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 Analysis of Fujitsu's Fiscal Year 1999 Results

Another "Red Ink" Year

Fujitsu Leaders Promise Recovery and Quick Fixes, Deliver Losses

MOSCOW, Sept. 21 - Everybody knows that Fujitsu likes red. The red color, that is. It's the imperial color, after all, in much of the world. And also the color of the company's logo.

But now some Fujitsu shareholders may be seeing red. For, not all aspects of color red are flattering. For the third time in the 1990s, Fujitsu wrote its annual report's bottom line using its favorite color. And when it comes to financial statements, "red ink" bottom lines tend to cause alarm among investors and customers.

In the fiscal year 1999 (which ended Mar. 31), the company's net loss was $126 million on revenues of $48.5 billion. In fiscal years 1993 and 1994, Fujitsu also lost money, $308 million and $384 million respectively. And even last year, the top Japanese computer company's financial performance was unimpressive. Net earnings were just above the break-even point (net of $36 million on revenues of $34.8 billion, a net margin of only 0.1%.

Of course, even seeing red is a relative thing. By comparison to another Japanese company whose favorite color is also red - Hitachi Ltd., which lost $2.8 billion in its 1999 fiscal year - Fujitsu's loss may seem like great news to its shareholders.

Maybe that's you why you don't get a sense of doom, and thus the urgency to change radically, if you read the Fujitsu FY99 Annual Report. Its shareholders are supposed to believe that it was just another year of bad luck. And that the savvy executives will immediately right the listing ship and correct all the old mistakes.

But what if they weren't mistakes? What if the Japanese computer giants are led by yesteryear executives with industrial mindsets who can't see the forest for the trees? And who instead thus keep hoping that "management execution" will make it all better next year.












But what if that's but a pipe dream? What if there is something structurally wrong with Japanese industrial giants, just as that is the case, albeit to a lesser extent, with some of their Fortune/Forbes 500 counterparts?

After all is said and done in Fujitsu's case, the company which sold $309 billion-worth of goods and services during the decade of the 1990s, returned $1.35 billion in net earnings to its shareholders. That's a net margin of only 0.4%! Even some Japanese or Russian banks did better than that.

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Hitachi's results during the same period are, of course, much worse than Fujitsu's. And in both cases, we are talking about top Japanese computer companies, not just some "ma and pa" outfits.

"Trouble for Japanese"

So what's wrong with the Japanese industrial giants? Nothing. Except perhaps that the IT world has changed and they haven't. At least not sufficiently or fast enough to be able to prosper in the "new brave world" of the 21st century.

As for the 1990s, everything is happening exactly according to the forecast we outlined 9 years ago, in a March 1990 Annex Bulletin which described the "industry stratification" trend which we said was about to unfold during the 1990s decade (see 90-13, 3/30/90). One of the points it made was that the new IT world of integrated solutions and services will spell trouble for Japanese hardware vendors.

Which, by the way, the leaders of some of these Japanese companies - our clients, also had a chance to read. And some to hear in person, too, in some of our executive workshops. As they say, however, you can lead a horse to water, but you can't make him drink.

Unfortunately, we've seen it all before. In the 1980s, for example, we similarly warned our computer leasing clients of an impending doom for their businesses unless they changed quickly and transformed themselves into software and financial services operations. Most didn't. Most don't exist anymore. Oh, well…

image9.gif (4852 bytes) But back to that Japanese horse… One reason the Japanese companies were slow to change was that they tended to follow, rather than lead, the IT industry. In the PCM (plug compatible manufacturers) game of the 1970s and the 1980s, that was actually an advantage for them. All they needed to do was wait for the then industry leader (IBM) to come out with some new techno-gizmo, match it by offering either better or cheaper products, and then run to the bank to cash the checks.

Well, when the industry leader stumbled and nearly fell off the cliff itself in the early 1990s, the Japanese competitors, like lemmings, followed the Big Blue in its footsteps. It is no coincidence, for example, that Fujitsu suffered its worst losses in 1993 and 1994, about a year after IBM experienced the same (in 1992 and 1993).

FY'99 Results

As for Fujitsu's latest results, there were some bright spots amid the gloom and doom of losses in its semiconductor business, and erosion of its telecommunications' revenues. One of them was the growth of Amdahl Corp., which boosted Fujitsu's global server results (see Annex Bulletin 99-07, 2/22/99).

Another positive factor was strong sales of PCs on the Old Continent, which helped push up Fujitsu's total European revenues by 28% in yen, (by 72% in U.S. dollars.)

But a decline of Fujitsu's overall sales in the Japanese market, which still accounts for about 60% of the company's global business, dragged down the total worldwide results.

Trying to emphasize its new focus on services and software, Fujitsu also broke out for the first time in FY99 Annual Report the software and services from the rest of its IT operations. Revenues from this business activity increased by 17% in yen, and 55% in U.S. dollars to $18.8 billion.

The IT systems revenue (mostly hardware), on the other hand, was up by 7% (42% in U.S. dollars), with overseas sales surging by 30% , while the domestic volumes dropped by 5% (both in yen).

But one consequence of Fujitsu's business repositioning has been pressure on gross margins. Just as was the case with IBM, when the Big Blue decided to switch its focus from manufacturing to services, Fujitsu also experienced a big erosion in gross margins. They have plummeted from 35% in FY95 to 28% in the latest fiscal period.

Unlike IBM, however, which responded to such pressures by slashing expenses and laying off more than 180,000 employees, Fujitsu has continued to increase both its SG&A (selling, general and administrative) and R&D (research and development) expenses, and to grow its employment.

As of the FY99 year end (Mar. 31), the company had about 188,000 on its payroll, up about 8,000 from the year before. And its R&D spending has risen by 2%, although it did drop in terms of its share of revenue - from 7.8% in FY98, to 7.5% in FY99.

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But there is one thing which Fujitsu and IBM have in common in their respective struggles to redefine themselves for the new IT world of the 21st century. Slow growth, coupled by faster increases in their respective payrolls, have led to declines in sales productivity. IBM's has dropped from a peak of $337,000 per capita in 1996, to $281,000 last year. Fujitsu's has declined from a peak of $233,000 in FY95, to $258,000 in the latest period. Preceding statistics suggest that both IT dinosaurs are converging in a context of mediocrity.

Happy bargain hunting!

Bob Djurdjevic

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Volume XV, No. 99-31
September 21, 1999

Editor: Bob Djurdjevic
Published by Annex Research;

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