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Japan: Why did Vodafone fail in Japan?

     
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Reference ID: 06TOKYO3509
Created:     2006-06-23 08:10
Released: 2011-08-30 01:44
Classification: UNCLASSIFIED
Origin: Embassy Tokyo

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UNCLAS SECTION 01 OF 02 TOKYO 003509

SIPDIS

STATE FOR EAP/J - PLEASE PASS TO USTR MCHALE
COMMERCE FOR ITA DICKSON, LEE, AND HEINEMAN

E.O. 12958: N/A
TAGS: ECPS, ECON, JP
SUBJECT: Why did Vodafone fail in Japan?
An insider's take on the failure of Japan's largest foreign
investment.


1. (SBU) Summary: Vodafone Japan's CFO blamed the failure of the UK
mobile phone operator, which was the largest foreign investment in
Japan on: 1) bad managers brought in by Vodafone who never
understood the local environment; 2) the difference in shareholder
expectations of profitability in Europe and the United States
compared to Japan; and 3) the unfair allocation of spectrum in
Japan, which made it very costly for Vodafone to operate 3-G phones
efficiently.
End Summary

------------
Background:
------------

2. (U) Vodafone sold its Japanese business (Japan's third largest
mobile phone company) to the Tokyo-based Internet company Softbank
in April 2006 for 1.75 trillion yen (about 15.4 billion U.S.
dollars). Vodafone-Japan which has about 15 million subscribers ,
had represented the largest foreign investment in Japan since
Vodafone bought J-Phone in 2001. Because Vodafone retains 400
billion yen (about USD 3.5 billion) in shares in the Japanese
company, the British parent company remains one of the largest
foreign investors in Japan.

3. (SBU) Vodafone Japan's Chief Financial officer, John Durkin, who
first came to Japan about 15 years ago and had earlier worked as CFO
for NIKE Japan, shared his views on the reasons Vodafone retreated
from the Japanese market with the embassy on June 2

---------------
Bad foreign management
---------------

4. (SBU) The most important reason, according to Durkin, was that
Vodafone brought in the wrong people to manage the company and kept
bringing in new teams to fix the problems created by the last
management team. Durkin said he had worked for five presidents in
five years at Vodafone. Worried about sinking profits in early
2005, Vodafone brought in a new management team that was
particularly dysfunctional. The British and Dutch managers were
culturally insensitive to the point of racism, Durkin asserted. The
Japanese managers and engineers were aware of the company's problems
but were discouraged from saying anything and chose to keep silent.
As a result, the company simply stopped functioning for about 9
months, according to Durkin. The entire management team -- except
for Durkin -- was fired in late 2005, but it was too late for
Vodafone to turn things around. (Note, in a previous conversation,
Durkin had talked about Vodafone's botched roll-out of its 3G phones
in Japan and the fact that the 3G handsets, which it had
successfully marketed as expensive, high-end devices in Europe, were
regarded as clunky and poorly designed by Japanese consumers. End
Note.)

-----------------------------------
Higher Foreign shareholder expectations
-----------------------------------

5. (SBU) The second problem for Vodafone was the higher expectations
of profitability from the start among U.S. and Europe shareholders
compared to Japanese shareholders. Japan was Vodafone's largest
mobile market in terms of subscribers, but compared to other markets
in which the company operated, the profit margins in Japan were very
low, about ten per cent. However, in Japan, that ten per cent
profit margin put Vodafone among the top class of Japanese
companies, Durkin claimed. Still, from early 2004 Vodafone felt
considerable pressure from shareholders to increase its
profitability or hang up on its mobile phone business in Japan.

------------------------------
Unfair allocation of Spectrum
-----------------------------

6. (SBU) Even if Vodafone had not had such serious management
problems, Vodafone Japan would have had a hard time succeeding
because of the unfair allocation of spectrum by the Japanese
government, Durkin contended. He believed that the spectrum problem
seriously hindered Vodafone's ability to grow and succeed in Japan.
Durkin explained that the 2.1ghz allotted to Vodafone was too high
for the efficient 3G wave propagation and made it difficult to
penetrate walls. Vodafone estimated it would need 25,000 base

TOKYO 00003509 002 OF 002


stations to overcome the problem. Vodafone Japan had invested 600
billion yen (about USD 5.2 billion) in upgrading its systems and had
already built 14,000 base stations at the time of its sale to
Softbank.

7. (SBU) Durkin said that Softbank needs to get access to the 800
MHz spectrum to operate efficiently, but that the Ministry of
Internal Affairs and Communications (MIC) did not like Softbank's
Chief Executive Masayoshi Son, and "was not inclined to do him any
favors." Son also told him that he would like to use GSM, Durkin
added. However, MIC was giving Son, a self-made billionaire of
Korean ancestry, "a hard time", said Durkin. (Note: GSM refers to
the Global System for Mobile Communication which is the most popular
standard for mobile phones in the world and is used, for example, in
Europe, Asia, Latin America, and in the U.S. by Cingular and
T-mobile among others. End Note.)

--------------------------------------------- ---
More troubles ahead for Japan's mobile operators
--------------------------------------------- ---

8. (U) Durkin predicted that as IP (internet protocol) telephony
grows and has a greater impact on the mobile phone market, within a
few years' time companies will make most of their money in
providing content and services. Softbank, with its tie-up to Yahoo
Japan was in a good position as a content provider, he pointed out.
(Note: In May, Softbank also announced an agreement with Apple to
develop jointly cellular phone handsets that have built-in iPod
digital music players and can download songs directly from Apple's
iTunes Music Store.)

9. (U) DoCoMo, NTT's mobile phone subsidiary, would like to turn
itself into a credit card company through its "electronic wallet"
phones, claimed Durkin. (Note: In March 2006 DoCoMo teamed up with
Mizuho Bank to allow its cell phones to be used as full-fledged
credit cards. DoCoMo phones had already had the capability to work
as prepaid wireless cash cards. In May, DoCoMo bought two per cent
of Lawson, one of Japan's largest convenience store chains, another
signal of its intention to strengthen services based on cell phones
equipped with "mobile wallets," which have built-in chips for
storing electronic money and function as credit cards. These moves
are a part of DoCoMo's overall strategy of seeking new ways to make
money as its mobile phone revenues decline. End Note.)

10. (SBU) As for the future of Vodafone Japan, there is, on paper, a
Vodafone-Softbank joint venture to develop technology and content
and to invest in start-ups, and in China and India. However, the
joint venture so far remains unfunded and with only tentative plans.
As CFO, Durkin was spending most of his time handling the personnel
issues of laying off all of Vodafone Japan's management. He
expected to be one of the last employees of Vodafone Japan and
intends to leave Japan for a year in order to avoid the massive tax
headaches of a foreigner no longer working for a foreign company in
Japan.

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