Corporate Strategy and Business Development The Role of Technology Change in NEC’s Growth J....

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