NEC - Company History

Laying the foundations of a telecoms maker born as a foreign joint venture

Before NEC came into being, Japan's telecommunications system was built up in stages. Telegraph service began in 1869, telephones came into use from 1877, in 1890 a full public telecommunications service began under state operation, and in 1896 a seven-year telephone expansion plan was adopted[1]. Western Electric of the United States, already the largest telecommunications equipment company in the world, wanted a way into the Japanese market as part of its global activity[2]. With the revision of the commercial treaties in 1899, the Nippon Electric limited partnership — established the previous year, in 1898, with capital of ¥50,000 — was taken as the base, and with an injection of capital from Western Electric it was reorganised as a joint-stock company with capital of ¥200,000[3]. That it started from a predecessor partnership and launched as a joint venture with foreign capital set the direction of the international character that followed.

NEC was founded in July 1899 as Nippon Electric Company (日本電気株式会社), a joint venture with Western Electric of the United States — W.E., as it was known in Japan. It was the country's first manufacturer formed as a joint venture with foreign capital[4], and at the outset its main businesses were telephone exchanges and telecommunications equipment. Telecommunications equipment was a capital-goods industry in which mass-production know-how and a web of patents decided the base of the business, and at a time when Japan had little accumulated volume-manufacturing technology of its own, tying up with Western capital to bring the technology in was the rational choice. In 1918 Western Electric separated its overseas investment arm and the resulting company, I.W.E., took over the NEC shareholding[5]; in 1925 I.W.E. was acquired by ITT and renamed International Standard Electric (ISE)[6]. From its first day NEC grew its telecommunications business as one part of a Western capital group.

In June 1932 ISE entrusted the management of NEC to Sumitomo Honsha[7] — the starting point of the later relationship with the Sumitomo group. In December 1941 the NEC shares held by ISE were disposed of as enemy property and the capital tie was dissolved[8], and in 1943 the company changed its name to Sumitomo Communication Industries[9]. After the defeat it returned to the name Nippon Electric Company in November 1945[10], listed on the Tokyo Stock Exchange in May 1949[11], and revived its capital tie-up with ISE in November 1951[12]. Looking back years later, president Kobayashi Koji (小林宏治) described the state of the industry: In the field of electrical communications, the technology and the real condition of the industry were such that, in terms of patents, as much as ninety per cent were foreign patents. The related materials and components industries were extremely poor — near enough to non-existent.[13] and spoke of the effort spent catching up with technology of Japan's own. As a company with the unusual history of having its foreign ties severed in wartime and reconnected immediately afterwards, NEC placed the foundations of its international network business on a continuing relationship with Western capital.

Diversification accelerated by the C&C idea: semiconductors and PCs

In April 1961 NEC introduced a divisional structure, switching to six divisions — telecommunications equipment, radio equipment, electronic devices, electronic components, consumer products and overseas[14]. In October of the same year it moved up to the First Section of the Tokyo Stock Exchange[15], and in January 1963 it established Nippon Electric New York (today NEC Corporation of America) in the United States[16], putting overseas expansion on a proper footing. The Central Research Laboratories were completed in September 1975[17], and from the 1970s the company steadily expanded investment in semiconductors and computers. This was the run-up in which a single-product telecommunications equipment maker widened its field into a comprehensive electronics maker spanning information processing and communications. Already in 1966 president Kobayashi saw where software was heading: About ten years ago, with electronic computers, you supplied the machine to the customer and the customer worked out how to use it. Lately the computer comes with software attached, and that too is supplied to the customer for their satisfaction — the software business has become integrated with the hardware.[18]

In 1978 chairman Kobayashi Koji proposed at Intelcom '78 the concept of C&C — the fusion of Computers and Communications[19]. He later set out the circumstances behind it: I proposed C&C, arguing that we should make use of the synergy between our business domains.[20] NEC did not have the resources to fight the world in any single domain, and could only stand against Western rivals through synergies across domains. The PC-9800 series, launched in October 1982[21], held more than half the domestic PC market into the first half of the 1990s, and in the 1980s NEC took the world's top share in DRAM. A trade magazine in 1983 rated the rise of the brand: Nippon Electric is not merely a high-technology company; as its proposal of C&C symbolises, it throws up dreams with a deft feel for the times; and from 1981 it knocked the perennial number one, Hitachi, off the top and took first place three years running[22].

The weight of diversification surfaces as scattered strength at the end of the 1990s

Diversification was an engine of growth and, at the same time, a device for scattering competitive strength. In the second half of the 1990s the rise of Korean and Taiwanese makers eroded the profitability of the DRAM business, and in PCs the spread of IBM-compatible machines (DOS/V) stripped the proprietary PC-9800 standard of its advantage. The telecommunications equipment business was strong in the home market but relatively weak abroad against Siemens, Alcatel and Nortel in North America and Europe, and the structural weakness of a company that could not fight on economies of scale gradually came to the surface. In 1990 president Sekimoto Tadahiro (関本忠弘) set out a line of differentiating through software and philosophy — The finest software is philosophy. I am now putting it this way: corporate philosophy and corporate culture are the fifth management resource.[23] — but it was not enough to overturn the pressure of falling hardware prices in DRAM and PCs. One by one, the business fields NEC had widened under the C&C idea were being pushed into positions where profit was hard to make as the world market re-sorted itself.

In February 1999 the Nihon Keizai Shimbun reported that consolidated net income for the year to March 1999 would fall to a record loss of $1.3B (¥150bn), that some 15,000 employees, about 10 per cent of the workforce worldwide, will be cut over the next three years, and that 9,000 of them in Japan alone would be affected[24]. The internal company system introduced in April 2000[25] was an attempt to run the three main pillars on independent accounts and make responsibility clear. At the same time, the collapse of prices in the semiconductor memory market made a review of the business portfolio unavoidable, and in November 2002 NEC hived off its semiconductor business to establish NEC Electronics[26] — the first major surgery to cut one wing of its founding trade away from the parent. That the company kept swapping its organisation over in short order — a business-line system in April 2003, a business-unit system in April 2004[27] — tells of the drift of those years, when it could not find the right shape; the design of an organisation to work off the legacy of diversification was still unsettled when the external shock of the DRAM price collapse arrived.