1993 apr jun 41 55 fujitsu (a) operations case

8/6/2019 1993 Apr Jun 41 55 Fujitsu (a) Operations Case

1/15

Fujitsu (A)*T Madhavan and P S Thomas

Starting in 1935 as a small manufacturer oftelephone equipment, Fujitsu grew

phenomenally to become a world leader in

computers. Its strategy of global reach,based on leveraging the firm's focal faculties(in high-speed information processing,large-scale integration, etc.) throughcarefully structured internationaloperations, served to destabilize establishedcompetitors and benefit customers. In early1991, Fujitsu's Executive Board had todecide on its future approach to "competingin computing" in the face of dramaticdevelopments in this high-tech industry.

Readers are welcome to send theirresponses on this case diagnoses,

prescriptions and generalizations toVikalpa office.

T Madhavan is Professor of QuantitativeMethods andP S Thomas is on the research staffof the Indian Institute of Management,Ahmedabad.

judo n Modern development of JU-JTTSU[Jap.= gentle way]

ju- jitsu n Japanese system of unarmed combatusing opponent's strength and weight to his

disadvantage [Jap.=gentle science]

- Pocket Oxford Dictionary

In early 1991, Fujitsu's Executive Board met in the "sci-

tech" conference hall on the 21st floor of the companyheadquarters in Tokyo's central business district. At thehead table sat Mr T Sekizawa, President and ChiefOperating Executive, flanked by Chairman TYamamoto, Vice Chairman M Yasufuku and ExecutiveVice Presidents K Watanabe and M Ohtsuki. The 31other men present included executive directors, manag-ing directors, directors, and auditors who had as-sembled from around the world. The 36 member Boardwas meeting over a three day period to review theresults of the fiscal year due to end shortly, to exchangeviews on recent industry developments and to set somebroad parameters for the Group's operations in future.

On taking the floor, Sekizawa noted that Fujitsuhad recorded a compound annual growth rate (CAGR)of over 15 per cent in the decade to date. But onlycurrent growth had touched the long-term target of 20per cent (Exhibit 1 is an eight-year financial summary).Still, it had propelled the company to the second posi-tion, behind IBM, in the world computer industry. Thesuccessful negotiation of an 80 per cent stake in Britain'sInternational Computers Ltd. (ICL) for 743 million in1990 had greatly helped in achieving this position. Thedeal had also raised the level of Fujitsu's revenuesgenerated overseas from 20 per cent to 25 per cent, the

long-term goal being 33 per cent (Exhibit 2 gives thedomestic/overseas sales amounts for a ten-yearperiod).

* Based on published materials (See Appendix I) and a simu-lated problem focus. The valuable cooperation of Fujitsu Ltdis gratefully acknowledged, but the authors take respon-sibility for the write-up.

Vol.18, No.2, April-June 1993 41


2/15

About 2/3 of Fujitsu's revenues were accounted forby computer products ranging from small hand-heldPCs to huge supercomputers and related services.Hence, Fujitsu management paid close attention todevelopments in the world computer industry whichwas undergoing transformational change driven byswift progress in semiconductors and telecommunica-

tions equipment (in which Fujitsu was 6th and 8threspectively in the world). Competition was intensify-ing, alliances were proliferating, software was increas-ingly becoming critical and governments everywherewere super-sensitive to trade, investment and otherissues involving the information technology sector inwhich Fujitsu was broadly positioned.

The third Middle East crisis had accentuated aslowdown in the industry induced by recessionaryeconomic conditions originating in the US in mid-1990.By the end of that year, American and European computer companies were haemorrhaging in varying

degrees. Groupe Bull of France (a public sector unit) hadposted a loss of over $1 billion, an all-time record in thecomputer industry. IBM had just announced a com- pletely unexpected halving of first quarter 1991revenues. Wall Street was even projecting an unprece-dented loss for the full year. However, with the recentlaunch of a new line of mainframes (IBM's "most sig-nificant" announcement in 25 years which Fujitsu hadimmediately countered with its powerful M-1800series), vigorous competition seemed certain for Fujit-su.

In these circumstances, Sekizawa (59), whose career

at Fujitsu had its roots in telecommunications and whohad been elected Chief Executive a year ago, exhortedthe group to look at Fujitsu's situation as objectively as possible. Reminding his colleagues of th? corporateslogan "what mankind can dream, technology canachieve," he urged the team to think of effective waysin which Fujitsu could continue its pace setting role inproducts and customer relationships. The firm's focalfaculties and strategic aspirations had to be carefullyassessed and steps taken to strengthen them in theinterests of Fujitsu's industrial future.

Company BackgroundFuji Tsushinki Seizo K K came into being in 1935 as amanufacturer of telephone equipment, a spin off fromFuji Electric of the Furukawa Group. Furukawa (withinterests in copper mining and processing) had enteredinto a wide ranging collaboration with Siemens AG adozen years earlier. Fuji Electric was currently Japan's

fourth largest maker of electrical machinery. Its stake inFujitsu (the shortened name having been adopted in thelate 1960s) was 13.5 per cent. Fujitsu was listed on theTokyo Stock Exchange in 1949.

As an integrated producer of telecommunicationsequipment for the public sector telecom service, Nip-pon Telephone & Telegraph (Nil), Fujitsu became a

leading member of its so called "Den Den" family ofsuppliers (NEC, which incorporated in 1925 the decadeold AT & T Western Electric plant in Japan, was thedominant firm in this Group). NTT was privatized in1985, and only accounted for about 10 per cent ofFujitsu's telecom revenues currently. However, Fujitsuwas a global telecom supplier, ranking 8th in the worldindustry. Its total telecom revenues which had declinedto 25 per cent of company revenues by 1978 levelled offat about 16 per cent during the 1980s. Its cellular phonewas the world's smallest.

In computers, Fujitsu was the first Japanese com-

pany to develop a relay based (electromechanical) sys-tem, the FACOM 100, through the efforts of a teamunder T Kobayashi in 1954. Initially, this gave a strongimpetus within the company to numerically controlledmachine tools for which a large group was formed thevery next year under Dr S Inaba. In fact, Kobayashi'soffice computer group began to receive encouragementonly when K Okada came from Fuji Electric to becomeFujitsu's President a few years later. By that time,several Japanese companies had jumped into the com-puter business in collaboration with American firmsand Fujitsu overtook them only in the late 1960s.

By 1980, Fujitsu even overtook IBM Japan to occupythe first place, a unique feat in IBM dominatedgeographic markets. In 1983, it launched its first super-computer and later it entered the laptop and hand-heldcomputer market. The computer business accounted for66 per cent of company revenues in 1990-91 with anaverage of 64 per cent for the decade as a whole. Al-though the markets were quite distinct, the computer business was related to the telecom business since adigital telecom switch was essentially a computerwhich could handle voice as well as data (Exhibit 3 givesthe segment-wise profile of Fujitsu's total information

systems revenues as of 1990 with comparable data forIBM).

"Electronic devices" especially "microelectronics"constituted the third key strand of Fujitsu's business,currently accounting for 14 per cent of total revenues(the same as the ten-year average). This line consistingmainly of a wide range of semiconductors began with

42 Vikalpa


3/15

the volume production of transistors in the late 1950s.Volume production of integrated circuits (ICs) began in1966 and a merger two years later with Kobe Kogyo(originally a specialist in receiving tubes whichswitched to transistors at the same time as Fujitsu) gavethe firm a 4 per cent share in the Japanese semiconduc-tor industry which was basically oriented to consumer

electronics.In July 1975, a consortium of five major Japanese

electronics companies including Fujitsu was formed byNTT and MITI to conduct research in ICs and shareproduction technology. As a result, Fujitsu was the firstto sell the 64 kilobit dynamic random access memorychip (64K DRAM for short) on the world market in1978-79. Continued innovation by the Japanese coupledwith an appreciating dollar during a cyclical downturnin the business led to the domination of the memorychip market by the Japanese and the withdrawal ofseven out of nine American producers from this busi-

ness by the mid-1980s (IBM made memory chips solelyfor internal use though it was now planning to sell inthe open market also).

In 1986, Fujitsu played a critical role in the keymicroprocessor chip market by manufacturing a 32-bitReduced Instructing Set Computing (RISC) chipdesigned by Sun Microsystems, a new American com-puter company. This component has since acceleratedthe shift from large stand alone mainframes to intercon-nected desktop machines consisting of "workstations"and personal computers.

Fujitsu was the sixth largest merchant producer of

chips in the world though half its output was usedinternally. Leading edge devices such as microproces-sors (produced under license) and logic chips ac-counted for 70 per cent of its business with memorychips taking care of the rest. Thus, it was ranked fourthin memory chips but first in gate arrays. In 1990, theworld market for memory chips (predominantlyAmerican and computer/telecom based) had plungedby 25 per cent (Exhibit 4 gives Fujitsu's net sales byproduct group for a five-year period and Exhibit 5 givesa list of the top 20 semiconductor vendors in the world).

Fujitsu in JapanInaugurated in 1985, the company headquarters wherethe Executive Board was in session was one of Fujitsu'sfour main office premises. Besides, it had 15 manufac-turing facilities in Japan. The Kawasaki Research andManufacturing facility, established in 1938, had thelargest staff complement (12,000 persons) engaged in

product development (hardware as well as software)for computer systems, communication systems andsemiconductors. The Oyama plant, commissioned in1959, specialized in telecom systems while the NumazuComplex, set up in 1976, concentrated on large com-puter systems and advanced software development.The Iwate, Wakematsu and Mie plants, which were

constructed in the early 1980s, produced semiconduc-tors. The Iwate plant, an 84,000 square metre facility,fabricated and assembled memory chips while theWakematsu plant made gate arrays.

For marketing purposes, Fujitsu had three regionalsales groups (i.e., for Tokyo, Eastern Japan and WesternJapan), a number of, customer/business oriented salesgroups as well as the usual product groups. Fujitsu hadscores of showrooms and sales branch offices in Japan.In addition, it had a number of telephone enquiry ser-vices for customers, a Business Systems Customer Ser-vice Centre and a Business Systems ApplicationSoftware Promotion Centre.

Fujitsu also had 118 subsidiaries in Japan, nearly aquarter of them manufacturing/R&D companies. Aleading subsidiary, Fujitsu Labs was set up in 1968 andwas the first in Japan to specialize in computer research.Fujitsu TEN incorporated the company's car audio sys-tems business and was spun off in 1972. It receivedcapital participation from Toyota and Nippondenso.PFU Ltd, set up in collaboration with MatsushitaElectric Industrial Co Ltd. in 1973, produced minicomputers (and later PCs) under the brand name ofPANAFACOM. Originally, this unit had been startedby a Fujitsu executive. Besides all these, there were

numerous software/data processing service sub-sidiaries (most of which were specialists in particularindustries) and sales/design/service subsidiaries forintegrated circuits.

Among Fujitsu's leading Japanese "affiliates" wasFANUC Ltd (41 per cent Fujitsu equity) which wasestablished in 1972. A $2 billion company, it dominatedthe world's numerically controlled machine tool in-dustry with a 70 per cent market share in Japan (50 percent on a world-wide basis). Dr S Inaba, FANUC'sPresident, was a Director on Fujitsu's Executive Board.Another leading affiliate, Advantest, was a semicon-

ductor equipment maker that ranked 4th in this in-dustry globally with over $400 million in 1990 revenues.

In late 1971, Fujitsu established close inter-firmcoordination with Hitachi under the auspices of a Mill project to develop mainframe computer technologyfocusing it into a joint venture named FACOM- HITACLtd in 1974. Fujitsu and Hitachi were members of the



4/15

Dai-ichi Kangyo Bank (DKB) Keiretsu or alliance ofdiverse businesses (Kobe Kogyo was once a member.More recently, a consumer electronics firm had joinedthe group at the behest of DKB and it was called FujitsuGeneral Ltd). DKB is the world's largest commercialbank. Together with Asahi Mutual Life Insurance Co.,a total of 11 per cent of Fujitsu shares are in DKB

financial institutions. Hitachi, one of Japan's largestmanufacturing companies, had loose links to severalKeiretsu due to its highly diversified nature (Exhibit 6shows the Keiretsu links of Japan's leading electronicscompanies whose annual revenues range betweenabout $ 10 billion and $ 50 billion).

In 1986, Fujitsu teamed up with Hitachi and Mit-subishi Electric to develop 32 bit microprocessors basedon "The Real-Time Operating System Nucleus" (abbrev.TRON) architecture originally developed by a Univer-sity of Tokyo scientist with whom Hitachi had madecontact. The first TRON based chips were currently

nearing commercial launch as one of the world's fastestmicroprocessors at 100-200 million instructions persecond (MIPS) (Exhibit 7 gives Fujitsu's R&D and capi-tal expenditures for a ten-year period).

Global Strategy

When leading Japanese companies entered into col-laborations with American computer companies, Fujit-su followed an independent path just as IBM did. InI960, IBM's sales at $2 billion were 30 times those ofFujitsu but the group under T Kobayashi was alreadythinking "catch up." Without foreign collaborators'

restrictions to hinder it, Fujitsu embarked very early ona global strategy, sending salesmen first to Bulgaria(where its technology was licensed) and eventuallylanding a sales contract for the FACOM 23 (developedin 1964) in the Philippines in 1965. Its first overseasoffice opened in New York in 1967 with its Californiaoffice starting a year later. In the early 1970s, Fujitsumoved into Spain and Brazil on one side of the worldand Korea and Australia on the other.

At that time, the world computer market wasdominated by IBM which had successfully made thetransition during the 1950s from office machines (suchas tabulating machines and typewriters) that datedback to its World War I origins to computers. Once itentered the computer business, IBM developed veryrapidly, spanning two generations of computer tech-nology (vacuum tubes and transistors) by 1960.

IBM's commercial operations in Japan began in1937. Later, it set up IBM Japan as a 100 per cent sub-

sidiary in 1950 even before IBM Corp followed SperryRand's "UNIVAC" into electronic computers inAmerica. In 1960, IBM Japan applied to MITI for per-mission to start computer manufacturing activities.When this permission was not forthcoming, IBMbypassed the Foreign Investment Law of 1951 (sincediscontinued) by raising the required funds locally.

MITI retaliated by cutting off imports of parts andproducts. A settlement was reached when IBM agreedto share its basic patents with the Japanese. Thus, IBMJapan began manufacturing in 1963. It quicklydominated the Japanese market, taking an 80 per centshare with domestic companies holding the rest. On thestrength of its highly successful 360 series, launched in1964, IBM gained a firm grip on the industry world-wide. MITI immediately commissioned a study whichformed the basis for the subsequent development of theJapanese computer industry.

In 1967, a key executive of IBM Japan joined Fujitsu

as head of the computer business. Within a year,Fujitsu's computer revenues caught up with its telecombusiness. It was then decided that in order to competein world markets, Fujitsu would make computerswhose central processing units (CPUs) were compatiblewith IBM systems so as to run the numerous applica-tions software packages that had been designed for the360 series. RCA had tried to follow such an "IBM-compatible" strategy but somehow it did not make itsperipherals such as printers and storage devices also"plug compatible." Its Japanese licensee was Hitachiwhose success in the domestic market had been notedat Fujitsu.

In 1970, Dr Gene M Amdahl, the chief designer ofthe IBM 360 left to develop a more powerful machinealong the lines of the new 370 series. Fujitsu immedi-ately contacted him in California, clearing its approachwith Hitachi. Amdahl Corp was formed in 1971 andFujitsu contributed a capital subscription of $5 million.Its leading computer scientist, Dr T Ikeda, participatedin the prototype development process in California andFujitsu increased the supply of equity funds to Amdahlas the work progressed. Eventually, the first Amdahlmachines were supplied from Japan on an Original

Equipment Manufacturer (OEM) basis in late 1975equipped with Fujitsu's emitter coupled logic (ECL)chips and badged with Amdahl's logo in oriental redcolours. The Amdahl V/6 was an immediate hit, espe-cially with reputed customers such as NASA and AT &T, because of its high quality and extraordinaryreliability.

44 Vikalpa


5/15

Restrained initially by anti-trust fears, IBMretaliated two years later by dropping the price of its370 mainframe by 30 per cent. Afterwards, it began tocopyright its operating system software and, in 1979, itlaunched a mote powerful low-priced model, the 4300.Amdahl, whose sales had reached $ 300 million in 1978,countered with an even more powerful model, the V/7,

at just a marginally higher price. At the same time, it cutthe price of its previous model and added a smallerversion, the V/5. Fujitsu supported Amdahl's price cuts by reducing its own charges by 20 per cent usingcheaper Complementary Metal Oxide Semiconductor(CMOS) memory chips, providing extended terms ofpayment and shifting final assembly for the US marketto California. Computers for the Asian and Australianmarkets continued to be made by Fujitsu in Japan whilesystems for the European, South American, Canadianand Middle Eastern markets were supplied from a newAmdahl factory in Ireland from 1979.

Meanwhile, IBM's revenues plateaued and it evenexperienced a cash crunch at this time. Its world-widenetwork grew to be dominated by operational con-siderations of balancing intra-firm trade flows and max-imizing local staffing levels rather than pursuing globaleconomies of scale. In this way, IBM tried to be a goodcorporate citizen and to deflect any latent interferencefrom governments (which also tended to be its maincustomers).

Amdahl specialized in the design and distributionof large IBM compatible mainframes that used 370software and its extensions. The firm was also active in

computer maintenance and computer education ir-respective of whether the customers used Amdahlmachines or competing ones. Its corporate mission wassimply "to provide solutions which give our customersa competitive edge." In the process, it had grown from19th among US computer companies in 1980 to 13th in1990 with revenues of $2.2 billion from 9,000employees. In fact, it was No. 2 in the US mainframesegment. Its current models had been introduced in1986-88 and a new line to counter IBM's latest Summit9000 series was due to be shipped in late 1991 with chipsfrom Fujitsu.

Amdahl's relationship with Fujitsu was charac-terized by competition as well as collaboration. AfterGene Amdahl left in 1979 to pursue furtherentrepreneurial interests, Fujitsu's stake in the com-pany levelled off at 44 per cent (valued on the books at$50 million). According to a 1984 agreement betweenAmdahl and Fujitsu, the holding could not exceed 49.5

per cent for ten years. However, Amdahl faced sig-nificant competition from Fujitsu in the mainframemarkets of Australia, Canada and Europe. Competitionfor Amdahl also increased as Fujitsu entered into allian-ces with European computer makers.

Strategy of Alliances

Siemens: In 1976, Fujitsu obtained a listing on theFrankfurt Stock Exchange and two years later signed anagreement with Siemens to supply its mainframes ex-clusively to the EC market on an OEM basis and tolicense software. It was a "natural alliance" because ofthe historical link between Siemens and Fujitsu'sparent, Fuji Electric. Besides, Siemens' 1964 agreementwith RCA had ended when the latter withdrew fromthe computer business in 1971. The agreement withSiemens was stated by Fujitsu to be aimed against CrayResearch of the US which had developed a supercom-puter in 1976 and had begun opening overseas sales

offices. Fujitsu began to develop supercomputers in1977.

Siemens was among the world's largest manufac-turing companies with 1989 revenues of $36 billion,nearly 400,000 employees, a range of over 200,000products loosely grouped into 300 separate operatingbusinesses in the electrical machinery industry and astrong cash position. One third of Siemens' profits camefrom the telecom business because of lucrative contractsfrom the German national telecom authority. However,it was losing money in the chip business (because ofdifficulties in sustaining the pace of product innova-tion) and in computers (because of its 1990 merger withloss making Nixdorf). Siemens Nixdorf InformationSystems, SNI, was Europe's largest "indigenous" com-puter company, but second to IBM Europe.

When IBM attacked Fujitsu's operating system oncopyright grounds in 1982, it pressured Siemens to stopaccepting Fujitsu software until arbitration ended inSeptember 1987 (with both sides declaring victory).Siemens acquired IBM's Rolm telecom manufacturingunit in 1988, collaborated 50:50 with IBM in the unit'smarketing function and engaged in a joint study withIBM of European telecom network services with BellAtlantic providing software expertise. In late 1989, IBMagreed to team up with Siemens to develop the 64megabit DRAM chip (due in the market by 1994). Inreturn, Siemens sponsored IBM's admission to JESSI(the Joint European Submicron Silicon Initiative), amulti-billion dollar long-term EC project launched inearly 1989 to increase European companies' competi-tiveness in semiconductors.



6/15

But Siemens also marketed Fujitsu's VP-200 super-computers with Europe accounting for about a quarterof the $ 2 billion world market for such machines.Siemens planned to introduce Fujitsu's 170 MIPSmainframe in 1991 to counter IBM's Summit 3900 series.At the low end, Siemens had begun re-selling laptopPCs made by Matsushita Electric Industrial Co.

ICL: ICL came into being in 1968 as a result of theamalgamation of a number of British computer/electronic companies under governmentauspices. One of the constituents, ICT, which hadoriginated in a similar manner in 1959, traced its ownroots to . BTM, a competitor of IBM in tabulatingmachines during the inter-war period. ICT had an ar-rangement with Hitachi dating from 1965.

In 1976, ICL took over Singer Business Machinesadding three new products, 2,500 new customers andentering some new European markets (besides Franceand Germany) in the process. The UK market accounted

for about half of ICL's business at the time with asignificant part of it on civilian government account via preferential procurement systems. The rest of ICL'srevenues (40-50%) originated overseas, especially in theBritish Commonwealth (South Africa was an ICLstronghold) and even Eastern Europe. It had operationsin some 40 developing countries. However, the USmarket was a marginal one for ICL.

In 1979, ICL's financial position suddenly becamevery precarious due to a global recession and manage-ment deficiencies. The government propped it up witha loan guarantee (initially for 2 years, then for 3 more)

and used the opportunity to change the top manage-ment team in May 1981. Mr Robb Wilmot, the newManaging Director, 36 years of age, set out to restoreICL's profitability (through deep staff cuts) and to im-prove its viability (by filling gaps in its product range).

The previous year, Hitachi had signed an OEMagreement for the supply of mainframes to BASF inGermany and Olivetti in Italy. NEC struck a similar dealwith Groupe Bull in France. So Wilmot turned immedi-ately to Fujitsu where Yamamoto, a protege of Okada,had just taken over as President. The three- year agree-ment eventually signed in December 1981 on which

ICL's survival rested, covered the supply of Fujitsu'sM-780 mainframes on an OEM basis (switched sub-sequently to Amdahl), the supply of semiconductors/circuit boards and a technology sharing agreement fora new ICL (non-IBM compatible) mainframe. Wilmotthus began a process of structural change which wascontinued on a cultural plane after his departure in 1984

by his Director (Marketing) Mr Peter L Bonfield whomoved into the vacant position of Chief Executive.

Bonfield focused on ICL marketing in order to in-crease its responsiveness. Five industry specific group-ings were formed for this purpose. "Retail" whichaccounted for a substantial part of ICL revenues wasfocused specifically on supermarkets. In the US, thisgroup focused on "Do it Yourself1 (DIY) stores. Theother four groups formed were manufacturing, finan-cial services (other than banking), public administrationand defence. About 50 per cent of ICL's R&D resourceswere allocated to these marketing groups. Product salescontinued to be the responsibility of ICL's unified salesforce. After taking suitable housekeeping measures,ICL's manufacturing was computerized using its ownmachines, transforming it from a problem area to ashowcase for ICL computers.

In late 1984, ICL was acquired by the telecom firmof STC (originally a Western Electric subsidiary that hadbeen taken over by ITT) for 411 million. But STC didnot interfere in the computer business. Fujitsu renewedits agreement with ICL for a further seven-year period.It provided inputs to ICL management on the reformprocess and participated in the design of the new series39 mainframe which was launched in 1985. ICL thusbecame a significant customer for Fujitsu's CMOS gatearray chips.

By 1987, ICL became consistently profitable and themainstay of STC's own financial health. Corporatefunding was inadequate given the high R&D and capi-tal investment requirements and growing price com-petition in the computer business. Hence, STC beganthe process of finding a new owner for ICL. Talks wereheld with numerous European and American companies and with Fujitsu. (Exhibit 8 gives profiles ofleading European companies). In July 1990, a fewmonths after Mitsubishi Electric took over the ailingBritish PC maker Apricot Computers, STC manage-ment negotiated the sale of an 80 per cent stake in ICLwith Fujitsu Chairman Yamamoto. Shortly afterward,STC itself was acquired by Northern Telecom Ltd. ofCanada which became the co-owner of ICL to the extentof 20 per cent.

At the time, Fujitsu emphasized its plan to let ICL(with Bonfield as Chairman) manage as autonomouslyas possible and announced that 25 per cent of ICL shareswould eventually be publicly held. However, there wasan outcry from the French over ICL's Japanese link andit was excluded from some of the JESSI projects due tothis.

46 Vikalpa


7/15

Sun Microsystems: Founded by Mr Vinod Khtfsla (aStanford MBA) in the early 1980s, "Sun" stood for "Stan-ford University Network" which catered to a need inacademic and engineering circles to use a platform(operating system) called UNIX. Not only was UNIX(developed by AT & T) virtually in the public domain,but it was also quite versatile. Sun customized UNIX in

some significant ways and designed desk top com-puters called workstations based on it. Sun built thesemachines entirely from "off the shelf components andparts so that its designers could take advantage of everyopportunity to achieve higher performance levels intime frames of only 12 months or so (compared to a fourto five-year development cycle in the mainframe busi-ness). By 1985, Sun introduced three generations of itsworkstations.

For the Sun 4, however, it came up with a significantinnovation. Instead of using standard microprocessors,Sun designed its own chip using a technology originallydeveloped by IBM called Reduced Instruction Set Com-

puting (RISC). Unwilling and/or unable to manufac-ture the chip, Sun's designers approached establishedchip manufacturers to produce the new component. Allof them refused (even though it was simpler and lesscostly than traditional microprocessor designs) merelybecause it was not "in house" in origin. Besides, Sun wasonly a $30-40 million company with a two-year trackrecord. Fujitsu's local representative (in California)referred the youthful team to Tokyo headquarterswhere the then Executive Vice President (now ViceChairman) M Yasufuku was intrigued by the proposal.However, in order to accept it, he had to overcome theprevailing "mainframe mentality" in Fujitsu's semicon-ductor division. The so-called Scalable Processing Ar-chitecture Reduced-instruction-set Computing (orSPARC) chip first produced by Fujitsu in 1987propelled Sun to a leadership position (ahead of IBM,DEC and Hewlett Packard) in the most rapidly growingsegment in the overall computer market.

In order to increase the acceptance of the SPARCchip, Sun's aggressive Chief Executive, Mr Scott Mc-Nealy, licensed the design to an increasing number offabricators, ten at last count, on a non- exclusive basis.These licensees, including Fujitsu, used technologiesranging from low cost CMOS to ultrahigh performanceGallium Arsenide (GaAs). Fujitsu made the gate arrayversion. Thus, chips of the same design were availableat various speeds and prices and could be used in avariety of computer systems. Fujitsu used SPARC forits laptops while ICL's DRS6000 was a SPARC-basedminicomputer system which it supplied on an OEMbasis to Sun as well as to Fujitsu.

Sun's development cost for SPARC was a fractionof that required for popular chips like Intel's x86 family.By 1990, its sales were nearly $3 billion from the sale of150,000 systems in a market for workstations estimatedat $6.5 billion. Sun's architecture accounted for over 60per cent of all US RISC based computer shipments.Applications developed for SPARC hardware were

thrice the number of those designed for leadingworkstation competitors almost all of whom wereAmerican.

Following Sun's lead, these competitors haddeveloped RISC chips of higher performance. IBM hadachieved significant success with the introduction in1989 of a UNIX based workstation for the commercialmarket designed by Mr Andrew Heller who, however,quit in 1990 to start his own firm, HaL Computers, towork on "superscalar" machines while Sun turned toTexas Instruments (TI) to develop a "superscalar" chip.In early 1991, AT & T sold a part of its stake in Sun to

alleviate fears in industry circles that the latter wastrying to "monopolize" UNIX as its use spread fromnarrow engineering to broader commercial environ-ments. In Japan, Sun initially sold its workstationsthrough C.Itoh (a leading trading house in the DKBgroup) setting up its own subsidiary in 1986. However,re-sellers like Fujitsu accounted for the bulk of Sun'sworkstation sales in this market. Through Sun, Fujitsugained access to critical compiler technology and ex-perience in optimizing UNIX hardware.

MCI Communications: Washington, DC based

MCI was a "specialized common carrier" which usedmicrowave circuits to offer trunk telecom services(especially data transmission) in direct competitionwith AT & T over some very lucrative routes. Operatingrevenues of $7 billion gave it a 20 per cent US marketshare in this business. In the mid-1970s, it successfullybrought an anti-trust suit worth $1.8 billion, the biggestin US history, against AT & T. MCI's founder, the lateMr William G McGowan, was named toFortune's Hallof Fame.

In the late 1970s, it inducted state-of-the-art singlemode fibre optic transmission equipment (whichemployed laser technology) from Fujitsu becauseAmerican suppliers refused to make such equipmentavailable to MCI for competitive reasons. Such systemsnot only became the core of MCI's infrastructure butthey became the dominant optical fibre technology aswell. For MCI, Fujitsu had established a 405 megabit persecond (mbps) system in 1983, an 810 mbps system in1986 and a 1.8 gigabit per second system in 1988.



8/15

MCI was renowned for its low-cost position,sophisticated telecom software and aggressive cor-porate culture. IBM acquired a 16 per cent stake in MCIin 1985 with an option to increase it to 30 per cent butsold back the shares in 1988. Meanwhile, Fujitsu's in-stitutional advertising spotlighted strategic alliancessuch as that with MCI. Titled "How Fujitsu Helps MCI

Change the World" a recent advertisement featuredMCI's Chief Strategy and Technology Officer, MrRichard Liebhaber, who attributed a significantmeasure of MCI's commercial success to Fujitsu's tech-nological partnership.

According to Liebhaber, MCI planned to rely ongeneral purpose computers for switching purposesrather than specialized digital switches, in order toachieve a high degree of cost-effectiveness. At the sametime, MCI focused heavily on software development toachieve the required level of customization. An es-timated 60 per cent of its software work was done in-

house while the rest was farmed out to contractorssubject to MCI's parametric control.

Other World-wide Activities

Australia: Fujitsu Australia Ltd was established in June1972. Australia's computer market was characterized by: a) openness and accessibility b) reliance on theEnglish language just as in the UK and USA and c)government procurement practices based strictly on thelowest bid. In this market, Fujitsu focused onmainframe sales and maintenance services. TheAustralian operation served as a test market for

products and training ground for managers destinedfor Western countries. In 1976, Japanese expatriateswere replaced by Australian personnel. From a marketshare of less than 1 per cent, Fujitsu's share increased to5 per cent in 1980 and 10 per cent in 1982 primarily onthe basis of very aggressive bidding. At that time,Australia had one of the largest overseas concentrationsof Fujitsu's mainframes.

In Australia, Fujitsu competed against Amdahl andICL with which it had OEM supply arrangements. Ameasure of operational coordination among the threewas attempted to minimize conflicts in the field. InSeptember 1988, Fujitsu established a telecom factory insoutheastern Australia. In the following year, it signeda five-year $15 million (cash + equipment) R & D agree-ment with Australian National University (ANU).Under this agreement, it made available a pre-produc-tion model of its AP 1000 supercomputer, a massively parallel processing (MPP) machine, for purposes ofapplication software development.

United States: Following the establishment of a smallsemiconductor assembly plant in San Diego, Fujitsuformed a joint venture in 1980 with TRW Inc. to marketits point-of-sale (POS) terminals and small computers.Three years later, it bought out TRW's 49 per cent share.Through this deal, Fujitsu got a valuable foothold in theretail oriented sector dominated by IBM and NCR Corp.

Fujitsu also tied up with Computer Consoles (forperipheral equipment) and Ampex (for tapes) in theearly 1980s.

A number of Fujitsu's acquisitions/investments inthe US followed the large appreciation in the value ofthe yen in late 1985. One of the first was a new factoryfor manufacturing computer peripherals in Oregon. In1988, it began constructing a telecom plant and R & Dcentre in Texas.

Soon, Fujitsu also took a 30 per cent stake (raised to80 per cent in 1990) in Poqet Computer Corp, a new USdesigner of palm top PCs, said to be the world's most

portable computer. Wilmot was appointed Poqet'sChief Executive and was based in California. Fujitsuwas very successful in selling Poqet hand-held PCs toorganizations such as Pepsico and its subsidiaries tostreamline and automate their large field sales opera-tions, viz, order entry, inventory management androute accounting.

For some years before the yen revaluation in Sep-tember 1985, criticisms of Japanese semiconductortrade practices were heard in the US but no formalsanctions were sought. However, when a price warerupted in 1984/85, Micron Technologies, a small US

DRAM producer, filed dumping charges in June 1985against top Japanese memory chip makers and also theonly other American memory chip producer, TexasInstruments, whose DRAM business was based inJapan. At the same time, the US Semiconductor In-dustry Association (SIA) invoked the Special 301provision to demand more access to the rapidly grow-ing Japanese chip market, i.e., for "voluntary importexpansion" by the Japanese. In due course, an agree-ment was arrived at between the US and Japanesegovernments in July 1986 governing the dealings insemiconductors for a five-year period.

To take care of the dumping problem, eachJapanese producer was assigned cost-based "fairmarket values" (FMVs) below which it could not priceits chips outside Japan without attracting penalties. Inthe area of market access, the understanding was that"foreign" market share in Japan would be allowed todouble by the end-1991 deadline.

48 Vikalpa


9/15

Fujitsu faced a problem because the initial FMVsassigned to it (based on one-year old cost data) wereabout three times higher than those of some of itsJapanese counterparts. This put it at a competitive dis-advantage in export markets. However, for manymonths afterward, chips purchased at low prices in theJapanese market (exempt from the agreement) con-

tinued to find their way overseas in one way or another.In response to complaints about this "grey market"activity, Japanese chip makers then coordinated theirproduction at MITI's instance. The resulting shortages pushed up prices, above even the highest FMVs.Though this "solved" the dumping problem, the com-puter industry in the West was forced to pay high pricesfor chips. Still, American companies did not re-enter theDRAM business but Korean new entrants were able toestablish a strong low-cost position at this time.

One of the other effects of the agreement (and theprevailing high yen exchange rate) was to accelerate the

pace of Japanese green field investment in memory chipproduction facilities outside Japan. Fujitsu had plannedto set up a full-scale plant in the US in 1984 butpostponed the decision due to the slump in the industryat that time. In August 1986, it received an offer to take80 per cent of Fairchild Semiconductor, a pioneeringfirm in the industry which was facing chronic financialdifficulties even after it had been acquired in 1979 by aFrench oil-field services company called Schlumberger.Fairchild's intellectual property rights were no doubt ofvalue to Fujitsu though its technological prowess wasnot what it used to be. Fairchild also had a global

distribution network supplied by nine US plants andtwo smaller facilities in West Germany and (since 1984)in Japan. However, the complex deal caused such a hueand cry in the US among industry and governmentcircles that Fujitsu abruptly decided to drop the acquisi-tion plan in March 1987. But it put forward alternate proposals to Fairchild for a series of technology ex-change and development programmes as well as plansfor joint production in Japan. However, Fairchild wassoon acquired by another American semiconductorfirm at half the original price offered by Fujitsu. In theprocess, Fairchild's Japanese plant was sold off to Sony

while Matsushita acquired one of the US plants. Ul-timately, even Fairchild's historic identity became non-existent in the restructuring. For its part, Fujitsuproceeded to set up a new DRAM production facility inOregon, commissioning it in October 1988 (incidental-ly, in 1981 also, Fujitsu had to withdraw from a key fibreoptic contract with AT & T because of hostile Americanpublic opinion).

In 1990, trade disputes between the US and Japanerupted in supercomputers and in liquid crystal dis-plays (LCDs). In the case of the former, US manufac-turers, such as Cray, were given access to Japanesegovernment tenders. In LCDs, American manufac-turers filed an anti-dumping suit against 13 JapaneseLCD exporters, including Fujitsu.

Altogether, Fujitsu had about 5,000 employeesbased in the US engaged in a highly concerted effort atlocalization through numerous cooperative agree-ments with local manufacturers, investments in localR&D and manufacturing, and close design engineeringand after-sales services to customers.

India: Fujitsu opened an office in New Delhi in 1983.Within a couple of years, Mr Rajiv Gandhi became thePrime Minister and personally gave a fillip to the com-puter industry which, on the strength of a boom in PCs,(set off -world-wide by IBM's revolutionary 1981product) grew at about five times the rate achieved in

the US over a decade. The previous, relatively stagnantperiod had seen ICL's ICIM (International ComputersIndia Manufacture), which originated in the early1960s, take over the leadership of the industry afterIBM's exit in 1978. Though Unisys entered, it opted fora joint venture and confined itself to software develop-ment and export. Post-1985, Hewlett-Packard, DEC andSun Microsystems established themselves in India.ICIM lost its No. 1 ranking due to a lack of PCs in itsmainframe-oriented product line up. It filled this gapquickly and recovered some lost ground through thesuccessful introduction of ICL's DRS/6000 and itssmaller variants which were Unix minicomputers

based on SPARC architecture, in 1990. Its product rangenow spanned the full spectrum from mainframes, su-perminis and minis to PCs and printers.

Fujitsu's primary interest in India was in telecom-munications especially in view of the government'splans to join the select group of ten countries in theworld with over 10 million phone lines. In 1987, Fujitsuhad installed a 25 km, 140 mbps fibre optic transmissionsystem between Ahmedabad and Gandhinagar, one ofabout 30 systems in the country from all sources (with40 other such projects in progress). It was seeking tointroduce its FETEX-150 digital switching technologyto a market which had (since the early 1980s) relied onAlcatel's equipment of this type. Siemens as well asAlcatel (with a new project) were also trying to enter theIndian market for digital switches along with Fujitsu.The telecom markets of developing countries such asIndia were characterized by high growth rates but lowprofitability for MNCs compared to developed countrymarkets.



10/15

In the meantime, Fujitsu had tied up with SterlingComputers' Mr C Sivasankaran (35) to introduceperipherals such as a printer and keyboard to the Indiancomputer market supplied from its Thai factory. Theindustry's import intensity was, however, becomingproblematic as the country's balance of payments posi-tion began to assume serious proportions in the wake

of the 1990 Gulf crisis. Yet it was rumoured that IBMwas interested in re-entering the Indian computermarket in 1991 though, in mainframes, it had continuedto do well there simply through its Singapore andAustralia offices.

Europe: Fujitsu chose Spain in the late 1960s to base itsEuropean operations establishing Fujitsu Espana(Spain) in 1973 and taking capital participation inSECOINSA in 1975. It established a multipurposemanufacturing facility in the Mediterranean port ofMalaga in 1977 and took over the utility companyTelefonica's computer subsidiary in 1985. With Spain'saccession to the EC in 1986, Fujitsu was in a position to

offer a range of products to the European market in-cluding supercomputers, mainframes, minicomputers,PCs, automated teller machines (ATMs), data transmis-sion equipment and peripherals.

Fujitsu's semiconductor business was establishedin Europe a decade ago beginning with imported semi-conductors and then an assembly and test facility inDublin. Fujitsu's microelectronics group was head-quartered in Frankfurt and marketed a wide range ofhigh quality components including connectors, relays,keyboards and plasma displays. In all, Fujitsu operatedwith several thousand direct and indirect employees in

more than 15 European countries and had nine semi-conductor design centres across the continent to adapt

advanced computer chip technology for local Europeanmarkets.

On February 6,1989, the EC adopted tougher rulesof origin on semiconductors to shield the Europeanmarket from imports as well as to upgrade the industryin Europe. Instead of qualifying as "local" on the basis

of the "lastsubstantial transformation" (generally as-sembly and test), the new rule specified "the mostsub-stantial transformation" which meant that the criticalcircuit diffusion process had to be performed locally. Inaddition, the EC required a 40 per cent non-Japanesecontent in imported products. Fujitsu was in the processof completing a 400 million integrated plant for 4megabit memory chips in Newton Aycliffe, England(Exhibit 9 gives Fujitsu's geographic distribution ofsales).

Global Vision and the Real World

As the last of the situation reports faded out on the videoconference screen at the end of the first day, Sekizawaglanced at his watch, had a word with his senior col-leagues and rose to conclude the meeting. He thankedeveryone for their contributions and reminded themthat the deliberations would continue for two days inan informal setting at Fujitsu's suburban club to whichthe group would proceed after the evening banquet.The thought with which he ended was simple:

"To meet the demands of increasingly discerningcustomers, Fujitsu would compete for the global title of'Imagination, Incorporated.' It would enter the 21st

century as a highly respected name in the "digital"business everywhere ."

50 Vikalpa


11/15


12/15


13/15


14/15


15/15

Gregory, G (1985). Japanese Electronics Technology.Chichester:

John Wiley.

Harman, A J (1971). The International Computer Industry.Cambridge, MA: Harvard University Press.

Horn, J et al. (1989). "Schlumberger and Fairchild Semiconduc-tor," Boston: Harvard Business School, Case No 9-389-133 (Rev 6/28/90).

Hufbauer, G C (ed) (1990). Europe 1992. Washington, DC:Brookings Institution.

Jelinek, M and Schoonhoven, C B (1990).Innovation Marathon.Oxford: Basil Blackwell.

Johnstone, B (1992). "Fujitsu: A Moment to Sieze,"Far EasternEconomic Review, January 16, pp 36-40.

LaMond, A and Flaherty, M T (1989). "The Loss of USDominance in DRAMs: A Case History (1976-1984),"Boston: Harvard Business School, Case No 9-689-067.

Levine, J Ret al. (1989). "High Noon for Sun,"Business Week,

July 24, pp 38-43.

Marwood, D C L (1985). "ICL: Crisis and Swift Recovery," LongRange Planning, Vol 18, No 2, April, pp 10-21.

Moskowitz, M (1987). The Global Market Place. New York:Macmillan.

Mowery, D C (ed) (1988). International Collaborative Venturesin US Manufacturing. Cambridge, MA: Ballinger.

Okimoto, D I et al. (eds) (1984). Competitive Edge. Stanford:Stanford University Press.

Ouchi, W G (1984). The M-Form Society. Reading, MA: Ad-dison- Wesley Publishing Co.

Quinn, J B (1992). Intelligent Enterprise.New York: Macmil-lan/Free Press.

Schlehder, B R (1991). "Inside Fujitsu: How Japan's BiggestComputer Maker Plans to take on IBM, AT & T - andthe World,"Fortune, July 1, pp 22-26.

Schoven, J B (ed) (1988). Government Policy towards Industry inthe US and Japan. Cambridge: Cambridge UniversityPress.

Sobel, R (1986).IBM vs Japan.New York: Stein & Day.

Soma, J T (1976). The Computer Industry. Lexington, MA: DCHeath & Co.

Staff (1991).Fujitsu Data BookMarch 1991. Tokyo: Fujitsu Ltd.

Thomas, P S and Madhavan, T (1991). "Fujitsu Ltd: A Case ofGlobal Management in Telecomputers," Ahmeda-

bad: Indian Institute of Management, WorkingPaper No 945, June.

Tilton, J E (1971). The International Diffusion of Technology.Washington: Brookings Institution.

Turner, L (1987). Industrial Collaboration with Japan. London:Routledge and Kegan Paul.

Tyson, L D (1992). Who's Bashing Wltom? Washington, DC:Institute for International Economics.

Wiegner, K (1988). "Sun Microsystems,"Forbes, June 27, pp 49-50.

Yamamoto, T (1992).Fujitsu: What Mankind Can Dream Tech-nology Can Achieve. Tokyo: Toyo Keizai (tr Dick Bel-cher).

Yoffie, D and Wint, A (1987). "The Global SemiconductorIndustry: 1987," Boston: Harvard Business School,Case No 9-388-052.

Zemke, R (1989). The Service Edge.New York: New AmericanLibrary.


1993 apr jun 41 55 fujitsu (a) operations case

Documents