investment from Intel

System LSI ＤＲＡＭ Withdrawal System ＬＳＩ (November 2002) Partition

ＤＲＡＭ Withdrawal Group System ＬＳＩ (April 2003) Jointly Flash memory newly-established firm FUJITSU Semiconductor Division ＡＭＤ Comprehensive Group alliance Toshiba Semiconductor ＤＲＡＭ Withdrawal Company System ＬＳＩ Competitive Projects of Public and Private ( HALCA, MIRAI, ASPLA ） Adapted from METI report 11

<#> Fortune 500 Computer and Office equipment

1982 ( Mainframe ) 1992 ( Mini-Computer ) 2002 ( PC )

1 IBM IBM IBM

2 Sperry Hewlett-Packard Hewlett-Packard 3 Honeywell Digital Equipment Compaq Computer 4 NCR Unisys Dell Computer 5 Burroughs Apple Computer Sun Microsystems

6 Digital Equipment Pitney Bowes Xerox

7 Control Data Compaq Computer Gateway

8 Pitney Bowes Sun Microsystems NCR 9 Wang Laboratories Seagate Technology Apple Computer 10 Wang Laboratories Pitney Bowes

Top 10 Japanese IT companies

1981 2001 Matsushita Hitachi Hitachi Sony Toshiba Matsushita Mitsubishi Electric Toshiba Nihon Electric NEC （Nihon Electric） Sony Fujitsu SANYO Mitsubishi Fujitsu

Source; Fortune Global 500, 13

<#> Evolution of IT industry

-1995 1995-2000 2000-2003 2004-? Mainframe/ PC/Internet Mobile phone Digital home Minicon (US) (Europe) electronics, PSTN Ubiquitous computing (Japan ?) IBM, ATT, DELL,SUN, NOKIA, Sharp, Sony, Alcatel, CISCO, HP ERICSSON, Matsushita Siemens, NTT, INTEL MOTOROLA, (convergence of Fujitsu, NEC SAMSON AV, computer ST Micro, TI and Telecom)

Proprietary OS UNIX, Windows Simbian, TRON ,Linux ?

Two opposing views

TOYOTA SONY

Continuous Improvement

<#> Americanization of Toyota

Japan North 28% America 34% Latin Total America 6.04million 2% US$ Africa 2003 3% Oceania 4% Asia Europe Middle East excluding 14% 5% Japan 10%

16 Source; Asahi shimbun

Smile curves applied to automobile and computer industries

Automobile Computer and peripherals 14% 14%

12% 12%

10% 10%

8% 8%

6% 6% 85 4% 85 90 95 4% 90 95 97 99 2002 2% 2% 97 99 0% 0% Materials Fabrication Service Materials Fabrication Service And Parts And Parts

produced from input and output table by Fujitsu Research institute 17

<#> Another evidence of “doing as others do” strategy (2001)

(%) 18 16 14 US EU Japan 12 US EU Japan 10 8 6 4 2 0 t s ri a i la M er e ta hi h tel o B t ips su i ib c In r I GE il en o h m Sony sh NEC ita P u Lucen ot ie Fujit ts Tosh H tsubis M S a i M M Dell Compu a Brown Bov e

Abb As Source：Japan Research Industries Association 18

Where Japanese strength lies in terms of number of parts

【number of parts】 1 10 100 1,000 10,000 100,000 1,000,000

【strength】 Camera, machine tools, TV, auto

【weakness】 chemical catalyst Air craft, space biotec OS

<#> New product areas

Japanese share％（2000） 80 70 VTR Japanese 60 strength 50 Color TV 40 Japanese 30 weakness 20 PDA Mobile 10 Desktop PC Note PC phone 0 0 10203040506070 2000/1995 growth rates %

Number of patents granted in the US (2003)

Rank Company No Rank Company No

1 IBM (US) 3,439 11 Samsung (Korea) 1,316

2 Canon(JPN) 1,997 12 Mitsubishi (JPN) 1,265

3 Hitachi (JPN) 1,906 13 Toshiba (JPN) 1,217

4 Matsushita (JPN) 1,821 14 NEC (JPN) 1,198

5 Hewlett-Packard (US) 1,763 15 General Electric (US) 1,139

6 Micron Technology (US) 1,708 16 AMD(US) 908

7 Intel (US) 1,595 17 Fuji Photo Film (JPN) 809

8 Phillips (Holland) 1,355 18 Seiko Epson (JPN) 779

9 Sony (JPN) 1,354 19 TI (US) 771

10 Fujitsu (JPN) 1,338 20 Bosch (Germany) 758

21 Source; Denpa Shimbun January 14, 2004

<#> Share of semiconductor in the world Top 20 2003 Company Name 2003 Revenue (Millions of US$) Percent Change Percent Total

Intel 27,036 14.1% 14.9% Samsung Electronics 9,675 10.6% 5.3% Renesas Technology 7,971 NM 4.4% Texas Instruments 7,850 20.2% 4.3% Toshiba 7,571 17.9% 4.2% STMicroelectronics 7,238 13.9% 4.0% Infineon Technologies 7,109 32.3% 3.9% NEC Electronics 5,705 8.7% 3.1% Freecale Semiconductor (Motorola) 4,629 -3.7% 2.5% Philips Semiconductors 4,512 3.5% 2.5% Matsushita Electric 4,016 22.4% 2.2% Advanced Micro Devices ( AMD ) / Spansion 3,939 48.0% 2.2% Sony 3,558 27.5% 2.0% Micron Technology 3,418 18.1% 1.9% Sharp Electronics 3,075 35.6% 1.7% Hynix 3,071 28.4% 1.7% Fujitsu 2,605 -16.0% 1.4% IBM Microelectronics 2,515 -10.4% 1.4% Qualcomm 2,466 27.0% 1.4% Rohm 2,398 1.5% 1.3% Others 61,368 0.5% 33.8% Total Revenue 181,725 14.2% 100.0%

Source ：iSuppli Corporation, March 2004 22

World semiconductor market

($billion ) (2002-2007) 250

(CAGR % ) 200 opt (9.7) discrete (6.0) 150 analog (5.9) logic (10.8) 100 MPU (8.4) memory (11.7) 50

0 2002 2003 2004 2005 2006 2007

Source JEITA 23

<#> The distribution of major electric device- semiconductor market (Forecast) 100,000

consumer electronics ）

M$ computer

CELLULAR （ DESK TOP PC communication NOTE BOOK PC automobile 10,000 CAR (BODY) CAR(DRIVE) PC SERVER TV GAME DSC CAR(INFO.) LCD MONITOR DVD RECORDER HDD ANALOG TV DIJITAL STB DVD BURNER DIGITAL TV INK-JET MFP DVC AV 1,000 RECEIVER DVD PLAYER LASER MFP INK JET PRINTER DVD-ROM（Comb.） CAR(ELECTRIC) HYBRID CAR LASER BEAM PRINTER Market of semiconductor IP TELEPHONE DVD-ROM CAGR(03-07)=9% PDA (Stand-alone) Themarket sizeof semiconductor of2007 100 -20% 0% 20% 40% 60% 80% CAGR ( Compound Annual Growth Rate ) 2003-2007 Source:JEITA, MAY2004 24

Production of key IT products and components Jan-March 2004 change from weight(2000) 2000average Jan-March 2003 Lithium ion battery 41.9 217 123 telecom relay station 5.5 143 51 LCD television 2.2 275 162 Digital camera 16.1 305 121 Car navigation 13.1 226 122 mobile phone 88.3 94 93 fax 8 17 52 circuit switching 24.4 54 123 digital transmission equipment 26.5 10 53 DVD video 6.8 46 100 color TV 10.6 46 118 PHS 6.7 13 37 main frame computer 9.2 111 99 mid-range computer 16.2 129 94 PC 84.1 71 101

<#> Production of Semiconductor Jan-March 2004

change from weight(2000) 2000average Jan-March 2003 Active LC device (large) 52.9 149 122 Active LC device (small) 28.6 371 158 Optical exchange device 42.9 110 120 Moss type device (logic) 150.1 101 121 Moss type device (logic) 116.3 198 135 mixed IC 41 96 105 Micro computer 84.7 103 108 CCD 13 776 178 Passive LC device 30.3 27 79 transistor 33.7 69 115 linear 75.1 84 108

Factories producing 300mm silicon ( existing and planned )

Company Location Investment （100million Yen） Date of Operation Intel US 2,100 First half, 2002 US 2,100 First half, 2002 Ireland 2,100 2Q, 2002 TI US 1,500 First half, 2002 IBM US 3,000 Latter half , 2002 AMD US 2,000 2004 Samsung Korea 1,500 1Q, 2002 Korea 2,000 2Q, 2002 TSMC Taiwan 2,600 2Q, 2002 Taiwan 2,300 1Q, 2002 Elpida Memory Japan (Hiroshima) 1,600 September, 2002 Mitsubishi Japan (Kochi) 2,000 First half, 2003 Toshiba Japan (Oita) 2,000 July, 2004 Japan (Yokkaichi) 2,000 Spring, 2006 NEC Electronics Japan (Yamagata) 600 Latter half , 2004 Fujitsu Japan (Mie) 1,600 April, 2005

Source; Fri Research based on various company’s reports 27

<#> Shortening lead time

Unit; Months Lead time Interval of model change

1997 80 120 Steel, metal 2002 80 120

1997 33 71 Auto ▲27％ ▲17％ 2002 24 59

1997 28 47 machinery ▲10％ ▲ 9％ 2002 25 42

1997 35 45 Precision ▲19％ ▲40％ 2002 29 27

1997 26 45 Electronics ▲25％ ▲43％ 2002 19 25

World leading Companies in 2010

Technical fields Companies No. of votes LCD Sharp 19 IC tag (RFID tag) Hitachi 18 Photo voltaic system Sharp 17 Hybrid car Toyota 15 Fuel cell・Hydrogen-fueled car Toyota 12 Amino-acid Foods Ajinomoto 12 High capacity Optical Disk Sony 11 CCD / CMOS Sony 11 lithium-ion battery Sanyo 11 Electronic money Sony 10

Organic electro luminescence panel Sanyo 10

<#> ▼Japan

Key factors for corporate competitiveness -survey on 300 managers from Japan, Korea and China （％） 5.0 26.0 Flexibility to innovative changes 25.5 8.0 14.0 Korea Management style from long-term perspective 4.7 China 21.0 Brand 10.013.2 Japan 19.0 32.0 Ability of Managing Brand 12.3 11.015.0 Competence of Cost Control 34.9 24.0 25.0 Creation of New products and services 39.6 0.0 26.0 Product Development ability 28.3 15.0 Organaization 0.0 10.4 12.0 27.0 Ability of Employee 18.9 43.046.0 Qualification of Manager 13.2 0 1020304050

Source; Nikkei Shimbun, March 24, 2004 31

<#> But, entrepreneurial spirit is still weak

32 Source; Fortune, February 9, 2004

Solid ownership of shares is dissolving. Steady shareholders and tight cross holdings is declining. (%)

50 Proportion of steady holdings ( value base) 40 Proportion of steady holdings in 30 number Cross holdings (value) 20

10 cross holdings ( value)）

0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source; White paper on international trade 2003, METI NLI Research Institute 33

<#> M&As in Japan

（Cases） (Million US$） 2500 250,000 Number of cases (left scale) 2000 200,000 Rank value (right scale)

1500 150,000

1000 100,000

500 50,000

0 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

（footnote） Rank value=transaction value including net debt

34 Source; White Paper on International Trade 2003, METI, Adapted from The Thomson Corporation’s data

M&As in Japan by Foreign Investors (cases) 160 140 136 120 114 111 101 100 85 80 60 53 40 36 37 34 40 33 20 10 12 0 90 91 92 93 94 95 96 97 98 99 '00 '01 '02

Source; White Paper on International Trade 2003, METI, 35 Based on Financial & Economic Research Center of Nomura securities Co., Ltd. research

<#> Bankruptcies of listed companies

（Billion Yen） (Cases) 3500 35 3000 30 Total debts (left scale) 2500 Cases(right scale) 25 2000 20 1500 15 1000 10

500 5 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source; White Paper on International Trade 2003, METI 36

Introduction of performance

(%) based pays 50 46 45 40.9 40 40.9 35 34.8 35.7 29.5 30 28 31.1 25 25.2 22.7 20.6 20 17.8 15 14.6 15.4 10 9.8 11.4 Total 5 less than 500 employees Over 1000 employees 0 1996 1998 1999 2000 2001 2002

(Note) 303 companies from 2547 listed companies Source; White Paper on International Trade 2003, METI 37

<#> Ways to build IT system (%)

Indirect jobs Direct jobs Average

JPN US JPN US JPN US

Use package soft and very little 27.6 34.5 12.9 27.3 17.1 29.3 customization Use package soft, but customize 36.3 53.5 22.0 47.5 26.1 49.2 much

Order made only 33.5 7.2 61.7 19.3 53.6 15.8

Source：WHITE PAPER Information and Communications in Japan 2003, Ministry of Public Management, Home Affairs, Posts and Telecommunications 38

Amount of IT investment per one company JPN US

Amount of IT investment per company $ 6 million $ 9 million

Cost of maintenance and operation 69.0 69.3 relative to total IT investment (%)

IT investment ratios to sales (%) 1.3 4.3

Source：WHITE PAPER Information and Communications in Japan 2003, Ministry of Public Management, Home Affairs, Posts and Telecommunications 39

<#> Information sharing through IT network (%) Introduction of IT system for purpose of information JPN US sharing Gaining new customers, enhancing 58.0 80.9 customer satisfaction Purposes Advancing quality of jobs 13.5 47.4 ( multiple Employee satisfaction and skill 26.2 41.4 answers) improvement Raising efficiencies of jobs 52.3 52.1 % of firms that share information by IT across 51.6 61.7 departments % of firms that share information by IT with 75.9 94.6 supplier firms, clients and business partners % of firms that set up a special division to control the 28.5 64.3 flow of information

Source：WHITE PAPER Information and Communications in Japan 2003, Ministry of Public Management, Home Affairs, Posts and Telecommunications 40

IT literacy of employees and training

scheme (%) JPN US

% of firms with training programs 22.1 71.6 Training is provided, literacy is 6.8 44.3 high Training is provided, but literacy 15.3 27.3 level is not adequate % of rims with no training program 75.6 25.3

No training but literacy is high 30.3 13.3

No training and literacy is poor 45.3 12.0

No answer 2.3 3.0

Source：WHITE PAPER Information and Communications in Japan 2003, Ministry of Public Management, Home Affairs, Posts and Telecommunications 41

<#> Conclusion

Q IT and globalization intensifies pressure for prompt and timely decisions.

Q Firms have to choose strategies out of much wider options than before, outsourcing, M&A, collaborations with competitors.

Q Bottom-up approaches, characteristics of Japanese firms, may be disadvantage, esp. in IT sector.

Q Capital market has become more fluid, adding to pressure on firms for higher performances

Q Products life cycle is getting shorter and shorter, so are lives of firms.

Q Challenges for managers will be tougher and tougher

<#>