`It's The Elephant Against The Rats' For Japan's Phone Business

Masashi Kojima's office is sparsely decorated, but the 61-year-old president of giant Nippon Telegraph & Telephone Corp. does treasure one memento. It's an autographed photo of adventure novelist Tom Clancy, pictured in combat fatigues against a bombed-out cityscape. Clancy, says Kojima, is a close friend.

Unfortunately for Kojima, his own battles don't much resemble those of Clancy's hero, Jack Ryan. While Ryan foils every nemesis from the Red Navy to Irish terrorists, Kojima is stalemated by an even more implacable opponent: the Japanese bureaucrat. And while Jack Ryan is always the good guy, it's harder to sort out right from wrong in the contest over the fate of NTT.

It's no secret that NTT is locked in mortal struggle with the Posts & Telecommunications Ministry, which once had the government-owned phone company under its wing. That changed in 1985 when NTT was set up as a separate company and the Finance Ministry announced plans to sell NTT shares to the public. With NTT moving toward independence, the postal ministry pushed to modernize the phone service by introducing American-style competition. Its goal was to break up NTT in much the way that American Telephone & Telegraph Co. was broken up in 1984. In 1990, under pressure from NTT's unions and equipment suppliers, the ministry agreed not to seek a breakup before 1995 and has been silent on the issue since.

Meanwhile, Kojima lingers in an uncomfortable limbo. The ministry has already opened the lucrative long-distance market to rivals, forcing NTT to lower its prices. But NTT still has huge expenses, including running the world's biggest local phone network from its Tokyo control center. And the postal ministry hasn't yet let NTT compensate for its lost long-distance revenue by raising the price of local phone service, which is among the cheapest in the world (charts).

So NTT's profits are falling. Its market value--once $350 billion, greater than that of IBM, General Motors, General Electric, AT&T, and Exxon combined--has tumbled more than 80% from its peak in 1987. Says Kojima: "If this were an ordinary company, I'd have been forced to resign by now." He's still in office, Kojima says, because people understand that his hands are tied. "There are constraints," he says. "I don't have 100% responsibility."

`SACRED SPACE.' Indeed, no one does. While Westerners often marvel at the close cooperation between government and industry in Japan, NTT's case is a counterexample. Authority over the phone giant is vaguely defined, and when strong interests clash, policy gridlock results. "Too many decisions are hashed out behind closed doors by special advisory panels to the postal ministry," charges Tsuruhiko Nambu, economics professor and telecommunications expert at Gakushuin University in Tokyo.

From the start, NTT's passage into the private sector has been wrenching. Since the postal ministry began allowing competition in 1985, more than 1,000 telecom companies have opened shop. That includes three aggressive newcomers in the key long-distance market. By running bare-bones networks, they've been able to lure away NTT customers with discounts. NTT has responded with five rate cuts but can't stop the defections. In the last fiscal year, 54% of the intercity traffic between Tokyo, Nagoya, and Osaka went to the newcomers. Combined, the three startups will post $4 billion in sales this year while showing pretax profits of $358 million. As for NTT, its operating income this year should be just $3.4 billion on a flat $50 billion in revenue--exactly half the profit of 1987 in steady U.S. dollars.

Kojima is itching to get NTT moving, but many of his initiatives have been stymied. And by clinging to the idea that Japan needs an omnipotent NTT, Kojima is swimming against a worldwide tide toward competitive telecommunications. Echoing the warnings of AT&T's leaders before the Bell System breakup, Kojima says weakening NTT would cripple what he calls the company's "sacred space"--its world-class research and development laboratories. Moreover, he asserts that the quality of Japan's phone network would decline, even though advocates of the breakup contend that competition produced overall improvements in the U.S. and Britain. Casting around for role models, Kojima lights on Norway--a country with 1/30th of Japan's population--simply because Norwegian Telecom is a well-run monopoly.

With NTT's long-term fate still to be determined by the postal ministry, for now Kojima is focusing on things that are under his control. Since becoming president in 1990, he has continued to cut jobs, which are down by 66,000 since 1985, to 248,000. NTT has had to pay premium retirement packages to make those cuts, and analysts say the head count is still too high. But NTT's powerful union won't swallow faster cuts.

GETTING TOUGH. Still, NTT must keep improving the Japanese network. It plans to spend $75 billion over the next four years to finish converting its network to digital switches, and it has an even grander scheme to spread optical fiber to every home by the year 2015. To help finance it, NTT wants to collect higher license fees from manufacturers depending on its patents. The burden will fall on its "family" of equipment suppliers--NEC, Hitachi, Fujitsu, and Oki Electric Industry--who until now have paid practically nothing for work from NTT's world-class laboratories. And last month, NTT began the international expansion that Kojima has long wanted. In its first big foray outside Japan, the company signed a memo of understanding with Thai Telephone & Telecom Co. to co-design and build 1 million local telephone circuits throughout Thailand.

Kojima is also stepping up marketing. Last month, when rival Japan Telecom Co. kicked off long-distance service in Tottori Prefecture west of Tokyo, scores of NTT employees showed up at the main train station carrying placards and distributing leaflets claiming there was little difference with NTT's rates. Competitors also say that some NTT network managers tip off their sales staff when a customer is switching to another long-distance carrier so the salespeople can try to talk them out of leaving.

The new aggressiveness has incensed NTT's competitors. Tadashi Kagawa, president of Tu-Ka Cellular Tokyo Inc., laughs off NTT's warning that the "ants," such as his company, are starting to threaten the elephant. "O. K.," he says, "we're stronger. So now maybe it's the elephant against the rats."

The single most important thing that NTT could accomplish now, however, remains persuading the postal ministry to grant it higher rates for local phone service, the sector in which it claims to lose money. The ministry says NTT hasn't proved its case. In a sign of compromise, next April NTT will begin breaking out data on income from local services. A year later, Japan will probably implement an American-style access-charge system, where all long-distance operations--including NTT's own--will pay for usage of NTT's monopoly local-phone network. Sometime before that, a rate increase for NTT is likely.

The trouble with this scenario, say Japanese telecommunications experts: It's too vague and open-ended for business people to base their plans on. "NTT managers want to create an efficient company," says Andrew Harrington, a specialist in Asian telecommunications with Salomon Brothers Inc. in Hong Kong. "But how can they, when no one knows what regulations they'll face in six months, or in a year?"

STOCK PICKLE. The hazy regulatory picture hasn't helped with investors, either. The 80% plunge in NTT shares from their peak in 1987 outstrips the 50% plunge in the Nikkei 225-stock average since its 1989 peak. Some 1.7 million private investors got clobbered in NTT's stock collapse. Sanae Yanai, a graphics designer in Tokyo whose $18,000 investment has lost half its value, compares NTT shares to tsukemono, a type of Japanese pickle. "You throw vegetables in a jar with a lot of salt, then stash them away for a long time. Maybe the shares will be worth something to my grandchildren."

Kojima doesn't want people comparing NTT to a jar of pickles. But his ideas for enlivening NTT seem thwarted. To escape, he retreats each summer to a cabin deep in the mountains of Hokkaido. "I don't read the papers, I don't watch TV, and I don't see any people," he says. As long as NTT and its regulators are at loggerheads, it's hard to see a way out for Kojima. Unless maybe Jack Ryan has a rescue plan.

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