Gaijin on a Mission at Japan Telecom

Can William Morrow get Japan's No. 3 phone company ringing again?

It's a gloomy Friday morning in mid-June, but William Morrow is firing up his troops. Facing 300 middle managers in a Tokyo conference hall, the new chief executive of Japan Telecom Co. stresses that the company's fixed- line phone business is bleeding--and trots out charts and diagrams showing what everyone needs to do to turn it around.

For Morrow, it's an important moment, because earlier meetings with top lieutenants just didn't get the message across. "They weren't in crisis mode," he said later. So this time around, Morrow is taking a decidedly un-Japanese approach: He's going directly to the business-unit managers who will be implementing the changes. It works. "Thanks to Morrow, everyone understands that they have to make an effort," says Koichi Sakata, Japan Telecom's first CEO and now a senior adviser. "The future is starting to look a bit brighter."

A lot is riding on Morrow--and not just the future of Japan Telecom. Since last October, British cellular giant Vodafone Group PLC has owned 67% of the company, Japan's No. 3 carrier. Morrow's boss, Vodafone CEO Chris Gent, is under scrutiny for the vast sums he spent on acquisitions--including an estimated $11.5 billion for the Japan Telecom stake. Lured by Japan's booming mobile Internet market, Gent wanted control of Japan Telecom's fast-growing cellular service, J-Phone.

That was when Japan Telecom looked profitable. Even a gambler such as Gent might have balked had he realized the extent of the company's problems. After an unsuccessful effort to woo new local subscribers last year, Japan Telecom surprised analysts with a net loss of $550 million on sales of $14 billion for the fiscal year ended in March, vs. profits of $150 million and revenues of $12.2 billion the year before.

Morrow is the newest member of a small but growing club of foreign execs shaking up Japan's staid corporate landscape. Among the first was Mark Fields, who in three years restored Mazda Motor, the carmaker controlled by Ford, to profitability. Rolf Eckrodt is fixing Mitsubishi Motors for DaimlerChrysler. And no one has done more to boost the image of the foreign hired gun than Nissan Motor President Carlos Ghosn, who has revived the auto maker for Renault. "Ghosn is a model for us all," says Morrow. "He has done a great job."

But there's no guarantee Morrow can replicate Ghosn's success. Unlike the export-oriented auto industry, telecom is a purely domestic service business where a foreign manager needs to be more in tune with the local market. And the carmakers don't have to deal with Nippon Telegraph & Telephone Corp., the former state monopoly that still controls 85% of the local fixed-line business and serves 58% of Japan's wireless subscribers.

Morrow isn't running scared. Soon after his appointment last Dec. 21, he slashed the number of department heads and directors to 73, from 115, trimmed the board to 11 members from 23, and offered early retirement, which 8% of the company's 3,200 workers have accepted. He's reorganizing the fixed-line operations into three units--corporate, consumer, and international--and has hired managers with international experience to run them. Now, Morrow plans to sell money-losing, oddball ventures, such as a travel agency that the company stumbled into during a growth spurt a decade ago.

All that work is paying off. Japan Telecom expects to boost net profits this year to $400 million, on revenues of nearly $15 billion. But virtually all the profits will come from J-Phone, which represents 70% of Japan Telecom's sales. The fixed-line operations will be lucky to break even, says Merrill Lynch & Co. analyst Yasumasa Goda.

One question hanging over Japan Telecom is what Vodafone ultimately wants to do with it. Morrow acknowledges that he has had discussions about selling off the fixed-line business so Vodafone can concentrate on what it does best: cellular. "But right now," he says, "we're willing to stay in Japan Telecom and make money."

The fixed-line operation is the heart of Japan Telecom. Founded in 1986 by the Japanese National Railways, it was the first independent carrier to jump into the fray following deregulation of Japan's long-distance market. In 1989, it started offering international service, and by 1992, it had built a nationwide fiber-optic network for corporate data services. Two years later, Japan Telecom launched J-Phone. Today, Japan Telecom owns 45% of J-Phone, with Vodafone holding 40% directly.

Like Nissan's Ghosn, Morrow is shaking things up. He sends regular e-mails to staffers and invites junior employees to attend "Speak Your Mind" sessions, where they can query the CEO on the company's strategy. "We've never had this kind of communication before with our senior managers," says Kotaro Tanaka, 34, a sales manager who attended one of the sessions.

Also like Ghosn, Morrow is establishing a reputation as a cost-cutter. Already, he has saved nearly $70 million by renegotiating contracts and curbing marketing expenses. He cut capital investment in the fixed-line business by nearly 20%. And J-Phone has seen its investment budget cut by $400 million, to $2.5 billion in 2002. Not everyone backs such dramatic measures. "Morrow has imposed such drastic cuts in capital spending that he could be jeopardizing future growth," cautions Shinji Moriyuki, a telecom analyst with the Daiwa Research Institute.

Outside the company, Morrow keeps a low profile. But his 80-hour weeks show a dedication that has impressed Japanese peers. "He's one of the few gaijin [foreigners] here that I respect," says Seiji Sanda, founder of Japan Communications Inc., a mobile data network provider. "He's deliberate and thoughtful and not a hip-shooter."

In fact, Morrow is more of a trouble-shooter. As a high school student in California, he earned pocket money by repairing kitchen appliances for neighbors. After graduating with a business degree from National University in San Diego, he started working as an engineer for Pacific Bell. In 1994, he took over the company's troubled data network unit. "We had service problems and growth pains that were almost beyond repair," recalls Morrow, 43. He assembled a crack team and turned the operation around in just four months. Then in 1998, as an executive of the wireless operator AirTouch Communications Inc.--a Pacific Bell spin-off--he was dispatched to Belgium for two years, where he helped fix the local affiliate, Belgacom Mobile's Proximus.

That brought Morrow to the attention of managers at Vodafone, which acquired AirTouch in 1999. Former Japan Telecom CEO Sakata says Gent had originally planned to appoint a Japanese national as president. But Gent quickly shifted gears and settled on Morrow. "I don't think a Japanese executive could accomplish as much as Morrow has," Sakata says. In insular Japan, that's strong praise. Maybe this mission is not so impossible after all.

By Irene M. Kunii in Tokyo

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