Corporate Strategy and Business Developm The Role of Technology Change in NEC’s Growth J. Travis Brooks New York University February 19, 2003
Corporate Strategy and Business Development
The Role of Technology Change in NEC’s Growth
J. Travis BrooksNew York UniversityFebruary 19, 2003
2Corporate Strategy and Business Development
Discussion Topics
Background to NEC Corporation
Historical IT Perspective: Technology Innovation
The Era of Consolidation: Back to Basics
Strategic Challenges to NEC
March 18th Visit to Japan
3Corporate Strategy and Business Development
Background on NEC Corporation
4Corporate Strategy and Business Development
Structure: “In-House Companies”
Koji NishigakiPresident
Staff Groups
NEC Electronic Devices
Kaoru TosakaPresident
Hajime SasakiBoard of Directors Chairman
• Computers & Software • Communications • System LSIs
Employees: 141,000 (March 31, 2002)
NEC Solutions Akinobu Kanasugi
President
NEC NetworksKaoru Yano
President
Separation 11/02IPO
FollowingResulting inapprox.70% ownership
5Corporate Strategy and Business Development
Major Products and Services (1)
NEC Solutions
Systems Integration (SI) Services
Systems integration/Consulting
Software Operating systems/Middleware/Application software
Internet Services and Support Services
Internet services (BIGLOBE)/Maintenance of computers and related equipment
Outsourcing services/Education services
Servers/Storage/ Workstation
Mainframes/PC & UNIX servers/Supercomputers/Storage systems
Workstations/Industry specific workstations (ATM, POS, Multimedia terminals )/ Key telephone systems
Personal products Personal computers/Printers/Facsimiles
6Corporate Strategy and Business Development
Major Products and Services (2)
NEC Networks
Network Infrastructure
Optical Systems Backbone systems (DWDM for Terrestrial, Submarine), SDH/SONET)/ Metro, Access (DSL, Cable modems, FTTH, Ethernet)/ CATV systems/Installation and maintenance
IP Network Systems
IP networking (switches, routers, network servers)/Mobile communications core network systems/Digital central office switches/Digital PBXs/Installation and maintenance
Mobile and Wireless Systems
Base stations/Terrestrial microwave/Satellite systems/Fixed wireless access systems/ Installation and maintenance
Mobile Terminals
Cellular phones
Other Systems
Digital Broadcast/Studio/management/systems/ Aerospace/Defense electronics/Microwave tubes/Installation and maintenance
7Corporate Strategy and Business Development
Major Products and Services (3)
NEC Electronics Corporation
Semiconductors MPUs/Memory ICs (Elpida joint venture)/Semi-custom ICs/Application Specific ICs/General Purpose Linear ICs/Transistors/Diodes/ Thyristors/ Optical semiconductors/Microwave semiconductors
Others TFT color LCD modules/Color PDP modules/Plasma display monitors
Lithium-ion rechargeable batteries/Capacitors/Relays/Printed wiring boards
ABS (Antilock Break System) Unit/EPS (Electric Power Steering) Unit
Manufacturing equipment for semiconductors/LCD projectors
Construction services of information and network systems
8Corporate Strategy and Business Development
Net Sales
Net Sales
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000(Million yen)
-10%
-5%
0%
5%
10%
15%
20%(%)
Net Sales Annual Growth
Net Sales 4,397,192 4,948,437 4,901,122 4,759,412 4,991,447 5,409,736 5,101,022
Annual Growth 16.7% 12.5% -1.0% -2.9% 4.9% 8.4% -5.7%
FY1996/3
FY1997/3
FY1998/3
FY1999/3
FY2000/3
FY2001/3
FY2002/3
9Corporate Strategy and Business Development
Current Sales Forecast
( ): Y-over-Y Growth
10Corporate Strategy and Business Development
EBIT
Income (Loss) Before Income Taxes
-500,000
-400,000
-300,000
-200,000
-100,000
0
100,000
200,000(Million yen)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%(%)
Income (Loss) Before Income Taxes Ratio to Net Sales
Income (Loss) Before IncomeTaxes
151,318
121,222
90,993 (224,726)
30,183 92,323 (461,183)
Ratio to Net Sales 3.4% 2.4% 1.9% -4.7% 0.6% 1.7% -9.0%
FY1996/3
FY1997/3
FY1998/3
FY1999/3
FY2000/3
FY2001/3
FY2002/3
11Corporate Strategy and Business Development
Sales/Net Income in Dollar Terms
12Corporate Strategy and Business Development
Current P/L Forecast
13Corporate Strategy and Business Development
Overseas Sales
14Corporate Strategy and Business Development
NEC in the USA
NEC CorporationTokyo, Japan
NEC USANew York, NY
Holding Company
NEC Solutions AmericaSacramento, CA
Systems Integration Software
NEC America *Irving, TX
Telecommunications
NEC CapitalNew York, NY
Finance
NEC Laboratories America
Princeton, NJ(Nov. 1, 2002)
DCM SolutionsIrving, TX
Systems Integration
NiteoNewton, MA
HSNXSupercomputers
NEC Foundation
* Includes 4 subsidiaries:•NEC Business Network Solutions•NEC Eluminant Technologies•NMI•North Coast Logic
NEC FiberOptechNEC Financial
Services, Inc.Teaneck, NJ
Finance & Leasing
NEC ElectronicsSanta Clara, CA Semiconductors
15Corporate Strategy and Business Development
Historical IT Perspective: Technology Innovation
16Corporate Strategy and Business Development
Development History
First Japanese joint venture with foreign capital, Western Electric
1924: Radio ops established1932: Ally with Sumitomo zaibatsu
1939: R&D lab established1950: R&D of transistors
initiated after Bell Labs’ 1947 introduction
1954: R&D of computers begins
1958: Jack Kilby of TI, “Solid Circuit”; Robert Noyce in 1961
1956: R&D of electronic switching systems (ESSs)
1966: Satcom earth stations to India
1965: NEAC-Series 2200 mainframes; 1974 ACOS
1975: Central Research Lab established; 1978 Dallas Plant
1963: NEC America opens
1983: SX-1/2 supercomputers
1988: NEC Research Institute1990: 4Mbit DRAM, 1996
256Mbit SDRAM
1998: SX-5 fastest; 20-millionth PC sold in Japan2000: In-house company
structure adopted
17Corporate Strategy and Business Development
Explaining Moore’s Law
1947 Innovation of transistor, birth of the semiconductor
(Circuits per chip) = 2(year-1975)/1.5
Has held true for DRAMs and microprocessors
Semiconductor Industry
1950s-present
User communities, distinct (software developers) and indirect (consumers)
Expectations
feedback loop
Physics and chemistry
Market forces
e.g., Wintel
1959 Invention of the Planar integrated circuit and manufacturing process
Semiconductor circuit densities double at regular, exponential rates:
1965: Moore’s Plot (annual)
1975: Moore’s Law (18 months)
NEC patents from:
Communications =ISE (1950); ITT (1951); Western Electric (1951)
TV:RCA, EMI, Philips (1953-1957)
ICs: GE (1958); RCA (1958); Fairchild (1961)
18Corporate Strategy and Business Development
Products/Technology/Customer Matrix: Communications
GROUP I GROUP II GROUPS III-IVOSILayer Key
Technology IXCsRBOCs,ILECsCLECs
Enterprise
Layer 3 IP
Layer 2 ATM
Layer 1 SONET
OpticalSub-layer
DWDM
ATM Switch(IP/ATM MPLS)
Integrated AD(IP /A TM/F -R/ xDSL/P BX)
Multi-service AD(IP /A TM/F -R/ xDSL)
Gigabit/Terabit Switch/Router
SONETTDMDXC
Optical Switch(OXC, OADM)
NG (Optical)-DLC(FTTx, xDSL)
Long-haul DWDM
IP/ATM-PBX
VoIP Gateway(IP/P STN)
Metro DWDM
19Corporate Strategy and Business Development
CPE
CPE
CPE
CPE
ServiceNode
(Router)
IP Backbone
Access Network
Circuit Multiplexing Portion
Packet/Cell Multiplexing
CableModem
ATU-R(ADSL)
Modem/ISDN
DSLAM
• Authentication• Supply IP address• Accounting• Routing
Packet/Cell Multiplexing is also included in Access Network
Definition of Edge Node
ServiceNode
(Class5SW)
CPE
CPE
CPE
CPE
Circuit Multiplexing
PSTNBackbone
HE
Example
PON OLT
Conventional
IP Access
Circuit Multiplexing
Circuit Multiplexing
Packet/Cell MultiplexingPortion
Source: Photonic IP, 4.2 High-speed IP Access
Packet/Cell MUXing in Broadband (IP) Access Network
20Corporate Strategy and Business Development
Optical Advances
OC -1 51.84 Mbps
OC-3 155.52 Mbps
OC-12 622.08 Mbps
OC-24 1.244 Mbps
OC-48 2.488 Mbps
OC-192
10 Gbps
OC-256
13.271 Gbps
HomeHome
21Corporate Strategy and Business Development
WDM
Photonic Router T-bit
Router
OXC
PHYPHY
PHYPHY
PHY
PHY
Layer2
Layer3
Layer4
PHY
Layer2
Layer3
L2
L3
L2
L3
L2
L3
L4
T-bitRouter
T-bitRouter
SuperRouter
Photonic Router
SuperRouter
OADM
WDMPhotonic Router
T-bitRouter
T-bitRouter
T-bitRouter
OADM
H323GW
PBX
MLSW
MLSW MLSWSuperRouter
The Internet
PHY
Layer2
Layer3
Layer4
APL
PHY
Layer2
Layer3
VPN Service
Video Service
Authentication Service
WWW Service
IXP
Providing Consuming
Network
Service
Application
Service
BackboneEdgeNode
Access
EdgeNode
Access
PHY
L2
L3
L4
APL
InformationConsumer
Service Provider
OADMOADM
OADM
OADM
OADM
OADM
OADM
OADMOADM
OADM
OADM
Corporate
Home
Video over IP
Voice over IP
WWW
QoS Service
Best Effort Service QoS Service
Best Effort Service
Photonic Router
Photonic RouterPhotonic
Router
OXC
MMNode
NEC J’s Network Architecture
22Corporate Strategy and Business Development
3rd Layer
2nd Layer
1st Layer
Photonic Layer
IP Router
ATMNE
Fast Frame Relay SW
SDH/SONET LTE
Photonic NE : WDM, OADM, OXCPhotonic NE : WDM, OADM, OXC
SDH frame
PhotonicRouter
IP Router
ATMNE
FutureFutureNowNow
Vision of the Evolution of the Physical Layer
23Corporate Strategy and Business Development
NEC and Emerging Wireless Value Chain
24Corporate Strategy and Business Development
Metcalf’s Law
Robert Metcalf's law states that the "value" or "power" of a network increases in proportion to the square of the number of nodes on the network.– In other words, if you have four nodes, or computers, on
a network, say, an office intranet, its "value" would be four squared (4^2), or 16.
– If you added on addition node, or PC, then the value would increase to 25 (5^2).
– Holds for LANs and WANs (metro, the Internet)
One consequence of the network effect is that once a product is established in the market, demand for similar but incompatible products collapses. – Advantage of earlier drivers who come to dominate:
Microsoft; Dell; Intel; Amazon; eBay.– A feedback phenomenon that says whenever it is in
people's best interests to be where everyone else is, then that's where they'll be.
25Corporate Strategy and Business Development
Evolution of the Internet
26Corporate Strategy and Business Development
C&C Perspective-1977
27Corporate Strategy and Business Development
The Era of Consolidation: Back to Basics
28Corporate Strategy and Business Development
Worldwide Semiconductor Demand
HISTORICAL SEMICONDUCTOR SALES AND Y/Y GROWTH (3-month Average)
29Corporate Strategy and Business Development
U.S. Computer Hardware (1)
NOMINAL PDE INVESTMENT-COMPUTERS & PERIPHERALS (Y/Y)
30Corporate Strategy and Business Development
U.S. Computer Hardware (2)
IMPLICIT PDE DEFLATOR – COMPUTER (Y/Y)
31Corporate Strategy and Business Development
Networking Equipment
NOMINAL COMMUNICATIONS EQUIPMENT INVESTMENT (Y/Y)
32Corporate Strategy and Business Development
Networking Equipment Driver
ENTERPRISE EQUIPMENT SALES vs. UNEMPLOYMENT RATE
1Q98-3Q02
33Corporate Strategy and Business Development
Networking Equipment Pricing
PPI COMMUNICATIONS EQUIPMENT (Y/Y)
34Corporate Strategy and Business Development
Telecommunications Equipment
NEW ORDERS TELECOMMUNICATIONS EQUIPMENT (Y/Y)
35Corporate Strategy and Business Development
RBOC Capex and Capex to Sales
36Corporate Strategy and Business Development
Factors Leading to the Tech Bubble
The Telecom Act of 1996
The Buildout of the Internet
The Buildout of Digital Wireless Networks
Rebuilding of U.S. Cable Networks
37Corporate Strategy and Business Development
IT Consulting and Services
EMPLOYMENT Y/Y – COMPUTER & DATA PROCESSING SERVICES
38Corporate Strategy and Business Development
Best Technology vs. Basic Business
From 1993-2000, high R&D-to-sales ratios played best for companies with the fastest and latest equipment and strong revenue growth.
Now, operational factors more competitive:– Good cash management– Strong customer relationships– Control over both the supply and distribution sides of
their businesses– Evolutionary, not revolutionary technology
Consolidation seemingly inevitable– Slower but more sustainable rate of technological
development, more rational use of capital– Fewer players means more benign pricing pressures,
allowing for improved gross margins and profitability
39Corporate Strategy and Business Development
Strategic Challenges to NEC
40Corporate Strategy and Business Development
Issues Areas Being Addressed by NEC
Creating a globally competitive corporate culture with new management skill sets– Ensuring strategy formulation and execution; marketing;
financial
Should NEC remain in semiconductor, computers, and communications businesses
How best to survive and grow in consolidating IT sectors, particularly by integrating IT and network businesses
Aligning capital and costs structures to current and likely future market conditions; cash management
Identify/define core competencies needed in today’s high-tech markets
Institutionalizing strong corporate governance
41Corporate Strategy and Business Development
Upcoming Visit to NEC
March 18 (Mon)
at NEC Head Office– 9:00-9:05 Opening Remark (Dr. H. Kaneko)– 9:05-10:15 Presentation (S. Suzuki SVP) – 10:15-10:30 Q&A
at NEC Saitama– 14:00-14:30 Outline of NEC Saitama – 14:30-15:30 Plant Tour, Q&A