The Elusive Synergy: NEC's Success amidst Industry Downfall

Strategic Insights -

As the 1980s came to a close, many telecommunications-equipment and computer firms attempted to capitalize on the convergence of technologies by expanding into one another's markets. However, this strategy proved elusive for most, and by the mid-1990s, many had abandoned their forays into the other's domain. Japan's NEC Corp. stands out as a rare exception, having successfully combined its computer and telecommunications equipment businesses over nearly two decades. Under the leadership of Tadahiro Sekimoto, NEC's chairman, the company has achieved a close kinship between its computer and equipment businesses, but closer examination reveals that NEC's growth is largely driven by its semiconductor division, which has benefited from a global shortage of memory chips. Meanwhile, NEC's computer and telecommunications equipment businesses remain heavily dependent on the uncertain domestic market in Japan.

Key Takeaways:

  • NEC is the only firm to rank in the world's top five in both telecommunications equipment and computers, as well as in semiconductors.
  • The company's Tadahiro Sekimoto attributes its success to developing a close kinship between its computer and equipment businesses over many years.
  • However, NEC's growth is largely driven by its semiconductor division, which has benefited from a global shortage of memory chips.
  • The company's computer and telecommunications equipment businesses remain heavily dependent on the uncertain domestic market in Japan.
  • NEC's vertically integrated product divisions often worked in isolation from each other, limiting real synergy between the two businesses.
  • The company's restructure in 1991 into three horizontal groups aimed to encourage more internal collaboration, but may have also dulled growth.
  • NEC's shares have lagged the Japanese stock market by 28% over the past 10 years, compared to outperformance by Intel and Compaq.
  • The company's reliance on conglomeration has left it vulernable to fluctuations in the market, with domestic sales and Nippon Telegraph and Telephone Corp. ties no longer providing the same level of revenue.

Statistics:

  • NEC's semiconductor division has seen revenue grow significantly, with the company reporting a nearly 200% increase in 1994 compared to the previous year.
  • The global shortage of memory chips has created a sellers' market, with nearly every chip maker posting record results.
  • NEC's computer revenues were flat in 1994, a year that saw a significant increase in sales of affordable PC's in Japan.
  • The company's computer business has struggled to compete with Western firms introducing cheap IBM-compatible computers to the Japanese market.
  • NEC's telecommunications equipment business, heavily reliant on its ties with Japan's Nippon Telegraph and Telephone Corp., faces increased competition and declining prices.
  • The company's shares have underperformed the Dow Jones average by 28% over the past 10 years.

Sources:

  • The Economist
  • NEC
  • Bloomberg Financial Services