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Analysis of Fujitsu FY04 Business Results

Back in the Black Again, But…

Shrunk by the Marketplace and More Japan-centric Than 10, 20 Years Ago

PHOENIX, July 26 – After two years of horrendous losses that wiped out cumulative profits from the last 15 years, and topped them off with $1 billion in “red ink,” Fujitsu returned to black in its fiscal year 2004 (ended March 31).  The leading Japanese computer vendor earned $396 million on revenues of $43.3 billion, up 12% (in U.S. dollars; up 3% in Yen).

Investors nodded in approval.  Fujitsu shares are up about 40% since a year ago.  They are up about 17% since the start of 2004 (see the chart).

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But success is a relative thing.  After all was said and done in its first growth year since 2001, the Japanese company’s latest turnaround attempt still leaves it smaller than it was in 1998.  If that sounds familiar, it is.  In April 2003, we noted the same was the case with Fujitsu’s chief rival – IBM.

Sam Palmisano’s Big Blue of 2002 was about the same size as Gerstner’s IBM was five years ago ($81.3 billion in revenues). 

(see “Shrunk by the Marketplace,” Apr 2002). 

Following IBM into its missteps as well as successes, but always a few steps behind, has been one of several consistent patterns in Fujitsu’s recent corporate history.  Appearing to lead Japan’s charge on foreign markets, especially the U.S., is another…

In the early 1980s, America fretted and feared an invasion from Japan.  Not a military one.  The U.S. computer industry was thought to be the next target of aggressive business leaders from the “Land of the Rising Sun.”  Japanese companies had just executed successful campaigns against the American auto and electronics manufacturers.  

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As a result, they were being both vilified and admired in America.  Most of all, however, they were feared (see “Japan Bashing,” May 1983).  They needn’t have been.  Here’s what we said about it three years ago:

Anybody still remember quality circles, consensus management, lifetime employment, fifth generation computers…?  They were the hallmarks of the daunting “industrial miracle” that the Land of the Rising Sun once represented.


The feared Japanese takeover of the American business became such an obsession in the early 1980s, that certain U.S. congressmen unabashedly bashed Japanese products on the Capitol steps with hammers, symbolizing the Japan-bashing climate that pervaded the American psyche at the time.

Today (2001), admiration and fear of the former Japanese industry titans has been replaced in America with pity and indifference.  And for good reason…  Those who ride the crest of one economic wave are the first to crash when the next one comes along.

(“From Piety to Pity,” Aug 2001)

What is the reason the Japanese companies’ failed to conquer America’s IT market?  With the advent of services and the Internet, the ground shifted and the game changed away from hardware manufacturing – the Japanese strength.  Set in their ways and slow to change, the Japanese weren’t able to keep up and adapt, just as we predicted over 14 years ago (see “Trouble for Japanese?” -  “Industry Stratification,” Mar 1990).

“Can the Ethiopian change his skin, or the leopard his spots?” (Book of Jeremiah).  The answer, of course, is no.  That is true not only of biblical Ethiopians or leopards but also of some modern-day IT enterprises.

The more Fujitsu tries to become a global contender – and it has been trying that very hard in the last two decades - the more it looks like a Japan-centric company…

Two decades ago, Japan’s share of Fujitsu’s worldwide revenues was 72.5%.  Ten years ago, it was 70.5%.  Now, Japan’s share is 75.6% (fiscal year 2004).  “It will not be enough to just (focus) on Japan; we will also have to make our presence known abroad,” said Akira Yamanaka, corporate vice president in charge of servers, speaking at a July 22 briefing in Tokyo.

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Halleluiah!  How many times have we heard pontifications like that from the various Fujitsu executives over the last two decades?  In fact, one can even go back one more decade (to 1974 when Fujitsu invested in Amdahl Corp.), to trace this Japanese company’s global ambitions.  That’s when Fujitsu acquired a minority position in Amdahl, an American “plug-compatible manufacturer” (PCM) that became IBM mainframe’s main bane in the next two decades.

Fujitsu also established a “beachhead” in Australia in the 1970s, an English-speaking market from which the company intended to launch its “invasion” of America.

It never happened.  Technologies have come and gone; leaders have come and gone; profits and losses have come and gone… Yet, Fujitsu has remained stuck in the 70% to 76% range (Japan’s share of global business – see the charts).  Worse, overseas markets continue to be the sore spots in Fujitsu’s financial results.

Business Segments

Geographic Segments… Take the Americas, for example.  The world’s biggest and richest IT market not only accounts for a miniscule (5%) share of Fujitsu’s revenues; it has been losing money for the last four years.  In the latest fiscal year, for example, this geography lost $120 million on revenues of $2.3 billion.  As for Amdahl, Fujitsu’s erstwhile pride and joy in America, it has disappeared in the bowels of the Japanese giant (see “Amdahl Boosts Fujitsu,” Feb 1998, and “Amdahl Plans to Stop Making Mainframes,” Oct 2000).

Nor are Fujitsu’s European operations faring much better.  In 2004, they earned only $61 million in operating income on revenues of about $5 billion (11% of worldwide total).  The year before, the operating profit was even smaller ($31 million).  But that was still better than the two years of losses that had preceded it.

Fujitsu’s acquisition of ICL in 1990, a British IT company that had been a formidable competitor to IBM in the 1970s and 1980s, was another example of its global aggressiveness.  Like Amdahl, however, ICL disappeared in the bowels of the Japanese parent. 

By late 2003, Fujitsu’s British operations were hanging by their threads.  Then came a stroke of good luck… its partnership with Capgemini in the Inland Revenue deal (see “Biggest Feather in Cap’s Cap,” Dec 2003).  Although Fujitsu got only one-third of the $5.2 billion “megadeal,” and the least profitable part at that (infrastructure management), the company was more than happy.  “Beggars can’t be choosers,” as an old saw goes.

“(The Inland contract) saved the company,” one insider told us afterward.

Software and Services… Managing the change from hardware toText Box:  software and services has been one of the recent successes for Fujitsu.  In fiscal 2002, for example, this business segment’s revenues exceeded those of the hardware for the first time in history.  And in 2004, software and services grew by 12% (up 3% in yen), the same as the company’s overall growth.

But once again, even in this relative success story, Fujitsu was following in IBM footsteps.  It was IBM, a “gaijin” (foreigner) in Japan, that blazed the trail to the new world of services in a culture that had staunchly rejected paying for such “intangibles” in the past.

When this writer visited Japan in late 1993, IBM’s march toward services was already under way, though still in its early stages.  So his recommendation for the Japanese companies to follow suit, made during a seminar in Tokyo, fell on deaf ears.  The excuse offered was that the Japanese customers would supposedly never agree to pay for something they have been getting for free (services were included in the price of hardware).

Well, 11 years later, IBM Global Services (IGS) is thriving in Japan.  Its Asia/Pacific revenues, of which Japan is by far the biggest part, have been growing in double-digits – faster than in any other part of the world.  And Fujitsu is once again having to play catch up to IBM, this time in its domestic market. 

Such is the fate of a follower… “The scenery only changes for the lead dog,” as another old saying goes.

Furthermore, Fujitsu’s Japan-centric nature is evident even in its services and software business, a $19 billion-unit.  Although now the third largest such operation in the world (after IBM and EDS), Fujitsu’s non-Japanese revenues are only $4.7 billion or less than one-quarter of the total (see the charts).  And its international portion actually declined 1% last year (in Yen), while the Japanese services and software business grew by 5% (also in Yen).

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Meanwhile, Fujitsu’s solutions/systems integration versus infrastructure services’ (outsourcing) revenue shares are pretty close (46% and 54% respectively).

Perhaps the most positive aspect of the services and software unit is that its operating margin is by far the highest among the Fujitsu business segments.  At 6.6% of revenue, it towers over that of hardware (1.8% - the “platforms” in Fujitsu’s nomenclature), and of electronic devices (3.8%).  But it also serves to underline how much less profitable even the “best of breed” Japanese companies are in comparison to their U.S. counterparts.

Fujitsu’s 6.6% operating margin includes software.  IBM’s does not.  Software is IBM’s most profitable unit.  It generates gross margins in the 86% range, and pretax margins around 24%.  Yet even without software, IBM Global Services’ operating margin, estimated at 10.9% in 2003, by far exceeds Fujitsu’s 6.6% margin that includes software.  Such is the difference between a leader and a follower…

Platforms… Fujitsu’s platforms unit (hardware) haText Box:  
s undergone the most radical changes in the last three years of the company’s “restructuring” efforts.  They emerged smaller but profitable once again. 

In 2002, the platforms lost $433 million at the operating level on revenues of $15.2 billion.  In 2004, they had a $266 million operating profit on revenues of $14.6 billion.  Clearly, the revenue contraction was not as severe as was the profitability improvement.  So add one more feather to the company’s management cap.

Within its hardware segment, however, the servers’ revenues, which include the once mighty mainframes, continued to shrink (down 4.5% in 2004 in Yen).  The executives who spoke at the company’s July 22 briefing in Tokyo said they would reverse that trend.


Chiaki Ito, executive vice president, said he expected an 8% revenue growth for the servers in the current fiscal year, and a 9.5% revenue growth for the platforms as a whole.  More importantly for the Fujitsu shareholders, Ito said he expected the operating margins to rise from 1.6% to 2.3%.  Still not much to write home about, of course, but better than the read ink the Fujitsu hardware had been bleeding in prior years.

Ito also alleged that Fujitsu’s server business is much more than meets the eye.  It provides a fourfold leverage to its other operations (for every Yen spent on servers, the customers supposedly spend four Yen on other Fujitsu products and/or services).

The services unit, for example, benefits to the tune of 2.5 times from the server revenues.  Even PCs, storage and middleware enjoy “drag-along” effects from servers, though to a lesser degree (see the above chart).

It remains to be seen to what extent such server praise may be self-serving.  The only thing certain from past evidence is that the Fujitsu servers have shrunk drastically, while its services operations have expanded.

Akira Yamanaka, the vice president in charge of servers, plans to reverse that.  And he is figuring on overseas business growth to do it.  In the Unix market, for example, Yamanaka is hoping to grow the business by 91% during the current fiscal year.  This would put the overseas Unix servers’ share of Fujitsu’s worldwide total at 58%, by far surpassing the 28.5% international share for non-Japanese revenues at the corporate level (see the chart on page 5).

As for Fujitsu services and software, the planned revenue growth for the current fiscal year is quite modest (up only 1%).  But the company will try to increase its operating margins to 7.9%.  So the emphasis seems to be on quality rather than quantity.


“The more things change, the more they are the same,” Alphonse Karr noted in 1849.  Fujitsu is a case in point.  The harder the company tried to become a global contender, the more Japan-centric it looked.

Is there a way to break out of that vicious cycle?  Yes, there is.  But it would take vision, courage and humility.  Vision – to lead, rather than follow.  Courage – to believe in and execute the vision.  Humility – to learn from others.

The next few years will show if Fujitsu’s current leaders – NaoyukiText Box:  Akikusa, chairman, and Hiroaki Kurokawa, president - have what it takes to do it. 

Let’s start with the vision…

What Fujitsu and other Japanese vendors refused to believe back in 1993, has become quite obvious by now: Services is the name of the game and the top of the food chain in the global IT market. 

What has also become quite evident by now is that Fujitsu is incapable of becoming a major global IT services player on its own.  So it needs to buy its way into it, and/or partner with others to do it.

Both choices take courage… courage to change; to abandon the old tried and failed Fujitsu ways of doing things.  Believing that one can operate a successful global IT services company under a Japanese brand name is one Fujitsu myth.  The company’s dismal North American results are screaming their disapproval of such marketing theories.

Oddly enough, Fujitsu doesn’t have to look far to see contrary examples of successful marketing.  Enter humility…

Few buyers of Infiniti luxury cares in America know that they are actually buying a Nissan product.  Ditto re.  Lexus and Toyota brand names.  

As for Japanese electronics manufacturers, Panasonic, Pioneer etc. had pioneered this marketing branding trend long ago.

Nor does it necessarily take a very long time to establish a successful brand name.  Take Accenture, for example.  Today, this name is synonymous with IT services success world over.  Even competitors speak of it with awe and admiration.  Yet only four years ago, Accenture did not even exist.  The name was adopted by Andersen Consulting in late 2000 as part of its arbitration settlement with Arthur Andersen.

Secondly, setting its sights on EDS as a possible acquisition target could be a way for Fujitsu to kill two birds with one stone.  It could become the second largest IT services provider in the world, practically overnight.  And it could acquire a widely recognized global brand name.  With some spit and polish, and with new (American) leadership, EDS could easily regain its former luster.  And Fujitsu would finally break out of its 25% to 30% overseas market share barrier.  It would be a win-win deal.

Do Messrs. Akikusa and Kurokawa have what it takes to carry out such a bold play?

Time will tell… And time seems to be one commodity in ample supply in the Japanese culture. 

Ironically in EDS’ case, time will work in Fujitsu’s favor, at least in the short term.  EDS share prices are likely only to go one way – down.

Meanwhile, even if it did nothing drastic, Fujitsu expects to double its operating income and net incomes in the next three years.  IF, of course, things go according to plan… But, as Fujitsu knows all too well, “the best laid plans of mice and men…” oft go astray.

Enter “Plan B.”  Ours.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004: Fujitsu: Back in the Black, But... (July 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (Jun 2004); Accenture: Revving Up a Notch (Jun 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Going Retro with Mainframes (Apr 8);  IBM: Five-year Forecast (Apr 8); Mainframe at 40! (Apr 2);  Accenture: Burning the Track (Mar 2004); "Crown Jewel" Restored? (Mar 2004); "Cap Gemini: Another, Smaller Loss" (Feb 2004);  "CSC: Good Quarter Gets Boos" (Feb 2004); "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); "Cronyism Is Alive and Well at EDS" (Jan 2004);  "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

2003 IGS:  "IBM OnDemand: Different Strokes for Different Folks" (Dec 2003); "Investing in Growth" (Apr 2003)

2003 IBM: "IBM vs. HP: Spinning Global Server Market Shares" (Nov 2003);  "Finally Heard, Part II," (Nov 2003), “Small Is Now Big at Big Blue” (Oct 16),  “On the Nose But No Cigar” (July 16), “A Paler Shade of Blue” (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), "Finally Heard!" (Jan 29), “Start of a Real Turnaround?” (Jan 17).

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

2002 IBM: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

Or just click on and use appropriate  keywords.

Volume XX, Annex Bulletin 2004-16
July 26, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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