Why did Vodafone fail in Japan?

UNCLAS SECTION 01 OF 02 TOKYO 003509 SIPDIS 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. SCHIEFFER