Japan Won’t Be the Same With Born-Again NTT

TOKYO —  Ending 105 years of government monopoly control of Japan’s telecommunications industry, Nippon Telegraph & Telephone begins new life today as a private company. Three challengers are preparing to enter the telephone business, and more than 200 others are ready to launch telecommunications enterprises for the first time.

Although the historic transformation won’t precipitate overnight the massive changes wrought by the breakup of American Telephone & Telegraph, it has already aroused visions of a gold mine of opportunities.

Foreign--particularly American--expectations of sales of products and know-how have risen to unprecedented levels, so much so that the Reagan Administration has singled out the telecommunications field as “the litmus test” of whether overall U.S.-Japanese economic frictions will ease or explode.

Only in the basic telecommunications field, however, will foreign investment be restricted--to less than one-third ownership of NTT’s new competitors in the primary telecommunications field and none at all in the new NTT.

U.S. firms, such as IBM, AT&T;, GTE Telenet, General Electric Information Services, NCR (Japan) and Burroughs, have been preparing for more than a year to enter the large-scale “enhanced services” field, or what is called “value-added networks” (VAN, for short) in Japan. This field has now been opened to private business for the first time.

Will Lease Phone Lines

Fujitsu, NEC and Hitachi also are expected to launch large-scale VAN services. To date, such networks have been run only by NTT.

Using these networks, firms will lease phone lines to provide a “software interpreting service” among computers that could not otherwise communicate.

In the last five years, the value of data communications business here has increased 70%, according to NTT, whose own revenue in this field reached $1.4 billion in the fiscal year ended March 31, 1984.

Takuma Yamamoto, Fujitsu’s president, announced last year that his company intended to provide not only computer-to-computer transmission services but also basic telephone, facsimile and TV conference services--and expected to achieve sales of $444 million within the first five years.

The reform gives firms leasing telephone lines here permission to go into all forms of the telecommunications business.

To Link 2,000 Drugstores

More than 200 other firms are reportedly planning to enter the VAN business on a smaller scale.

An NEC subsidiary, for example, is planning to begin operation in June of a value-added network linking about 2,000 drugstores throughout the country to take orders, divide them by variety and pharmaceutical maker, place orders, arrange delivery and send out bills--all automatically. Idemitsu Petroleum Co. plans to set up a VAN linking its retail gasoline stations.

The value-added networks will also offer manufacturers instant information on what products are selling well in what locations, valuable input for market research and new product development.

To date, the biggest value-added network in operation in Japan has been the one linking the country’s banks, which allows branches to arrange cash transfers by computer. It has been operated by NTT for 16 years.

The opening of the telecommunications market will not hand U.S. firms the bonanza that Japanese electronics companies got when AT&T; was split up, Akiyoshi Takada, a senior adviser in the telecommunications bureau of the Postal and Telecommunications Ministry, said in an interview.

Little Jump in U.S. Sales

“When local phone companies in the United States broke away from Western Electric (to buy equipment), Japanese exports rose. That is true. But we will not see anything equal to that in American sales to Japan in the next two or three years,” he said.

“American frustrations over the imbalance in (telecommunications) trade won’t be eased.”

Last year, the United States sold only about $110 million worth of telecommunications products here, while Japan sold about $1.5 billion worth in the United States.

John W. Cusick, head of AT&T; International in Japan, offered one reason for the trouble in selling here when he told a symposium last Friday that most American telecommunications equipment doesn’t come up to Japanese standards.

“Because of NTT’s procurement requirements, everything AT&T; sells here must be modified,” he said.

Heavy modification expenditures drive down profits--which he said American executives are forced to consider in short-range terms “because they are judged quarter by quarter by the profits they make.”

‘Won’t Spend the Money

“It really hurts me to turn down NTT tenders because I know my own company won’t spend the money to make the modifications,” Cusick said.

Another reason the trade imbalance won’t be eased overnight is that it will take time for big changes in the system to occur.

NTT’s competitors in the telephone business--at least one of which is expected to purchase an American communications satellite--won’t be able to start business for at least two years, Takada, the Japanese official, said. One of the new primary communications enterprises, called “Daini Denden” (loosely translated Second NTT), is a consortium of private firms headed by Kyocera, while the other two are consortiums with governmental tie-ins: one to the Construction Ministry, which plans to lay cables along government-built expressways, and one to the Japan National Railways, which plans to do the same along rail lines.

In addition, few American firms are expected to be able to compete with the Japanese electronics giants in selling telephones, the field of first new opportunity.

Cusick, for example, said his firm expects its main sales jump here to come in software know-how, not in product sales.

Buying All Own Phones

“Our competitive edge lies in the software area. We don’t see much of an edge in the hardware area,” he told the symposium.

Average Japanese, beginning today, will for the first time be able to purchase all their own phones. Until now, subscribers were forced to lease their first one from NTT. Although families could buy additional telephones from anyone, few households here have more than one--a fact that gave NTT a stranglehold.

Subscribers who buy their own phones will have their monthly bills reduced 72 cents (or about 10%), which is the fee they now pay for leasing. If they have phone lines inside their home installed by a private firm, instead of NTT, monthly bills will be cut another 28 cents a month.

All Japan’s major electronics firms--as well as companies in South Korea and Taiwan--are expected to push sales of new-style phones in the hope of cultivating a replacement market.

Fears that massive numbers of subscribers will return their leased phones are giving NTT, which itself will start selling telephones, its first jitters as a private company.

Tokyo-Osaka Calls

Other telephone fees will remain unchanged for the immediate future. NTT, however, is expected to gradually lower its long-distance rates--particularly those for calls between Tokyo and Osaka, the nation’s two largest cities--to gear up for its new competition, Takada said.

NTT maintains a rate structure in which the cost of a Tokyo-Osaka call is 40 times that of a local call: $1.60 for three minutes as opposed to a mere 4 cents for three minutes.

Local rates are expected to rise while long-distance rates fall, as they did in the aftermath of the AT&T; breakup in the United States.

Hisashi Shinto, NTT’s president, has said that Tokyo-Osaka rates will have to be reduced to one-third of the present level so that the company can compete with new firms.

The reforms, however, won’t produce complete efficiency under free competition because the Posts and Telecommunications Ministry will retain its power to approve all phone rates. The ministry is expected to peg rates for such heavily used lines as Tokyo-Osaka at artificially high levels--even if lower than present rates--to allow NTT to write off some costs of providing phone service to remote areas.

Biggest Firm, Biggest Union

Challengers of NTT--in whatever field--will find themselves like goldfish competing with a whale.

With a labor force of 320,000, equity of $3.12 billion and annual sales of more than $18 billion, NTT today becomes Japan’s largest private corporation. Its union, to which 280,000 of the employees belong, also becomes the country’s largest single labor union. For the first time, this month it will negotiate wages and working conditions directly with management, instead of with a government commission.

For the moment, the government retains ownership of all NTT’s shares but will eventually sell off two-thirds of them to make NTT a “joint stock company.”

The new firm also will have to submit its annual business plans to the post and telecommunications minister for approval.

Shinto, who was brought into NTT as president from the private sector four years ago to guide its transformation, has promised to “nurture” its new competitors. Already, he has offered to join new companies in the basic telecommunications business in sharing the use and the costs of purchasing an American communications satellite, although he has declared that NTT won’t buy a U.S. satellite by itself in the near future.

Cutting Technological Edge

In other fields, however, NTT could become a new--and foreboding--presence to established companies here and overseas.

Staffed with many of Japan’s best scientists and engineers and operating the country’s leading electronics laboratories, NTT stands on the cutting edge of technology. To date, NTT, which has no manufacturing arm, has used the results of its research only to order products produced to its specifications by private firms.

But from now on, according to Ei Shikiba, director of NTT’s information network system services, the company will “use the results of our research to set up new enterprises,” at least some of which, he added, will take the form of joint ventures.

“The result of our research will be used more directly in the market than it has been until now,” he added.

Last year, Shinto said the new NTT would for the first time consider joining with private firms to develop “packages” of telecommunications equipment for sale and installation overseas.

More Reforms Seen

The reforms give the giant the right to enter manufacturing itself, but Shinto has said that the new NTT will refrain from doing so.

Farther down the road, additional reforms are envisioned. Laws passed last December call for a review of the results of the industry’s transformation within three years. A review of the NTT restructuring will be held within five years.

Then, Takada of the Postal Ministry said, the government will consider breaking up NTT into a series of regional companies.

“Our main criterion will be what is good for the consumer--and, in judging that, the experience of the United States with the breakup of AT&T; will be a major point of reference,” he added.