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The Role of Technology Change in NEC’s Growth

The Role of Technology Change in NEC’s Growth. J. Travis Brooks New York University February 19, 2003. Discussion Topics. Background to NEC Corporation Historical IT Perspective: Technology Innovation The Era of Consolidation: Back to Basics Strategic Challenges to NEC

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The Role of Technology Change in NEC’s Growth

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  1. The Role of Technology Change in NEC’s Growth J. Travis Brooks New York University February 19, 2003

  2. Discussion Topics • Background to NEC Corporation • Historical IT Perspective: Technology Innovation • The Era of Consolidation: Back to Basics • Strategic Challenges to NEC • March 18th Visit to Japan

  3. Background on NEC Corporation

  4. Structure: “In-House Companies” Hajime Sasaki Board of Directors Chairman Employees: 141,000 (March 31, 2002) Koji Nishigaki President Separation 11/02 IPO Following Resulting in approx.70% ownership Staff Groups NEC Networks Kaoru Yano President NEC Solutions Akinobu Kanasugi President NEC Electronic Devices Kaoru Tosaka President • Communications • System LSIs • Computers & Software

  5. Major Products and Services (1)

  6. Major Products and Services (2)

  7. Major Products and Services (3)

  8. Net Sales

  9. Current Sales Forecast ( ): Y-over-Y Growth

  10. EBIT

  11. Sales/Net Income in Dollar Terms

  12. Current P/L Forecast

  13. Overseas Sales

  14. NEC in the USA NEC Corporation Tokyo, Japan NEC Electronics Santa Clara, CA Semiconductors NEC USA New York, NY Holding Company HSNX Supercomputers NEC America * Irving, TX Telecommunications NEC Solutions America Sacramento, CA Systems Integration Software NEC FiberOptech NEC Financial Services, Inc. Teaneck, NJ Finance & Leasing NEC Capital New York, NY Finance NEC Laboratories America Princeton, NJ (Nov. 1, 2002) NEC Foundation Ｎｉｔｅｏ Newton, MA * Includes 4 subsidiaries: • NEC Business Network Solutions • NEC Eluminant Technologies • NMI • North Coast Logic DCM Solutions Irving, TX Systems Integration

  15. Historical IT Perspective: Technology Innovation

  16. Development History First Japanese joint venture with foreign capital, Western Electric 1924: Radio ops established 1932: Ally with Sumitomo zaibatsu 1939: R&D lab established 1950: R&D of transistors initiated after Bell Labs’ 1947 introduction 1954: R&D of computers begins 1956: R&D of electronic switching systems (ESSs) 1958: Jack Kilby of TI, “Solid Circuit”; Robert Noyce in 1961 1963: NEC America opens 1965: NEAC-Series 2200 mainframes; 1974 ACOS 1966: Satcom earth stations to India 1975: Central Research Lab established; 1978 Dallas Plant 1983: SX-1/2 supercomputers 1988: NEC Research Institute 1990: 4Mbit DRAM, 1996 256Mbit SDRAM 1998: SX-5 fastest; 20-millionth PC sold in Japan 2000: In-house company structure adopted

  17. Explaining Moore’s Law NEC patents from: Communications =ISE (1950); ITT (1951); Western Electric (1951) TV:RCA, EMI, Philips (1953-1957) ICs: GE (1958); RCA (1958); Fairchild (1961) 1947 Innovation of transistor, birth of the semiconductor 1959 Invention of the Planar integrated circuit and manufacturing process Semiconductor circuit densities double at regular, exponential rates: 1965: Moore’s Plot (annual) 1975: Moore’s Law (18 months) (Circuits per chip) = 2(year-1975)/1.5 Has held true for DRAMs and microprocessors Expectations feedback loop Physics and chemistry Market forces e.g., Wintel User communities, distinct (software developers) and indirect (consumers) Semiconductor Industry 1950s-present

  18. O SI G R OU P I G R OU P II G R OU P S II I- IV L a y e r K ey RB O C s , T e c h no l ogy I X Cs I L EC s E nt e r p r is e CL E Cs Gi ga b i t/ Te ra bit S w it c h / R ou t e r L a y e r 3 I P M u l t i - se rv ice A D ( I P /A T M/F - R/ x D SL ) I P / A T M - P B X A TM S wi tc h Vo I P G a t ewa y ( I P/ A T M M P L S) ( I P/P ST N ) L a y e r 2 A T M I nt eg r a t ed A D ( I P /A T M/F - R/ x D SL /P BX ) N G ( Op t i ca l ) -D LC L a y e r 1 S ONET ( F TTx, x D SL ) S O N E T T D M D XC O p t i c al S wi t c h ( OXC , O AD M ) O pti c a l DWD M S u b- l a y e r L o ng - h au l DW D M Me t r o D W D M Products/Technology/Customer Matrix: Communications

  19. PSTN Backbone IP Backbone Packet/Cell MUXing in Broadband (IP) Access Network Access Network Conventional CPE Circuit Multiplexing Circuit Multiplexing Service Node (Class5 SW) CPE CPE CPE Packet/Cell Multiplexing is also included in Access Network IP Access CPE Circuit Multiplexing Packet/Cell Multiplexing Service Node (Router) CPE CPE CPE Definition of Edge Node Circuit Multiplexing Portion Packet/Cell Multiplexing Portion Example • Authentication • Supply IP address • Accounting • Routing Modem/ ISDN ATU-R (ADSL) DSLAM Cable Modem HE PON OLT Source: Photonic IP, 4.2 High-speed IP Access

  20. Optical Advances Home

  21. T-bitRouter T-bitRouter T-bitRouter Photonic Router OADM WDM OXC OXC PhotonicRouter SuperRouter T-bitRouter T-bitRouter SuperRouter SuperRouter T-bitRouter OADM OADM OADM OADM OADM OADM OADM OADM OADM MMNode MLSW MLSW MLSW OADM OADM OADM NEC J’s Network Architecture Corporate Providing Consuming Voice over IP Network Service PBX H323GW The Internet ApplicationService VPN Service IXP Authentication Service Video over IP WWW Service Photonic Router Photonic Router Home Photonic Router Video Service WDM QoS Service APL Photonic Router Best Effort Service Layer4 Layer4 QoS Service Best Effort Service Layer3 Layer3 Layer3 Layer3 APL L4 WWW Layer2 Layer2 Layer2 Layer2 L3 L4 L3 PHY PHY L3 PHY PHY L2 PHY L3 L2 PHY L2 Service Provider PHY Access EdgeNode Backbone L2 PHY PHY PHY EdgeNode Access InformationConsumer

  22. Vision of the Evolution of the Physical Layer Future Now IP Router IP Router 3rd Layer Fast Frame Relay SW ATMNE 2nd Layer ATMNE 1st Layer SDH/SONET LTE SDH frame Photonic Layer PhotonicRouter Photonic NE : WDM, OADM, OXC

  23. NEC and Emerging Wireless Value Chain

  24. Metcalf’s Law • Robert Metcalf's law states that the "value" or "power" of a network increases in proportion to the square of the number of nodes on the network. • In other words, if you have four nodes, or computers, on a network, say, an office intranet, its "value" would be four squared (4^2), or 16. • If you added on addition node, or PC, then the value would increase to 25 (5^2). • Holds for LANs and WANs (metro, the Internet) • One consequence of the network effect is that once a product is established in the market, demand for similar but incompatible products collapses. • Advantage of earlier drivers who come to dominate: Microsoft; Dell; Intel; Amazon; eBay. • A feedback phenomenon that says whenever it is in people's best interests to be where everyone else is, then that's where they'll be.

  25. Evolution of the Internet

  26. C&C Perspective-1977

  27. The Era of Consolidation: Back to Basics

  28. Worldwide Semiconductor Demand HISTORICAL SEMICONDUCTOR SALES AND Y/Y GROWTH (3-month Average)

  29. NOMINAL PDE INVESTMENT-COMPUTERS & PERIPHERALS (Y/Y) U.S. Computer Hardware (1)

  30. IMPLICIT PDE DEFLATOR – COMPUTER (Y/Y) U.S. Computer Hardware (2)

  31. NOMINAL COMMUNICATIONS EQUIPMENT INVESTMENT (Y/Y) Networking Equipment

  32. ENTERPRISE EQUIPMENT SALES vs. UNEMPLOYMENT RATE 1Q98-3Q02 Networking Equipment Driver

  33. PPI COMMUNICATIONS EQUIPMENT (Y/Y) Networking Equipment Pricing

  34. NEW ORDERS TELECOMMUNICATIONS EQUIPMENT (Y/Y) Telecommunications Equipment

  35. RBOC Capex and Capex to Sales

  36. Factors Leading to the Tech Bubble • The Telecom Act of 1996 • The Buildout of the Internet • The Buildout of Digital Wireless Networks • Rebuilding of U.S. Cable Networks

  37. EMPLOYMENT Y/Y – COMPUTER & DATA PROCESSING SERVICES IT Consulting and Services

  38. Best Technology vs. Basic Business • From 1993-2000, high R&D-to-sales ratios played best for companies with the fastest and latest equipment and strong revenue growth. • Now, operational factors more competitive: • Good cash management • Strong customer relationships • Control over both the supply and distribution sides of their businesses • Evolutionary, not revolutionary technology • Consolidation seemingly inevitable • Slower but more sustainable rate of technological development, more rational use of capital • Fewer players means more benign pricing pressures, allowing for improved gross margins and profitability

  39. Strategic Challenges to NEC

  40. Issues Areas Being Addressed by NEC • Creating a globally competitive corporate culture with new management skill sets • Ensuring strategy formulation and execution; marketing; financial • Should NEC remain in semiconductor, computers, and communications businesses • How best to survive and grow in consolidating IT sectors, particularly by integrating IT and network businesses • Aligning capital and costs structures to current and likely future market conditions; cash management • Identify/define core competencies needed in today’s high-tech markets • Institutionalizing strong corporate governance

  41. Upcoming Visit to NEC March 18 (Mon) • at NEC Head Office • 9:00-9:05 Opening Remark (Dr. H. Kaneko) • 9:05-10:15 Presentation (S. Suzuki SVP) • 10:15-10:30 Q&A • at NEC Saitama • 14:00-14:30 Outline of NEC Saitama • 14:30-15:30 Plant Tour, Q&A

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