Connecting With
Japan's Cellular Future

You'll find Nokia on the Web at http://www.nokia.co.jp (in Japanese), http://www.nokia.com (the Nokia group), and http://www.nokia-asia.com (Nokia Mobile Phones Asia).

interviewed by Wm. Auckerman

First of all, how big are Nokia's operations in Japan?

Olav Stang: This may be characteristic of European companies, but we have a pretty strong rule against revealing [local revenue and staff] numbers. I can tell you that we are growing quite strongly, mainly in the R&D sector. One of the important reasons for the growth is that we are now actively participating in the W-CDMA [wideband code division multiple access] R&D activities being led by NTT DoCoMo.

We think it is a very exciting prospect that the Japanese have started developing a third-generation set of digital cellular specifications, and we intend to be very active. That's the major reason for our growth.

Can you tell us a bit more about this third-generation cellular development effort?

Stang: This particular project has been started by NTT DoCoMo, and they have defined a number of industrial partners with whom they will cooperate in making test systems for infrastructure and for terminals. Nokia is an official member of the terminal group; we are also participating on the infrastructure side, although not as an official member but as an "interested party." The aim is to have test systems ready within a couple of years, and most of the industry believes that commercial products may be available by 2001.

Why does Nokia have two separate Japanese operations: Nokia Mobile Phones KK, and Nokia Japan KK?

Stang: As you know, the holding company laws in Japan were established just after the Second World War. As a result of those laws, we cannot have any holding companies - although that might change this year.

The sales company for Nokia here in Japan is a joint venture, with Mitsui & Co., Ltd., as our partner. That's why we have made two separate companies: we have the sales company (the joint venture) as one unit, and then a fully-owned unit doing sourcing and R&D.

Do your distribution and marketing strategies for Japan differ from those for other countries?

Stang: Yes. That's one of the major differences, actually. The [mobile phone] operators in Japan have decided, partly based on historical reasons, that they want to have control over distribution. Four of the operators are subsidizing terminal sales quite heavily. They demand that all the terminals sold be branded with their own brand names, and actually logistically run through their operations.

So we sell and deliver terminals to the operators; they're our customers. And then they resell them. That's very special; I don't know anywhere else where operators insist on having absolutely full control over the whole distribution chain.

So your customers here are the operators rather than end users?

Stang: Yes, because that's the way it's organized by the operators. We're forced to sell to them; we can't sell directly to the end users. Well, in theory we can, but then the terminals wouldn't get any subsidies, and who would pay a large sum for a terminal when they can get one basically free-of-charge around the corner.

To what extent do you localize your products for the Japanese market?

Stang: We have our own product development only for Japan. That's partly because the specifications, the technology, is different here than anywhere else. Japan's cellular phone standard, PDCS [personal digital cellular system] as we call it, is not used anywhere else. So we have to design new products only for Japan.

That also leads to us wanting to make our products as competitive as possible for Japanese end users. So the user interface, the use of Japanese language... everything is adapted to this market.

Do you try to promote your terminals on the basis of their quality and user friendliness, or based on price?

Stang: That's a leading question.

When we started up here in 1994, we got into the marketplace partly because we had at that time maybe the best product on the market. But also because we were very aggressive with the pricing. We did that on purpose. The pricing was artificially high here at that time; it's not any more, but at that time it was. When your customers are only a few big operators, it's a very effective way, so we used it.

Having said that, we "sold" the user interface very hard as well. And we had quite good success with that. We have both Japanese and English user menus in the phone.

How important is the Japanese market for Nokia?

Stang: Japan as a market is interesting: it's a big market, a rich market, and developing very quickly. So from that perspective, very important.

It is also very important from the technology development perspective. There are 10 or 12 potential competitors here in Japan, and everything happening here is influencing what's happening in the rest of the world. We have to know what's happening here to be able to compete.

Who are your main competitors in Japan?

Stang: On the terminal side, they're all Japanese companies; we are so far the only non-Japanese company delivering PDCS terminals to the Japanese market. The biggest one today is Matsushita, with Panasonic. And then - I'm not sure if it's currently the right sequence - NEC, Toshiba, Fujitsu, Kyocera... If I should name five competitors, those would be the ones.

Compared to Europe, is the Japanese market more or less profitable?

Stang: On a general level, I would say that the cellular business, with the current price level, is still profitable. The largest companies are probably getting reasonably good results. The smaller ones, though, depending on what kind of development effort or OEM [original equipment manufacturer] solutions they're using, probably are having problems. And I can't understand how some of the really tiny ones can develop products and still earn money at the low volumes they have.

A side facet of that question is PHS. We don't have products for PHS, and that's on purpose. Even though it's a reasonably fast-growing market, the price level was set so artificially low from the start that we didn't see any chance of earning a profit. PHS is not a very profitable business area.

Coming to a different culture is always a problem, for any company. You have to readjust your sights and start to do business in the local way.

Stang: The major change by far was the deregulation of the marketplace, which took place in '93 and '94. It opened up the competition. You can almost plot it exactly on the growth curves of the subscriber numbers. When deregulation came, and competition was introduced, the number of subscribers went up very drastically. That was long overdue in Japan, compared with all other countries and markets that it's normal to compare with.

During the past two years, the Japanese market has been growing fantastically. The last number I saw was 23 million cellular subscribers, if you take all the systems into account. That's from nearly zero to close to 20% penetration in only about three years. That, of course, has created a substantial home market for the Japanese industry.

What changes do you foresee for the next three to five years?

Stang: The next-generation development is probably going to be wideband CDMA. That opens things up for a new range of services, so technologically, lots of things will happen. It probably will take two to three years to get to a marketable product, but by 2000 or 2001 we will surely see something.

Business-wise, apart from this, there is a certain interest from the Japanese government and also from the biggest players to make this next generation into an international standard. The Japanese industry has failed twice now to define their own standard, which they then tried to export; both PDCS and PHS [personal handyphone system] have been more-or-less international failures, with no success outside Japan. Since this prevents them from creating the home base for big exports later, they are trying now to make third-generation development into an international standard.

Can they succeed?

Stang:Whether that's going to succeed or not is going to depend on how well Japanese authorities are willing to cooperate with European authorities and American authorities. I won't even dare to guess what the result will be.

If, for example, Europe with its GSM-based research and development and Japan with its next generation somehow succeed to combine their systems, it will be a very strong contender for a global system. And vice versa. If American and Japanese authorities get together and define a system, and forget GSM, then we will certainly have two camps. Lots of discussions are going on every day about this.

But whatever happens - one, two, or three systems - Nokia will certainly play an important role in all of them. We're sitting on all the standardization committees, worldwide committees, and we are actively participating in all of them to make sure that we will have the technology, whatever happens.

What kind of special problems do you find in doing business here in Japan?

Stang: Coming to a different culture is always a problem, for any company. You have to readjust your sights and start to do business in the local way, or you will have problems.

Generally, the problems we have had have been more related to our own lack of understanding of the Japanese market than to any practical hindrance. Of course, we would have preferred if the market in general, and in the way it is organized, had been more open for what we call "free competition," But because of the operator structure, and the subsidies, that will not be the case. Our products, which we get reasonably good payment for [from the operators], are given to the customers free-of-charge, which removes our possibility to enter that part of business.

The main challenge we still have - and it took some time, actually, before we discovered it - is that the way the Japanese electronics industry develops their products is a bit different from what we are used to in our part of the world. They tend to make small improvements, but they do it all the time, whereas we tend to make big jumps [but] much more seldom.

That's a very important difference between the Japanese market and anywhere else. It means that all these new products coming out will have some improvements, and that is what the customer compares. So we've had to change our way of thinking; that has taken some time.

Do you face special difficulties as a foreign company?

Stang: Of course. Back to this cultural perspective, the fact that many of us are not Japanese. We don't have the network, we don't have the school friends.... That leads to a lot of practical challenges. But that could be the same anywhere outside your own backyard.

The only way to compensate for that is to have qualified, good Japanese colleagues. And that is what we're doing; we're building up a strong Japanese organization.

But doing that is one of the difficulties. On the traditional ranking list of the best new graduates from universities in this country when looking for jobs, the top choice for most is government ministries, then the big companies. Size has been more important locally, although technology is starting to play a role. That makes it very difficult for a small foreign company to get good recruits. That's a big problem we have; we wish we could get lots more technically qualified Japanese colleagues.

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