Vodafone's Business Environment in Japan - Case Study Example

Report on Vodafone’s Business Environment In Japan Table of Contents Introduction 3 2. Market environment in Japan 4 3. Form ofthe Organization 6 4. Economic Environment 7 5. Competition 9 6. Japanese Culture & Strategy 10 7. Future Plans 12 8. Conclusion 14 References 15-16 Introduction Vodafone Japan is the Japanese subsidiary of the mobile phone operator Vodafone in Britain. The company was originally founded in 1991 as the mobile phone division of Japan Telecom under the name of Digital Phone. Subsequently, J Phone Co. Ltd was formed in 1999 by merging the Digital Phone Group and the Digital TU-KA Group. Japan Telecom had a stake of 45.1% initially but in October 2001, the British mobile phone firm Vodafone increased its share to 66.7% of Japan Telecom and 69.7% of J-Phone. On 1st October 2003, the name of the company and the service brand was officially changed to Vodafone. The Tokyo based company offers a wide range of sophisticated mobile voice and data services including Vodafone live! which provides mail and internet to its customers. Vodafone KK’s 3G service offers roaming in 130 countries and regions on 182 networks. Market environment in Japan Japan was one of the first countries to launch third-generation mobile services in 2001 and in 2002 Japan’s mobile subscribers outnumbered its fixed line subscribers. Like many other industrialized countries, Japan is facing a number of challenges like environmental concerns, an ageing population, falling birth rates and expanded urban development. Japan’s broadband network is emerging as the worlds fastest and most economical. Tremendous market growth can be foreseen in Japan as a result of ubiquitous network society. Japan’s mobile phone and mobile internet industry started growing from the second half of 1990s. Subscribers are now upgrading from 2G to 3G terminals. The ten-fold increase in communication speed offered by 3G should enhance the business activities. The best approach for new entrants in the Japanese market would be to go in for partnership with a Japanese firm of a foreign firm already in Japan (Jetro). Vodafone has been unstable for several years. Although initially it did take off well, but subsequent developments differed from what analysts predicted. While it has made a strategic change in its handset policy the decision has come too late. Vodafone is not the only operator in Japan to be apprehensive about its position (Mark Newman). In November 2005, Japan’s Ministry of Communications has awarded three new 3G licenses. Two of the successful bidders are the eMobile consortium, led by Japanese ISP eAccess, and BB Mobile, says Newman. The largest shareholder in BB Mobile is Softbank, which controls Japan Telecom. Both eMobile and BB Mobile are expected to become national operators competing with the existing three incumbents. This is giving a jerk not just to Vodafone but to the other two operators as well. The Japanese governments decision to hand over licenses to three other operators is sure to create a destructive price war in the already cut-throat market. This would definitely push down at least one existing player and the most likely target is Vodafone as it has been steadily losing customers to its competitors. After 1993 this is the first time that the government is granting license in this sector. The new entrants have no prior experience in this line due to which the marketing and pricing techniques may misbalance the entire industry. As of now the market is unevenly divided between Vodafone, NDD DoCoMo and KDDI. This seems to be a deliberate attempt to create more intense competition in the mobile industry. The new entrants will tap the market from different angles (Leo Lewis). IPMobile will tap the 2.0 GHz bandwidth where the technology will be different from the existing mobile networks. eAccess would establish wholesale business of selling packets of bandwidth to third parties. Softbank’s entry into the mobile market is definitely going to create a price war. Softbank is expected to lure customers with a joint offer of mobile and broadband services. It also envisages tie-up with yahoo to offer on-demand video on the mobile phones. It is also going to introduce cheaper handsets made in Korea. Online betting is also on the cards of Softbank. According to industry executive’s Vodafone is going either to wind up in Japan or sell it off or merge with some other company. When its survival is difficult even with three operators, how is it expected to survive in a market with five operators? Newman says chances culture mergers are remote as the two new operators could install their own network in the greater Tokyo region but use the Vodafone’s network elsewhere. They would become MVNOs on Vodafone network. Vodafone is talking to 30 more MVNOs, which could have profound implications on all Japanese operators. Mobile users in Japan have developed a taste for sophisticated technology and they require hi-tech features in the handset. New players would have an edge at the lower end of the market. By the time eMobile and BB Mobile launch their services, WCDMA will be a mature global technology. As of now the three existing operators have had to rely on the Japanese handset manufacturers. With the new WCDMA technology, the global manufacturers like Nokia, Sony, Ericcson and Motorola have now stepped up their activities in Japan. Vodafone has long had a problem in Japan, despite it being a growth market. Vodafone Japan is currently the third ranked mobile operator, and has been losing ground to rivals KDDI Corp NTT DoCoMo Inc, because it lacked a competitive 3G offering. It is expected that the 3G service will push up Vodafones vital ARPU figures. Vodafone expects a turnaround by the 3G assault. The CEO said he expects 3G to deliver "a material benefit" to the business "over time". He added: "We are targeting more than 10 million Vodafone live! with 3G customers in our controlled operations by the end of March 2006." By the end of next year, about 10% of Vodafones 140 million customers are expected to use 3G. (Computerwire). Advantages and disadvantages of the form of organization Vodafone has a control-oriented strategy worldwide and this is how it gradually gained 98% stake in Vodafone Japan after an initial stake of 66.7% in Japan telecom. The parent company’s holding being so large, investors and shareholders are apprehensive and keep away when the company is losing customers. They wanted to bring about a revolutionary change in J-Phone but the global strategy did not work in Japan, which is far ahead of the west. With total control in the hands of the parent company, Vodafone Japan too was following the global strategy which failed to give it the impetus that was predicted. Had it been a joint venture with the local bodies, the vision could have been to cater to the demands of the local market. It may have worked in other countries but Japan is way ahead and people have high tastes. Economic environment Japan started late development, which appears to be one of the causes for rapid industrialization (Sanford M. Jacoby). Important parts were kept under government control. Dualistic economic structure prevailed where the big companies were favored with capital either because of government connections culture because they drew from family resources. Shortage of capital and resources forced the Japanese manufacturers to rely on human capital. They started importing state-of-art organizational policies. Toady, Japan is the second largest economy in the world and is a huge consumer market. Significant government-industry collaboration, rapid technological innovation and a strong work ethic have sustained the economy at its present high level (Lara Srivastava). Structural reforms have taken place since 1996 and investment environment has undergone a transformation (Oasamu Watnabe). The government has removed culture legalized most legal restrictions to FDI thereby making the foreign investors conducive to invest. The economy has become internationalized as it adopted international accounting standards and the introduced of stock options. Unemployment had been low but evolvement in the employment policies and deregulations on several fronts have increased the mobility in employment sector. Skilled workers leave Japanese corporations and join foreign corporations. This has led to increase in the direct investment from foreign countries in Japan. While the government rules have been reformed to attract FDI, there still exist cultural and linguistic challenges to doing business in Japan. There are weaknesses in the Japanese social infra-structure, like medical care and education for foreign residents. In order to attract more FDI the government is paying attention to improve in these sectors so that more International schools could be available and foreign doctors be allowed to practice. In 1985 the NTT (so far a Public company) was privatized and the Japan Telecommunications Industry was opened to new entrants. This came as a turning point for the industry, where so far NTT had enjoyed monopoly (Lara Srivastava). Even when Britain’s Vodafone took over the country’s no 3 mobile phone company, the analysts and the investors were apprehensive if it would be able to find a footing in the competitive and most demanding market in the world. It has failed to provide compelling phone models, it took customers by storm when it unexpectedly increased its prices. It is also lagging growth in subscribers for its high-speed 3G services. The Japan unit is frustrated, which is evident from the subscriber figures. In April 2004 it posted a decline of 88% in new subscribers compared to the figures a year ago. Analysts and investors support the disinterest of log-term investors from investing in Vodafone Japan. (Daily Times). Changes in economic conditions can adversely affect the market for mobile phones. Competition is very active; the growth of the market is slow while retention is difficult. Competitors Competition is steep in the Japan’s cell phone market where Vodafone is struggling while its competitors NTT DoCoMo and KDDI, have registered significant growth. Japan has one of the most demanding market in the world where people are very technologically conscious. Vodafone tried to use the same handsets globally while competition introduced handsets specific to the Japanese markets. This is one of the reasons it fell behind competition. As of December 2004, NTT DoCoMo controlled nearly half of the country’s mobile market while the rest was divided between KDDI corp. and Vodafone. Today Vodafone controls less than 2% of the high speed market (Bloomberg News). Vodafone had been the first company in Japan to launch cell phones with camera and the ability to send digital photos via email but of late it has lost the edge in the market. While this was imitated by the competitors, subsequently they introduced products which left Vodafone far behind. NTT DoCoMo introduced a wallet phone, which can be used to make purchases and KDDI provided handsets which could download music, while Vodafone’s handsets could just provide messaging service (Telecom Asia Daily). Due to the competitive market new price plans had to be introduced which has led to a decline in profits and a decreasing trend in ARPU was reflected. While Vodafone did add 63,000 customers in December 2005, it was still short of the analysts’ prediction of 100,000. Its share of new customers dropped from 18% to 13% reflecting its continued weak position in the competitive market (Richard Wray 2006, Vodafone loses ground in Japanese market, The Guardian, http://business.guardian.co.uk/story/0,16781,1684267,00.html 17 January 2006). While it managed to add customers to its 3G service there was an outflow of its second generation customers. Vodafone is finding it difficult to compete in a market where convergence is under way (Jane Buenaventura). Competition is offering bundled product services across voice, data, access, and even on-demand entertainment services. Vodafone is still competing head-on with niche product pricing and expanding in the underserved segments of the market. Competition is harsh and survival tough. Japanese culture and strategy Mobile phones or keitai as it is commonly known in Japan come with the facility to take both still and video images. They can then be sent to other mobile phones. Cell phones are no more just phones but have become a way of life. Technologies that are in the experimental stage in the US is already mainstream in Japan. There is nothing that you cannot do with the cell phone in Japan. It has pervaded the culture, changed the way people think and communicate. Students use mobile phones to email questions to the professors during class and the professors answers them orally. "Keitai mail matched the Japanese culture of silently conveying meaning," says Kiyoharu Hara, assistant professor of sociology at the Bukkyo University (Anthony Faiola). More than 55% of the population access internet through their cell phones. The Japanese watch TV on their cell phones, download music, check train schedules, and also get e-coupons for discounts on food and entertainment, pay bills, play Final Fantasy, even program karaoke machines. They look for a cute and compact handset to match all their varied usage. Vodafone did not recognize this and intended to capture the market by keeping global standards for all their offices. Today cell phones are extensions of the self where people get up with the alarm from their phones. It has become a part of identity and they feel lost without it. The keypads have then facility where one can even change the characters, add emoticons to suit the mood or the caller. The Asian thumbs are small and nimble and thus more suited to type on the cell phone keypads. The Japanese use the cell phones to access the internet as the way the Americans use their laptop. The mobile phone handset is even used to read information from special barcodes. The QR code usually has a link to the website address which can be accessed through the cell phone. Apart from this NTT DoCoMo introduced the wallet phone, which is extensively used to purchase goods from the convenience stores. Due to the enhanced usage and needs of the Japanese, Vodafone lost 58700 customers in January 2005 and another 53200 a month later (Wikipedia). At the same time, NTT DoCoMo gained 184,400 and KDDI gained 163,700 customers. Vodafone tried to match the changing needs and demands of the customers but failed to attract customers. It cut back its investments in 3G services and paid for it. Despite these facilities, talking on the cell phone while riding on the train or bus is not considered acceptable behaviour. Even in restaurants, it is not permitted and has to be kept in the ‘manner mode’, which means the silent culture the vibrator mode. There are no government regulations to this effect but self – regulatory measures keep the culture alive despite the technological advancement. Plans for the Future While Vodafone is struggling in Japan, the situation is not beyond redemption. The threat of new competition has given a jerk to Vodafone and it has adopted new strategies in this competitive market. It has learnt the hard way that to survive in the market handsets have to be tailor-made for the people. Analysts and consultants are all of the opinion Vodafone fell short trying to make the same handsets and services as it uses globally. If they have to succeed in Japan, the handsets have to be tailored according to the local needs and tastes. In December 2005 they have already introduced the mobile wallets in the market but have been left far behind the competitors. Vodafone Japan has announced that it will add 50% more to its stakes, thus amounting to $2.4 bln, to improve classic and 3G telephony services, areas in which they lag behind their competitors (Softpedianews). Rumors did the rounds that Vodafone would unload the Japan operation but the President has put all speculations to rest saying that there would be a turnaround in business. Vodafone plans to focus on the youth market and launch a phone network-lease service (Telecomasia.net). Those in their teens and 20s are the most active in communicating via phone, hence they would concentrate on this age group. It also plans to lease its phone network to other companies like online firms who want to enter the mobile phone market. The company has also decided to cooperate with its business partners like content providers, handset makers, and retail shops to turn around its business. Vodafone has tied up with Yozan in December 2005 to enhance the ‘security system’. Yozan will develop mobile phone devise compatible with Vodafone’s network by April this year. They will actively market this service to the government, educational institutions, guardians and various corporations from January 2006. through this service the children, families and companies can call out to their family culture company in any emergency without using their hands. The locations will also be revealed in real time on a PC. This will function through Vodafone’s network. (Yozan and Vodafone). The parent Vodafone is keen to focus on developing markets hence it would be in line with their strategy to withdraw from Japan. If Vodafone could turn around its business in Japan and sign up with the MVNOs (Mobile Virtual Network Operator) then it could apply this strategy in other developing markets as well (Mark Newman). Besides, as the President says that their aim is growth, not sale (Bloomberg News). By opening up its network to the would be operators, Vodafone risks opening up the market for more aggressive competition (Jane Buenaventura). This would definitely give Vodafone a steady income while shifting some of its retailing burdens to these operators. Vodafone would thus have control over their network; its market will increase. By becoming an MVNO Vodafone is exploiting avenues of growth and perhaps this could bring about a turnaround. Conclusion Vodafone is committed to Japan and they have the resources to back them up. Investors like Eric Moore are confident that they will keep investing in Japan. Competition is fierce and further aggravated with three new entrants with newer technology on offer. Analysts are apprehensive about a turnaround of Vodafone’s success even by becoming an MVNO. It is not a question of ‘if’ but a question of ‘when’ they would wind up in Japan. The business environment for Vodafone is not at all conducive and it would be a wise move now to either go in for merger or sell it off. References: Bloomberg News 2005, Vodafone K.K.s Tsuda Seeks Growth in Japan, Not Sale, http://www.bloomberg.com/apps/news?pid=email_us&refer=uk&sid=aO1q4H95o.KA 17 January 2006 Buenaventura J 2005, Japan: An Operator at a Crossroads, http://www.pyramidresearch.com/documents/PSAP_V5_I9.pdf 17 January 2006 Computerwire 2004, Market Dynamics, http://computerwire-butlergroup-reports.com/HTML/WirelessMW_Sample.pdf 17 January 2006 Daily Times 2004, Vodafone struggles to find footing in Japan, http://www.dailytimes.com.pk/default.asp?page=story_16-5-2004_pg5_24 17 January 2006 Faiola A 2004, The Washington Post, http://www.msnbc.msn.com/id/4306834/ 18 January 2006 Jetro, Attractive Sectors, http://www.jetro.go.jp/en/market/attract/ict/key.html 18 January 2006 Lewis L (2005),Vodafone faces fight for survival in Japan, http://business.timesonline.co.uk/article/0,,13133-1863388,00.html 18 January 2006 Newman M (2006), New 3G licensees offer Vodafone an alternative to bailing out of Japan , Informa Telecoms & Media, http://www.informatm.com/marlin/20001001561/ARTICLEVIEW/mp_articleid/20017328615/mp_pubcode/EO?proceed=true&MarEntityId=1137488328321&entHash=102771f6b1f 18 January 2006 Sanford M. Jacoby 2005, Business and Society in Japan and the United States, London School of Economics, http://www.anderson.ucla.edu/documents/areas/fac/hrob/BJIRWeb.pdf 17 January 2006 Srivastava L 2004, Shaping the future mobile information society, http://www.itu.int/osg/spu/ni/futuremobile/general/casestudies/JapancaseLS.pdf 17 January 2006 Telecom Asia Daily 2005, Vodafone Japan aims to close gap with rivals with new plan, http://www.telecomasia.net/telecomasia/article/articleDetail.jsp?id=170228 17 January 2006 Softpedianews, Vodafone Japan will spend more, http://news.softpedia.com/news/Vodafone-Japan-will-spend-more-3030.shtml 17 January 2006 Watnabe O 2002, Prospects for the Japanese Economy, http://www.jetro.go.jp/en/jetro/profile/speeches/2002/dec12.html 17 January 2006 Wikipedia, http://en.wikipedia.org/wiki/J-Phone 17 January 2006 Yozan and Vodafone 2005, http://www.vodafone.jp/english/release/2005/20051222e.pdf 17 January 2006 Read More