JIN-177 -- Cost-Cutter or Profit-Maker? Japan Telecom's Morrow

J@pan Inc Magazine Presents:
T H E J @ P A N I N C N E W S L E T T E R
Commentary on the Week's Business and Technology News

Issue No. 177
Wednesday, April 17, 2002


++ Viewpoint: Cost-Cutter or Profit-Maker? Japan Telecom's Morrow
Chooses the Latter

++ Noteworthy News
- Tower Records to Sell Japan Unit in Record-Setting MBO
- Japan Embarrassed by S&P Downgrade
- Softbank Sells Yahoo! Shares

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++ VIEWPOINT: Cost-Cutter or Profit-Maker? Japan Telecom's Morrow
Chooses the Latter

Bill Morrow hasn't had the publicity that Nissan president Carlos
Ghosn enjoys but he is steadily taking strides toward a slimmer Japan
Telecom (JT), 66.7 percent of whose shares are owned by Vodafone.

When he became president last December, he described himself as a
'profit-maker,' as opposed to the 'cost-cutter' nickname given to
Ghosn. His first action as president was "to make the rounds of
clients and government officials accompanied by his predecessor, to
exchange greetings and business cards" and to email his employees
assuring that their anxiety would soon turn to confidence and
enthusiasm, according to the Asahi Shimbun, Japan's leading daily

Morrow may be under great pressure to improve JT's performance, as the
Japanese group is now consolidated in the UK-based Vodafone's
financial results. Despite its success with mobile unit J-Phone, JT
last September posted mid-term losses for the first time. That's how
Morrow came up with the idea of drafting a revival plan called
Project V. Its main themes are to reorient staff "toward performance,
results and customer-focused activities." Rather than introducing a
package plan from top-down, Morrow organized a team of middle managers
to set goals and strategies and sent e-mail questionnaires to all JT's
employees. The result of these discussions will be announced late
April or early May. In the meantime, he reshuffled the company's
management team and revised down its financial forecast for
fiscal 2001 to re-evaluate the carry value of its investments and to
write off debts.

The most recent buzz is a report by Japan's leading business daily,
the Nikkei Shimbun, that JT is selling its ADSL facilities to ADSL
operator eAccess. A JT spokesman told J@pan Inc that the company is
trying to revise its operations in general and nothing concrete has
been decided. But the deal "is very plausible," says Takashi
Hayasaka, a telecom analyst at HSBC in Japan. JT has already acquired
a stake of about 15 percent in eAccess last summer.

ADSL itself is a fast growing industry -- largely because of Yahoo's
aggressive price-cutting efforts, total ADSL subscribers have reached
2.3 million by the end of March. ADSL infrastructure costs are too
large for JT to bear alone and outsourcing the operations to eAccess
seems a natural way to go, says Hayasaka. KDDI, for example,
outsources its DION ADSL operations to ACCA Networks.

Focus and profitability are the main themes of Morrow's Project V.
After all, Japan Telecom was relying on J-Phone for over 83 percent of
its profits as of last September. Whether the deal comes through or
not is yet to seen, but it seems natural that the company would focus
more on profit-center, mobile business and corporate telecom
services and less on its unprofitable fixed phone business for
domestic customers. Morrow himself has said that corporate services
are the key to success and that the company will expand its corporate
data services.

Morrow is surely moving forward to a Western way of increasing
profitability, while incorporating some Japanese ways, says
Hayasaka. "Morrow enjoys a relatively good reputation among Japanese
staff as he seems to value the art of consensus-building."

-- Sumie Kawakami

"BIZ BEAT: Japan Telecom chief mixing management styles," Asahi
Shimbun (January 17, 2002)

"Japan Telecom to Sell ADSL Facilities," Nikkei Shimbun (In
Japanese)(April 16, 2002)

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** Tower Records to Sell Japan Unit in record-setting MOB

Extract: Tower Records K.K., Japanese unit of the global brand,
finally declared independence from its troubled parent company with
the help of Nikko Principle Investments.

Tower Records K.K. (TRKK) announced last Friday that its parent
company, MTS, would sell the Japanese unit to Nikko Principle
Investments (NPI) for $120 million by May 21. TRKK will take over the
entire Japanese operations under the leadership of Keith Cahoon, Far
East managing director, and Akio Moriwaki, head of corporate planning.

Despite the financial difficulties of its parent company, TRKK has
been posting solid financial records over the past nine years. There
have been reports that video and CD rental giant Tsutaya was
considering a move for the company. A TRKK spokesman did not disclose
the details, but said that the company held an auction last December,
in which several bidders participated. "One of the conditions we
offered was that the incumbent management would stay," he says.

This will be one of the biggest management buyouts (MBO) in Japan's
buyout history. Management boyouts refer to buying of a company by a
management team coupled with outside investors. A MOB typically
involves managers buying shares, but the number of shares that Cahoon
and Moriwaki will receive is currently unclear. NPI is a subsidiary of
Nikko Cordial Group.

Tower Records K.K. press release (in Japanese)

** Japan Embarrassed by S&P Downgrade

Extract: Credit rating agency Standard & Poor's downgrade of Japan's
credit standing on Tuesday is surely an embarrassment for prime
minister Junichiro Koizumi. The rating agency lowered Japan's local
and foreign currency sovereign ratings to AA-, placing it on a par
with Malta, the Czech Republic and Cyprus; the lowest among major
industrialized nations. The agency reasoned that Koizumi's pledge for
economic reform are too slow to bear fruit.

Koizumi's embarrassed ministers had this to say:

"The rating may be a little too low," said Yasuo Fukuda, Chief
Cabinet Secretary. He continued, claiming that it was not worth
commenting on a rating by a private business. "Even though it is a
private firm, I hope they evaluate (Japan) more carefully. Japan has
economic strength that others don't."

"I think they're pointing out the risk factors in the Japanese
economy including the bad loan problem and restoration of fiscal
discipline," said Economics Minister Heizo Takenaka. "It's a message
telling us to do more reforms, so we would like to press ahead with

Vice Finance Minister for International Affairs, Haruhiko Kuroda,
said the credibility of credit rating agencies had foundered since
energy trader Enron collapsed last year under mountains of debt.
"Since Enron, the credibility of credit rating firms has been lost.
We cannot understand the reason why JGBs have been downgraded."

"Japan reacts with disdain,resolve to S&P downgrade" Reuters
(April, 15, 2002)

"CURRENCIES & INTEREST RATES: Yen retreats after ratings downgrade"
Financial Times (Apr 16, 2002)


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** Softbank Sells Yahoo! Shares

According to AP, Softbank Corp. has sold 11.5 million shares in
Yahoo! for $171 million to reduce debt. Softbank has been selling its
shares in various firms in order to cover its investment losses as
a result of the collapse of the net bubble last year. For the fiscal
half ended in September, Softbank recorded a loss of 54 billion yen
($409 million). Softbank now owns 14.3 percent of the Internet portal,
down from about 16 percent.

"Japanese Internet company Softbank sells part of Yahoo stake to cut
debt" AP Apr. 15, 2002

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Written by Bruce Rutledge (bruce@japaninc.com) and Sumie Kawakami
Edited by J Mark Lytle (mark@japaninc.com)


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