The Role of Technology Change in NEC’s Growth
J. Travis Brooks
New York University
February 19, 2003
Corporate Strategy and Business Development
Discussion Topics
2

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
Corporate Strategy and Business Development
Background on NEC Corporation
3
Corporate Strategy and Business Development
Structure: “In-House Companies”
Hajime Sasaki
Employees:
141,000
Board of Directors Chairman
(March 31, 2002)
Koji Nishigaki
President
Staff Groups
NEC Solutions
NEC Networks
Akinobu Kanasugi
President
Kaoru Yano
President
• Computers & Software
4
• Communications
Separation
11/02
IPO Following
Resulting in
approx.70%
ownership
NEC Electronic
Devices
Kaoru Tosaka
President
• System LSIs
Corporate 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
5
Personal computers/Printers/Facsimiles
Corporate Strategy and Business Development
Major Products and Services (2)
NEC Networks
Network
Infrastructure
6
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
Corporate 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
7
Corporate Strategy and Business Development
Net Sales
Net Sales
Net Sales
Annual Growth
(%)
(Million yen)
6,000,000
20%
5,000,000
15%
4,000,000
10%
3,000,000
5%
2,000,000
0%
1,000,000
-5%
0
Net Sales
FY1996/ FY1997/ FY1998/ FY1999/ FY2000/ FY2001/ FY2002/
3
3
3
3
3
3
3
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%
8
-10%
12.5%
-1.0%
-2.9%
4.9%
8.4%
-5.7%
Corporate Strategy and Business Development
Current Sales Forecast
( ): Y-over-Y Growth
9
Corporate Strategy and Business Development
EBIT
Income (Loss) Before Income Taxes
Income (Loss) Before Income Taxes
(Million yen)
Ratio to Net Sales
(%)
200,000
4%
100,000
0
2%
0%
-100,000
-2%
-200,000
-4%
-300,000
-6%
-400,000
-8%
-500,000
-10%
FY199 FY199 FY199 FY199 FY200 FY200 FY200
6/3
7/3
8/3
9/3
0/3
1/3
2/3
Income (Loss) Before Income 151,31 121,22 90,993 (224,72 30,183 92,323 (461,18
8
2
6)
3)
Taxes
Ratio to Net Sales
10
3.4% 2.4%
1.9% -4.7% 0.6% 1.7% -9.0%
Corporate Strategy and Business Development
Sales/Net Income in Dollar Terms
11
Corporate Strategy and Business Development
Current P/L Forecast
12
Corporate Strategy and Business Development
Overseas Sales
13
Corporate Strategy and Business Development
NEC in the USA
NEC Corporation
Tokyo, Japan
NEC Electronics
Santa Clara, CA
Semiconductors
NEC USA
New York, NY
Holding Company
NEC America *
Irving, TX
Telecommunications
NEC Financial
Services, Inc.
Teaneck, NJ
Finance & Leasing
NEC Capital
New York, NY
Finance
HSNX
Supercomputers
NEC Solutions America
Sacramento, CA
Systems Integration
Software
NEC
FiberOptech
NEC
Laboratories America
Princeton, NJ
(Nov. 1, 2002)
NEC Foundation
Ｎｉｔｅｏ
Newton, MA
* Includes 4 subsidiaries:
•NEC Business Network Solutions
•NEC Eluminant Technologies
•NMI
•North Coast Logic
14
DCM Solutions
Irving, TX
Systems Integration
Corporate Strategy and Business Development
Historical IT Perspective: Technology
Innovation
15
Corporate Strategy and Business Development
Development History
First Japanese joint venture with
foreign capital, Western Electric
1932: Ally with Sumitomo zaibatsu
1950: R&D of transistors initiated
after Bell Labs’ 1947 introduction
1956: R&D of electronic
switching systems (ESSs)
1963: NEC America opens
1966: Satcom earth stations
to India
1983: SX-1/2 supercomputers
1990: 4Mbit DRAM, 1996
256Mbit SDRAM
2000: In-house company
structure adopted
16
1924: Radio ops established
1939: R&D lab established
1954: R&D of computers begins
1958: Jack Kilby of TI, “Solid
Circuit”; Robert Noyce in 1961
1965: NEAC-Series 2200
mainframes; 1974 ACOS
1975: Central Research Lab
established; 1978 Dallas
Plant
1988: NEC Research
Institute
1998: SX-5 fastest;
20-millionth PC
sold in Japan
Corporate Strategy and Business Development
Explaining Moore’s Law
NEC patents from:
1947 Innovation of transistor,
birth of the semiconductor
Communications =ISE (1950);
ITT (1951); Western Electric
(1951)
1959 Invention of the Planar
integrated circuit and
manufacturing process
TV:RCA, EMI, Philips (1953-1957)
ICs: GE (1958); RCA (1958);
Fairchild (1961)
Semiconductor circuit densities
double at regular, exponential
rates:
1965: Moore’s Plot (annual)
Expectations
1975: Moore’s Law (18
months)
(Circuits per chip) =
2(year-1975)/1.5
Has held true for
DRAMs and
microprocessors
feedback loop
Physics and chemistry
Market forces
User communities, distinct
(software developers) and
indirect (consumers)
17
e.g., Wintel
Semiconductor
Industry
1950s-present
Corporate Strategy and Business Development
Products/Technology/Customer
Matrix: Communications
OSI
Layer
Layer 3
Key
Technology
GROUP I
GROUP II
GROUPS III-IV
IXCs
RBOCs,
ILECs
CLECs
Enterprise
Gigabit/Terabit Switch/Router
IP
M ulti-service AD
(IP /A TM/F -R/ xDSL)
ATM Switch
VoI P Gateway
(IP/ATM MPLS)
Layer 2
IP/ATM-PBX
(IP/P STN )
ATM
I ntegrated AD
(IP /A TM/F -R/ xDSL/P BX)
Layer 1
N G (Optical)-D LC
SONET
(FTTx, xDSL)
SON ET
TD M
D XC
Optical Swi tch
Optical
Sublayer
18
(OXC, OAD M )
DWDM
Long-haul DW D M
Metro D WD M
Corporate Strategy and Business Development
Packet/Cell MUXing in Broadband (IP)
Access Network
Access Network
Conventional
CPE
Circuit Multiplexing
Circuit Multiplexing
Service
Node
(Class5
SW)
CPE
CPE
PSTN
Backbone
CPE
Packet/Cell Multiplexing is also included in Access Network
IP Access
CPE
Circuit Multiplexing
Packet/Cell Multiplexing
Service
Node
(Router)
CPE
CPE
IP
Backbone
CPE
Circuit Multiplexing Portion
Packet/Cell Multiplexing
Portion
Example
Modem/
ISDN
19
ATU-R
(ADSL)
DSLAM
Cable
Modem
HE
PON
OLT
Source: Photonic IP, 4.2 High-speed IP Access
Definition of Edge Node
• Authentication
• Supply IP address
• Accounting
• Routing
Corporate 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
Home
20
Corporate Strategy and Business Development
NEC J’s Network Architecture
Corporate
Providing
VPN
Service
Authentication
Service
WWW
Service
OADM
OADM
OADM
MLSW
Video over IP
OADM
OADM
OADM
T-bit
Router
T-bit
Router
T-bit
Router
MLSW
MMNode
OADM
Video
Service
MLSW
Super
Router
OADM
OADM
PBX
H323
GW
The
Internet
IXP
Voice over IP
Consuming
Photonic
Router
APL
QoS Service
Layer4
Layer4
Best Effort
Service
Layer3
Layer3
Layer3
Layer3
Layer2
Layer2
Layer2
Layer2
PHY
PHY
PHY
PHY
Super
Router
Super
Router
Photonic
Router Photonic
Router
OADM
T-bit
Router
Photonic
Router
Photonic
Router
OXC
T-bit
Router
WDM
WDM
OXC
Photonic
Router
QoS Service
Best Effort
Service
T-bit
Router
APL
L4
WWW
L3
L4
Edge
Node
Backbone
L3
L2
PHY
Access
L3
L2
PHY
OADM
OADM
L3
Service
Provider
Home
OADM
L2
PHY
L2
PHY
PHY
PHY
21
Edge
Access
Node
Information
Corporate Strategy and Business Development
Consumer
Vision of the Evolution of the Physical
Layer
Future
Now
3rd Layer
2nd Layer
IP Router
ATM
NE
IP Router
Fast Frame
Relay SW
ATM
NE
1st Layer
SDH/SONET LTE
SDH frame
Photonic Layer
Photonic NE : WDM, OADM, OXC
22
Photonic
Router
Corporate Strategy and Business Development
NEC and Emerging Wireless Value Chain
23
Corporate 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.
24
Corporate Strategy and Business Development
Evolution of the Internet
25
Corporate Strategy and Business Development
C&C Perspective-1977
26
Corporate Strategy and Business Development
The Era of Consolidation: Back to Basics
27
Corporate Strategy and Business Development
Worldwide Semiconductor Demand
HISTORICAL SEMICONDUCTOR SALES AND Y/Y GROWTH (3-month Average)
28
Corporate Strategy and Business Development
U.S. Computer Hardware (1)
NOMINAL PDE INVESTMENT-COMPUTERS & PERIPHERALS (Y/Y)
29
Corporate Strategy and Business Development
U.S. Computer Hardware (2)
IMPLICIT PDE DEFLATOR – COMPUTER (Y/Y)
30
Corporate Strategy and Business Development
Networking Equipment
NOMINAL COMMUNICATIONS EQUIPMENT INVESTMENT (Y/Y)
31
Corporate Strategy and Business Development
Networking Equipment Driver
ENTERPRISE EQUIPMENT SALES vs. UNEMPLOYMENT RATE
1Q98-3Q02
32
Corporate Strategy and Business Development
Networking Equipment Pricing
PPI COMMUNICATIONS EQUIPMENT (Y/Y)
33
Corporate Strategy and Business Development
Telecommunications Equipment
NEW ORDERS TELECOMMUNICATIONS EQUIPMENT (Y/Y)
34
Corporate Strategy and Business Development
RBOC Capex and Capex to Sales
35
Corporate 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
36
Corporate Strategy and Business Development
IT Consulting and Services
EMPLOYMENT Y/Y – COMPUTER & DATA PROCESSING SERVICES
37
Corporate 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
38
Corporate Strategy and Business Development
Strategic Challenges to NEC
39
Corporate 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 hightech markets

Institutionalizing strong corporate governance
40
Corporate 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
41
Corporate Strategy and Business Development