NIPPON TELEGRAPH AND TELEPHONE: CORNERSTONE OF JAPAN'S ELECTRONICS INDUSTRY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00283R000400020008-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 29
• Document Creation Date: December 22, 2016
• Document Release Date: November 26, 2010
• Sequence Number: 8
• Publication Date: January 1, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Secret
Nippon Telegraph and Telephone:
Cornerstone of Japan's
Electronics Industry F
a..
Secret
GI 84-10007
January 1984
Copy 3 5 2
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Intelligence 25X1
Nippon Telegraph and Telephone:
Cornerstone of Japan's
Electronics Industry F-]
'A Research Paper
This paper was prepared by
and Industry Division, OGI, on
Office of
Global Issues. Comments and queries are welcome
and may be directed to the Chief, Civil Technology
Secret
G184-10007
January 1984
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Secret
Nippon Telegraph and Telephone:
Cornerstone of Japan's
Electronics Industry F]
Key Judgments Nippon Telegraph and Telephone Public Corporation (NTT), the govern-
Information available ment-owned communications monopoly, has played the leading govern-
as of 15 December 1983 ment role in developing Japan's advanced electronics industries. Through
was used in this report.
its own R&D efforts and its aggressive support of product development by
a select group of private firms, NTT has been an important factor in the
emergence of Japan as a world-class competitor in microelectronics,
computers, and telecommunications equipment. At the same time, its
procurement policies have limited foreign access to the Japanese telecom-
munications market. These policies have prompted charges of unfair
competition and have made NTT, long a low-profile organization, a focus
of trade friction.
NTT's long-term support of its key supplier companies-NEC, Fujitsu,
Oki, and Hitachi-has. speeded commercial production of a number of
products and facilitated the firms' moves into international markets:
? NTT's research focus has moved beyond telecommunications systems
into such areas as semiconductors and computers, deemed essential to
providing advanced communications services. By assuming the bulk of
early development and engineering costs for many of the items it
requires, NTT has reduced the firms' R&D costs for developing new
product and process technologies.
? As a consumer of advanced electronic products, NTT has helped
underwrite commercial development costs as well as assisted in product
definition-enhancing corporate planning and production at scale econo-
mies. Although its share of the Japanese market has declined in recent
years, NTT remains a large and virtually guaranteed source of demand.
? At the same time, NTT limits foreign sales to the Japanese telecommuni-
cations market through its procurement approval process, its extensive
use of privately negotiated contracts, and its limited release of critical
technical specifications.
? NTT support has not only helped Japanese firms to price their products
competitively but has also played a role in promoting Japanese telecom-
munications equipment exports, particularly to developing countries.
The electronics industry benefits more from NTT support than it does from
R&D subsidies provided by MITI.
Secret
GI 84-10007
January 1984
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Because of the integral role NTT has played in the emergence of the
Japanese electronics industry, NTT and industry officials view the US-
Japanese procurement negotiations as more than just a market access
issue. Changes in NTT procurement, for them, imply tampering with a
system that has, in large part, been responsible for the rapid rise of
Japanese electronics. Consequently their resistance to liberalized procure-
ment stems from fears of a loss of overall capabilities, as well as reluctance
to give up a share of the home market. We believe NTT will use its planned
Information Network System program to continue support to domestic
electronics firms and to limit foreign firms' participation in the Japanese
market.
The proposed reorganization of NTT toward private ownership-an issue
now being debated in Japan-holds major implications both for Japan's
ability to compete in the fast-moving international telecommunications
market and for foreign access to selected Japanese high-technology
markets. We believe that a reorganization is likely, but it is far too early to
determine its final form and impact. At a minimum, a broadening of the
base of supplier firms is likely. Whether a diffusion of NTT relationships
with private firms will help or hinder Japanese competitiveness remains to
be seen.
Reorganization and deregulation, however, are likely to increase competi-
tion in areas where NTT has traditionally been a monopoly provider of
services. NTT has been positioning itself to compete in the rapidly growing
advanced telecommunications services market as well as to control the
telecommunications equipment markets. NTT will benefit from the pro-
posed Ministry of Posts and Telecommunications bill to limit foreign
access to the Japanese telecommunications services market. Moreover,
privatization could reduce Tokyo's leverage on NTT to honor future
bilateral agreements on procurement. It is also unlikely to open Japanese
markets to foreign suppliers because of longstanding supplier relationships
with NTT.
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Key Judgments
The Corporation
Promoting the Electronics Industry
Technology Transfer
6
Procurement Policies
6
Favoring Domestic Suppliers
8
Restraining Foreign Access
9
Enhancing Exports
10
Impact on Competitiveness of Japanese Firms
13
INS: Leading the Way Into the Next Century
Implications for the United States
Japan: Government Regulation of the Telecommunications Industry
vi
NTT: Corporate Organization
NTT: Research and Development Spending, by Year
Japan: Telecommunications Equipment Trade
NTT-MITI: Major Programs
8.
NTT: Trends in Growth Rates of Total Revenues and Expenses
19
Japan: Telecommunications Equipment Orders
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Figure 1
Japan: Government Regulation of the Telecommunications Industry
Ministry of Posts and Telecommunications
Administrative
Radio
Director of
Regulatory
Other
Telecommunications
Bureau
bureaus
Office
NTT Domestic
Telecommunications
Service
KDD Overseas
Telecommunications
Service
Ministry of
Finance
NHK Radio and TV
Broadcasting Service
(public enterprise)
Board of
Audit
Administrative
Management
Agency
Other radio and TV
broadcasting
companies (private
enterprises)
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Nippon Telegraph and Telephone:
Cornerstone of Japan's
Electronics Industry F-1
Created in 1952 during the Allied occupation,.the
Nippon Telegraph and Telephone Public Corporation
(NTT) is Japan's government-owned but nominally
independent telecommunications monopoly. Since its
inception, NTT has grown into one of the largest
corporations in Japan and will be the world's second-
largest telephone company after the breakup of
American Telephone and Telegraph (AT&T). NTT
provides a range' of services of the standard variety
offered by other public telephone and telegraph com-
panies including telephone, telegraph, telex, data
communications and leased lines, and also a number
of more advanced services, such as facsimile commu-
nications.' NTT is the nation's second-largest govern-
ment employer, after the Japan National Railways.
Despite being subject to government supervision,
NTT's public corporation status has given it more
independence than most government agencies (figure
1). Its president and top management are appointed
by the Cabinet, with consent of the Diet. Its rates are
set by the Ministry of Posts and Telecommunications
and approved by the Diet. Although NTT is a self-
financed corporation, its annual budget must also be
approved by the Diet, after review by the Ministry of
Finance. Japanese law has set only basic guidelines
for NTT operations, leaving specific business deci-
sions to the monopoly.n
The NTT bureaucracy is large and, by the public
admission of some officers, unwieldy. The corporation
is divided into several divisions and hundreds of
subordinate offices (figure 2). Despite a clear-cut
chain of command on paper, most major decisions are
achieved after considerable interoffice politicking and
consensus formation, In
' A process by which fixed graphic material including pictures or
images is scanned and the information converted into electrical
signal waves, which are used either locally or remotely to produce
in record form a likeness (facsimile) of the subject copy.n
the process, major proposals for action often must
pass through at least 11 layers of management before
a final decision is taken. Although President Hisashi
Shinto was appointed in January 1981 to streamline
the corporation, implement the US-Japan Bilateral
Agreement, and make its markets more accessible to
foreign manufacturers, he is 25X1
Promoting the Electronics Industry
NTT has used its size and monopoly power to influ-
ence the development of the electronics industry upon
which it relies. Prohibited by law from manufactur-
ing, NTT instead has exploited its substantial R&D
resources and its leverage as a major purchaser of
electronic equipment to guide and enhance techno-
logical development in key electronics sectors, shelter
the Japanese telecommunications market from for-
eign competition, and increase the price competitive-
ness of specific Japanese firms in foreign markets.
Although firms have decreased their dependence on
sales to NTT, its $3 billion annual procurement
reduces the risks of new product development, in part
by guaranteeing an initial sales base. Moreover, NTT
is able to influence additional corporate sales within
the Japanese telecommunications market through its
control of equipment standards and specifications.
This support often provides Japanese firms with a
strong basis for competing in international communi-
cations markets.n 25X1
NTT has several motives for taking an active role in
electronics development. NTT officials have stated
privately that they want to avoid dependence on
private firms for development of key telecommunica-
tions equipment, a concern that has grown as operat-
ing costs and the pace of the electronics revolution
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Figure 2
NTT: Corporate Organization
Management
committee
en .office 1
Sub. cable pI
Sub. cable work office 3
Teishin Hos ital 1
Teishin Hospital l
Telecomm. trainin school 2
Telecommunications
Bureau (11)
Work ofce 10
Material distributin house 10
E ui . mains.&re .office 10
Teishin Hos ital 14
Teishin Hos ital
Central health admin.ctr. 3
Health administration cente 55
Telecommunications
division (49)
I Urban
telecommunications
division (8)
I Area
communications
division (12)
Toll telephone offce 2
Billing office (2)
Telephone office 14
Central telegraph office 1
Telegraph office 12
Telegraph plant office (2)
Tele ra h&telep teoffice (1,316)
Radio telegraph office 3
lane ss,wa telecommunications
Billin office 5
Tele r.&tele h. service center 4
Tele hone office 52
office $
Central telegraph
Tele ra h Plant office (1)
Data comm.&tele r. plant off. (1)
Telegraph & telephone office (86)
Business office 4
Ex ress.telecomm. plant off. 1
Telegraph office (2)
Tele r. & tele h. service center(4
Tele hone office 105
Tele ra h and tele hone office 91
Business office (11)
xpressway t~ ecommunications
Toll telephone office (2)
Teleph. number info. office (2)
Central telegraph office 2
Telegraph plant office 2
Central data comm. office 1
Carrier
communications
division (10)
Radio
communications
division (10)
Note: Figures in parentheses show number of offices.
(As of 31 March 1982)
Okinawa
telegraph and
telephdne
administration
bureau
Controllin tele h. re Ir. sta. 244
Tele hone repeater station (47)
Controllin radio relay station 176
Billin office (7)
Tele r.&tele teleph. secenter (4
Radio transmittin station 3
Radio transmit.& rec. station (2
]Telegraph and telephone office 14
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Figure 3
NTT: Research and Development
Spending, by Year a
Research and Development Spending
Million $
I I I I I I I I I I I I I
1.0 1970 71 72 73 74 75 76 77 78 79 80 81 82 83'84`
Fiscal years.
hNTT plan.
`1984 budgeted.
have both accelerated in recent years and that may
intensify with privatization. Because of NTT's gov-
ernment ownership, the leadership of the corporation
has also viewed support of Japanese industrial devel-
opment as a major responsibility,
Moreover, through "amakudari," the process
by which NTT officials retire to high-paying jobs in
private companies, a close-knit relationship has
evolved over the decades between NTT and its princi-
pal suppliers.F_~
R&D Support
We believe NTT's long-term and stable support of
R&D is its major contribution to the rapid develop-
NTT's R&D activities are currently focused on the
following areas (figure 4):
? Advanced switching communications networks con-
sume almost 30 percent of the R&D budget. The
work is critical to the proposed integrated telecom-
munications network system, the Information Net-
work System.
? Advanced microelectronics accounts for 12 percent
of R&D spending. Major research efforts include
integrated circuitry for a wide range of telecom-
munications-related equipment including new types
of devices based on gallium arsenide and' Josephson-
junctions superconducting technologies.
? Computers have taken roughly 20 percent of the
R&D budget. NTT is currently participating in
Japan's Fifth-Generation Computer Project, includ-
ing development of artificial intelligence, speech
recognition, and language translation.
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? Fiber optics accounts for only 6 percent of R&D
spending, but NTT is a world leader in this
technology.
of the budget, up from 3 percent in 1978.
? Communications satellites now consume 9 percent
NTT has been able to save time and money by
concentrating its R&D effort on applied rather than
pure research.
Moreover, it has established a system to collect,
translate, and publish foreign research results.
significant state-
25X1 of-the-art knowledge (such as high electron mobility
transistors) has been gained through this practice. By
focusing its R&D resources on key technology areas
and providing the results to major Japanese firms,
NTT has.fostered a rapid pace of advanced product
development.
The Joint R&D Process. Through joint R&D,3 NTT
provides firms with technical know-how. Embassy
reporting indicates that NTT generally determines
the basic direction of research for products that it
plans to purchase, with its Engineering and Procure-
ment Bureaus often the most important links in the
decisionmaking process. The following steps are then
taken:
? Basic product and process technologies are devel-
oped in house through extensive applied research.
From this work come test data, basic manufacturing
know-how, new materials, and patents-all propri-
etary information of NTT-which are transferred
to the firms.
? Prototypes are developed and tested by NTT engi-
neers-most often with private electronics firms-to
determine technical feasibility.
Not all NTT-sponsored R&D is done jointly with supplier firms;
some R&D is contracted totally to the firms. In other cases, NTT
accepts products developed by the firms without NTT sponsorship.
The NTT Laboratories
NTT's four electrical communications laboratories
(ECLs) represent the core of its support to Japanese
advanced electronics. The laboratories conduct virtu-
ally all NTT applied R&D and account for about 95
percent of NTT's R&D budget. The ECLs provide
basic technical data required for improving existing
NTT operations and for purchasing new equipment.
After receiving NTT research requirements from the
Engineering Bureau, the ECLs perform R&D to
produce technical documentation for technical stand-
ards and procurement specifications.l
Although the work of the four laboratories overlaps,
each ECL concentrates on substantially different
areas of research:
? Musashino is the oldest, largest, and presumably
the highest budgeted ECL. Work at this laboratory
is focused on digital switching and software devel-
opment for the Fifth-Generation Computer.
? Yokosuka is the second-largest NTT laboratory,
with primary responsibility for developing trans-
mission technology for the integrated communica-
tions network system to link computers and tele-
communications equipment. It is also working on
satellite communications. .
? Atsugi, established in 1983, conducts the bulk of
NTT semiconductor-related exploratory research,
from materials production to the design, manufac-
ture, and testing of components. As a result, it is the
center of NTT's participation in semiconductor and
VLSI development.
? Ibaraki, although the smallest of the four laborato-
ries, is the largest Japanese R&D facility working
on fiber optics production technology. This labora-
tory is also responsible for development of some
advanced materials for microelectronics
components. F_
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? The same firms are usually selected to develop
commercial product designs and manufacturing
processes based on specifications drawn up by the
NTT.Engineering Bureau. Several prototypes are
produced, and NTT chooses models for mass
production.
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R&D process also reduces the costs and risks of NTT
product development for participating firms. Embassy
interviews with NTT officials indicate that NTT
finances most of the research up through the produc-
tion engineering phase. We believe this funding in-
cludes NTT's limited pure research and acquisition of
? NTT then decides which firms will produce the
product and allows them to use its patents.F_
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research data from abroad, its applied research and
prototype development, and much of the product
design work performed by participating firms. Be-
cause NTT pays for much of the R&D effort, includ-
ing the expensive phases of development and product
engineering, Japanese electronics firms are able to
build upon NTT R&D and focus their own resources
on commercial products.F__1
Technology Transfer. NTT has fostered a sizable
transfer of technology to the private sector. Besides
traditional telecommunications activities, NTT has
worked closely with its major suppliers in such areas
as very-large-scale integrated circuits (VLSI), main-
frame computers, and optical fibers. The companies
have obtained substantial process know-how from
exchanging data and research personnel, building
prototypes to NTT specifications, and acquiring joint
patents. NTT
also provides guidance through regular meetings with
family firms (see inset) and through its participation
in electronics industry associations. Such formal and
informal contacts reportedly promote increased coop-
eration where NTT and private firms are pursuing
parallel R&D. For example,
NTT has also been able to increase the capabilities of
less advanced electronics firms by selling them tech-
nology through the Nippon Telecommunication Engi-
neering Company (NTEC), a major channel for the
subsidized sale of NTT patents. Established in 1976
as a private consulting firm, NTEC is 30 percent
owned by NTT; other major stockholders include the
Nippon Electric Company (NEC), Fujitsu, Oki, Hita-
chi, and several banks. Approximately 350 small and
medium-size Japanese companies regularly receive an
NTEC journal listing available NTT technology.
Since its creation, the organization has sold more than
800 licenses.'
By providing technical support to private industry,
NTT has been able to influence the direction and
quality of research in Japanese advanced electronics.
Moreover, its own research effort and its procurement
decisions provide a guidepost for private research and
development. NTT also influences corporate research
through formal and informal disclosure of its interest
in specific products.
the major electronics firms often direct R&D
toward products for which NTT has indicated it will
allocate future procurement funds.
Procurement Policies
NTT's other vital means of supporting Japan's ad-
vanced electronics industry is its purchase of telecom-
munications equipment and related electronics prod-
ucts. In accounting for a large portion of the Japanese
market, NTT has provided a steady source of demand
for both major and many smaller equipment suppliers
(table 1). More importantly, NTT procurement has
been a key factor in assuring Japanese electronics
firms a flow of funds, a guaranteed market, and an
outlet for new technologies. Although its share of
purchases of Japanese telecommunications products
has dropped over the past decade (because private
demand has risen rapidly), NTT:
? Is the single largest purchaser of telecommunica-
tions equipment in Japan.
? Accounts for more than 80 percent of the total $2
billion Japanese Government purchases of telecom-
munications equipment from Japanese firms.
? Is the dominant consumer in many product areas
such as switching equipment.)
Japanese electronics
companies recover much of their own R&D expenses
through guaranteed product sales to NTT.
NTT decides the size of the order
each manufacturer will get in accordance with the
share each manufacturer has contributed to joint
research. This implies that research costs are re-
couped in the price of equipment sold to NTT.
Guaranteed purchases by NTT also enable Japanese
firms to establish small-scale production operations
that allow them to gain valuable early production
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During the past 30 years, NTT has developed a close
relationship with about 200 Japanese companies that
supply most of its equipment needs. These companies
include well-known giants of the Japanese electronics
industry as well as firms that supply cable and
construction services. Communications between NTT
and its supplier family can occur in a variety of
ways-ranging from joint R&D projects to direct
liaison-and are usually facilitated by executive
personnel affiliation. For example,
the top 10 construction contractors
25X1 for NTT received 60 percent of their executives from
NTT. In addition,
NTT provides guidance tofirms through the Commu-
nications Industry Association of Japan (CIAJ). The
CIAJ-whose director is a former NTT executive-
comprises 176 electronics firms that account for 90
percent of Japan's telecommunications production.F
NTT procurement, however, is dominated by a hand-
ful of companies. In 1982 the 10 leading suppliers
met roughly 60 percent of NTT's $3 billion in
procurement, while the four largest satisfied about 40
percent. These `Big Four"firms a are:
? Nippon Electric Company. Japan's largest produc-
er of telecommunications equipment and semicon-
ductors, NEC, is also NTT's largest supplier. Sales
to NTT accounted for nearly $500 million, or 10
percent, of NEC's total revenues. NEC s greatest
strengths are in telephone switching-especially
digital systems-in earth stations and microwave
systems.
experience. Early NTT orders for 256K DRAMs, for
example, will allow Japanese semiconductor firms to
acquire initial test and operating data in hopes of
establishing volume production and a de facto indus-
try standard. Industry executives indicate that by
providing a guaranteed market for new technologies
and underwriting development risks, Japanese firms
are able to invest in plant and equipment earlier than
? Fujitsu. The leading Japanese computer manufac-
turer ranks second to NEC in telecommunications
sales. In`1982 total telecommunications sales were
about $560 million, with NTT accounting for over
$300 million. In Japan, Fujitsu ranks second to
NEC in microwave equipment, carrier transmis-
sion, central office gear, and fiber optics. The
executive director for engineering and the senior
auditors are NTT retirees.
? Oki Electric. Although the smallest of the "Big
Four" suppliers ($1 billion in sales), Oki has proba-
bly benefited most from NTT support. The firm
relies on NTT not only for 40 percent of its sales
but also for extensive technical support. For exam-
ple, although Oki did not participate in the NTT 25X1
VLSI effort, Japanese press articles indicate that
NTT supplied Oki the 64K RAM technology. 0
Oki has also received NTT support
for its 256K RAM development. The close ties 25X1
between Oki and NTT are facilitated by the large
number of retired NTT officials who work at Oki,
.including three of Oki'sfive directors.
? Hitachi. Hitachi is one of the world's largest, most
diversified manufacturers. It produces nearly
20,000 different products, including computers and
telecommunications equipment. Hitachi is one of
NTT's major suppliers of switching systems and
sold it about $160 million in telecommupications
equipment in 1982.F__-]
through capital participation or sustained contracting
they might have otherwise. Moreover, this support
enables Japanese firms to price their commercial
products very competitively because they do not have
to recover a substantial proportion of expensive R&D
costs. 0 25X1
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Table 1 Percent
Japan: Telecommunications Equipment Orders
Total
100
100
100
100
100
NTT
52
49
44
38
33
Other government
9
8
8
9
8
Private/domestic
27
22
24
31
33
12
21
24
22
26
25X1 Source: Communication Industry Association of Japan.
Evidence also indicates that NTT purchases are a
source of substantial subsidies to the electronics in-
dustry. According to Embassy reporting, tentative
prices are set by NTT when it contracts for initial
production of new equipment, but final prices are not
established until after NTT surveys production costs
at the producing plant.
Figure 5
NTT: Total Procurement, by Year
Imports . Oki
OtherJapanese_ Fujitsu
firms
Hitachi ? NEC
Favoring Domestic Suppliers. NTT procurement has
long favored Japanese companies; domestic firms still
account for more than 97 percent of NTT purchases
(figure 5).
the close relationship between NTT
and its family of domestic suppliers has been resistant
to major modification. Key NTT leaders-particular-
ly in the powerful Engineering Bureau-reportedly
have been reluctant to alter their support of big
efforts to open the procurement process.
suppliers despite NTT President Shinto's publicized
middle-level engineers, who heavily influ-
ence major procurement decisions, have been far less
concerned with international pressures to expand for-
eign purchases than are more senior officials and can
slow down the review and approval of foreign firms'
applications.
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As a result of the US-Japan Bilateral Trade Agree-
ment in 1981, NTT developed a new system for
purchasing equipment and supplies. This system clas-
sifies equipment into three tracks, according to the
level of technological sophistication and the extent of
additional development needed:
? Track I. Procurement of products available in the
marketplace. NTT is to place an announcement,
examine the qualification of applicants, and make
selections on a competitive bidding basis. These are
products such as terminal equipment and office
supplies.
? Track II: Procurement of public telecommunica-
tions equipment that is available in the marketplace
and that can be placed in service as is or with
modifications. NTT is to place announcements,
solicit proposals, and examine and select equipment
that is best suited for its needs. Examples of these
products include cable connectors and online
computers.
? Track III: First-time procurement of public tele-
communications equipment that is unavailable in
closed process to all but selected firms.
As a result, NTT procurement has been a generally
in advanced electronics,
where extensive NTT R&D is involved, the corpora-
tion still prefers to deal with major Japanese firms
having long-established track records and close ties
with NTT research and management personnel. Ac-
cording to Embassy reporting, more than 90 percent
of purchases stem from privately negotiated contracts
rather than from open bids. NTT sources report that
the Engineering Bureau and the Procurement and
25X1 Supply Bureaus work with family firms to supply
NTT's procurement needs and generally exclude do-
mestic and foreign firms that have not participated in
the product development process.
the marketplace and must be newly developed for
or with NTT. NTT publicly solicits proposals and
selects development/production partner(s) from
among the applicants, with final purchases made
from the selected supplier(s) that produce the most
promising equipment. Past developments include
switching equipment, carrier transmission equip-
ment, and radio equipment.)
Although this system was implemented to liberalize
NTT's traditional procurement policies, it has not
significantly opened NTT's markets to US firms. To
date, US firms have sold mainly Track I equipment.
the long-
standing close ties between NTT and its family firms
during joint product development still remain an
impenetrable barrier to all but a few US firms with
special technical capabilities to enter the Track III
process.
Restraining Foreign Access. Despite the US-Japanese
agreement on NTT procurement and the GATT Code
on Government Procurement-both of which became
effective in January 1981-NTT's imports of tele-
communications and other electronics equipment are
small (see inset). Although NTT accounts for only a
third of the $4 billion Japanese telecommunications
market, it is able to influence all purchases by
regulating equipment requirements and design stand-
ards. NTT does not provide basic compatibility infor-
mation to nonfamily firms (foreign or domestic) even
though that information is required to build equip-
ment to NTT design specifications. NTT will tell
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prospective suppliers whether or not their products
meet NTT specifications but may decline to provide
some or all of the specifications-effectively blocking
nonfamily firms out of the Japanese market. The
recent flurry of NTT purchases notwithstanding, US
companies' share of NTT purchases is only about
1 percent. Moreover, many of the recent purchases
represent one-time acquisitions.
We believe that NTT will continue to make some
moves to improve foreign access. According to the
Japanese press, President Shinto has attempted to
strengthen the role of the Procurement and Supply
Bureau-usually less pro-Japanese than the Engineer-
ing Bureau-in initiating procurement proposals. In
the wake of a recent purge, he installed supporters in
key positions in the Procurement Bureau and has
placed engineers with overseas experience in impor-
tant posts in the Engineering Bureau. In addition,
since the US-Japanese bilateral agreement, NTT has
published some product specifications previously un-
available publicly, published its new procurement
rules, and, in some instances, extended the time period
for bidding.
Nevertheless, we doubt that NTT procurement from
foreign firms will grow rapidly, particularly from
those firms that do not have technical capabilities
superior to Japanese firms. Despite Shinto's new
policies, NTT engineering personnel will only reluc-
tantly back away from key supplier companies. Those
firms, in turn, will push NTT and Tokyo to maintain
a cautious approach in changing procurement pat-
terns. NTT officials have repeatedly complained C
for example, that foreign com-
panies have been slow to adapt to Japanese technical
and commercial requirements and that they have
rarely been cost-competitive with Ja anese firms.
Moreover, several impor-
tant products with lengthy service life-such as digi-
tal switching equipment-are already under joint
development with Japanese companies, making appre-
ciable foreign purchases unlikely.
Enhancing Exports. NTT has not only protected the
Japanese market but is playing an increasingly impor-
tant role in facilitating Japanese exports of telecom-
munications and electronics equipment. Japanese tele-
communications exports grew from only about 12
percent of sales in the early 1970s to more than 20
percent in 1982 (figure 6). The Japanese are now a
major competitor in markets outside the United
States and Western Europe-having built systems in
Argentina, Taiwan, Brazil, and Australia.n
Because of NTT's financial and technical support to
Japanese equipment manufacturers, products that
emerge from the NTT R&D process can be exported
by participating companies at extremely competitive
prices. Participating firms often do not pay royalties
on products that emerge from the NTT R&D if the
products are exported. NTT supplier companies are
also permitted to offer manufacturing know-how to
third countries for royalties both as a means of
earning revenues and as a lever for gaining contracts.
NTT assists
firms exporting telecommunications equipment to
LDCs. Since the early 1960s, NTT has provided
broad telecommunications assistance to LDCs by
establishing training centers, holding forums, and
sending engineers to provide technical guidance. With
LDCs increasingly introducing large-scale, advanced
telecommunications systems, these consulting services
are helping Japanese companies to win contracts.
According to Japanese press reports, NTT personnel
are influencing LDC purchases by matching and
combining Japanese equipment with specific country
25X1
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Figure 6
Japan: Telecommunications Equipment Trade
Total imports -
Imports From US.
needs. ] ]NTT provides
guidance on export pricing to Japanese firms. =
The Relationship With MITI
NTT and the Ministry of Industry and International
Trade (MITI) maintain an important but uneasy
association in promoting Japanese R&D in advanced
electronics. The Japanese Government has been un-
successful in forging a clear division of responsibility
and authority between NTT and MITI. While NTT
has control of the telecommunications network, MITI
is responsible for fostering the growth and develop-
ment of the computer and information-processing
industries. As the distinction between computers and
telecommunications blurs, these institutional arrange-
25X1 ments are increasingly the source of conflict and
duplication of effort. F_~
The two bureaucracies have attempted to increase
their cooperation, however, as R&D in advanced
electronics has grown more costly and complex and
MITI faces reductions in its budget. The trend proba-
bly has been reinforced since 1981 by the presence of
President Shinto, who spent his private industry ca-
reer with companies strongly tied to MITI. Notable
examples of cooperation include (figure 7):
? Coordination of VLSI development. NTT and
MITI launched separate programs in the mid-1970s
but later agreed to exchange information. Accord-
ing to press reports, MITI focused more effort on
logic components while NTT focused more-effort on
memory and telecommunications-related
technologies.
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Figure 7
NTT- MITI: Major Programs
Semiconductors
MITI
Next
comp
gene
uter
ratio
Phas
n
e I V
LSI
NTT
F
p
ollow
rojec
-on
ts b
VLSI
Computers
c1R l
;I RUr0@WNffiM '((gip ROW
~09~ 0 dU 6?u?maap
MITI
Super high
performance
computer
Next generation computer project
Phase II-A (operating system software
development) i I
Next generation computer project
Phase II-B (peripherals and terminals)
Software prod
uction technology
development
program
Software maintenance
engineering program
U
mods dd0&
dm 5
wboom 5 ftffiW 0
NTT
[mug flfl ldN d?
on
Japanese fiscal year 1970 71. 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89
Precise cutoff dates for various NTT programs are not known. Key: MITI=Ministry of International Trade and Industry
b Estimated follow-on project; precise details and level of
commitment not known.
? Joint NTT-MITI funding of the CAPTAINS pro-
gram-an information network connecting tele-
phone and television systems.
? NTT performed much of the fiber optics and cable
R&D for MITI's development of optical instrumen-
tation and control technology for manufacturing,
according to press reports.
? NTT participation in MITI's Fifth-Generation
Computer Project is focused primarily on telecom-
munications-related applications at its Mushashino
and Yokosuka laboratories.
NTT =Nippon Telegraph and Telephone
VLSI=Very-Large-Scale Integration
DIPS=Den Den Kosha'Information Processing System
INS =Information Network System
Despite increased signs of R&D coordination, NTT
and MITI still operate at arm's length. Both agencies,
for example, have developed different constituencies
among Japanese firms, with NTT's supplier family
reported by the Japanese press as generally being
much more close-knit. NTT reportedly has been
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highly protective of the R&D information developed
in cooperation with its suppliers. Its four laboratories
are widely known for their tight secrecy, which has
hindered cooperation with MITI's Electrotechnical
Laboratory (ETL).
Many times, however, Japanese electronics firms are
able to take advantage of parallel NTT and MITI
programs for product development. For example,
MITI's Fifth-Generation Computer Project and
NTT's INS Computer Project are both designed to
produce computers with artificial intelligence. Except
for Mitsubishi, the major computer manufacturers
benefit from both MITI and NTT funding. Although
the value of NTT support is hard to quantify, we
believe that NTT involvement has been more impor-
tant commercially to the firms than the more basic
research sponsored by MITI.
because it:
industry favors NTT over MI
? *Does not force sharing of information among firms
and thus allows each firm to develop its own unique
commercial product.
? Provides not only financial and technical support
but also a market for products produced by the
firms.
? Has strong technical R&D capabilities. 71
Impact on Competitiveness of Japanese Firms
NTT's R&D and procurement policies have strength-
ened the international competitiveness of Japan's
semiconductor, computer, and telecommunications in-
dustries. We believe that NTT's relationship with its
key supplier companies-NEC, Fujitsu, Hitachi, and
Oki-has speeded these firms' commercial production
of a number of products and facilitated their moves
into international markets. Moreover,
Oki would have gon oue
business without the technical and financial help of
NTT.
Semiconductors S
NTT has been a leading force in advancing Japanese
semiconductor technology. NTT's major contribu-
tions have been through its sponsorship of a series of
three-year-long VLSI R&D projects with NTT family
firms (table 2). These projects covered R&D in devices
(such as the 64K and 256K RAMs), as well as the
materials (such as high-purity silicon) and production
equipment (such as electron-beam and X-ray exposure
systems). The participants in the first two projects
(VLSI I, 1975 to 1977, and VLSI II, 1978 to 1980)
were NEC, Fujitsu, and Hitachi. Toshiba has been
admitted recently (October 1982) to VLSI III, which
began in 1981
NTT's work in VLSI I, which included the develop-
ment of the 64K RAM, has contributed to Japanese
commercial success in this market. The technology
and experience gained from the R&D cooperation
with and early sales to NTT have advanced partici-
pating firms' technological and manufacturing capa-
bilities to compete with US industry. For example,
Japanese firms dominated the early 64K RAM mar-
ket-achieving a 70-percent world market share in
late 1981-and still account for well over 60 percent
of the market.
In the second VLSI project, NTT and three family
firms developed a 256K RAM. press 25X1
reports have stated that NTT transferred important
circuit and manufacturing technology on the 256K
RAM chip. to Fujitsu, Hitachi, and NEC. NTT's
transfer of 256K technology began at least as early as
1980-as confirmed by NTT's coauthorship of tech-
nical papers on the device with Hitachi. Although we
do not know the extent of this transfer, a 1982 paper
coauthored by NTT and Hitachi researchers indicates
that NTT played a key role in solving one of the more
difficult problems associated with the 256K
DRAM-soft errors caused by alpha particle radia-
tion. Also, according to the trade press, NTT is
continuing to provide design and manufacturing
assistance from its laboratories at no cost'to the firms.
We believe the firms' competitiveness has been bol-
stered by early sales to NTT. The three corporate
members of VLSI II began supplying 256K RAMs to
NTT in early 1983. NTT's purchases gave the firms
valuable experience in producing a complex device
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requiring highly sophisticated fabrication technol-
ogies. The 256K RAM is expected to be a bigger
seller than the 64K RAM. 0
The current VLSI III program could solidify Japan's
leadership in the integrated circuit (IC) memory
market. The goals include the development of a 1-
megabit RAM and computer-aided design (CAD)
systems necessary to design increasingly complex ICs.
Without NTT's support, we believe the Japanese
companies would have a tougher time commercializ-
ing the chip for the market.
In addition to pursuing state-of-the-art device tech-
nology, NTT has been instrumental in advancing the
support technologies needed by Japanese firms to
produce VLSI devices. NTT has conducted R&D on
microfabrication equipment and materials and is now
developing CAD systems required for the production
of advanced ICs. NTT assisted in the development of
two significant support technologies that will be im-
portant for the production and testing of the next
generation semiconductor devices:
? Electron Beam Exposure System: NTT and Hitachi
developed an electron beam exposure system that
can either generate masks required to fabricate the
fine patterns on ICs or write those patterns directly
on the silicon substrate. This system is the basis for
Hitachi's HL-600, which is currently being
marketed.
? 100 Megahertz (MHz) Tester: NTT has been in-
strumental in advancing VLSI integrated circuit
testing technology in Japan and jointly developed
the world's first 100 MHz tester with Takeda
Riken NTT pro-
vided the R&D services at no cost and shared its
previously acquired tester technology with the firm.
Computers 6
NTT computer development programs continue to
make significant contributions to the commercial
development of computers. NTT has been developing
standardized, online data communications and
processing systems known as the Den Den Kosha
Information Processing System (DIPS). The DIPS
programs ensure the availability of hardware and
software support needed for NTT's data processing
services.
The DIPS programs have had more impact on overall
Japanese commercial computer development than on
NTT's development of data communications network.
NTT has funded the development of nine DIPS
models by Japan's three leading mainframe manufac-
turers-Fujitsu, Hitachi, and NEC. Although the
DIPS computers have not been sold on the open
market, technologies developed in these machines
have been incorporated in the firms' commercial
product lines:
? A comparison of operating characteristics shows
that the Fujitsu M-380 and the NEC NEAC-
3200/70 are basically identical' to the DIPS-11/45
and DIPS-11/10 computers, respectively. 25X1
he recently introduced NEC ACOS-
750 and Hitachi M-240H computers are commer-
cial counterparts -to the NTT DIPS-11/25 and
DIPS-11 / 15, respectively.
NTT's R&D support sharply reduced the level of
internal R&D needed by Japanese manufacturers.
Overall funding for the DIPS programs has amounted
to nearly $600 million during the 1970s. Although
this funding does not seem to be large when compared
with the annual R&D budgets of IBM ($3 billion) or
AT&T ($1.8 billion), we estimate that it represents
almost 20 percent of all Japanese computer R&D
during the 1970s. We believe DIPS R&D funding for
Japanese FY 1983 is about $48 million. Research and
development for the current generation of DIPS
machines (the 11/5 series) started in early 1977; the
machines are now being shipped to NT
' In terms of CPU cycle time, cache storage capacity, maximum
storage capacity, channel throughput, systems confi on, sys-
tem power consumption and space requirements. 79urati
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We believe the Japanese manufacturers have been
able to use NTT resources to meet both NTT and
commercial market requirements. NTT has not
forced the development of a single unified family of
computers in the DIPS program; each firm has been
allowed to adopt a different architectural approach
and hardware base for its own machine. However,
according to NTT technical publications, the NTT
laboratories cooperated with each firm in specifying,
designing, and manufacturing each firm's DIPS hard-
ware system. Although the mechanisms and full
extent of support provided to the individual manufac-
turers during early stages of product development are
unclear, NTT provides
space at its Yokosuka laboratory for the firms' com-
puter researchers. The NTT laboratories can also
conduct parallel research or branch off into comple-
mentary areas; in both cases, they share the results
with the frrmsl
NTT has also been instrumental in supporting devel-
opment of commercial peripheral equipment. The
DIPS program, for example, has fostered develop-
ment of mass storage and disk storage devices. In
October 1980 NTT announced the development of a
large-capacity, high-density disk drive to be used to
support data processing on the DIPS computers. C
Japanese press reporting indicates that NTT plans to
provide over $1 billion and technical support for
advanced computer development during the 1980s.
This exceeds the support that will be provided directly
to Japanese computer firms by MITI in its much-
publicized Fifth-Generation Computer, supercom-
puter, and new functional devices R&D during the
same period. The goals of the NTT programs are to
develop two series of general purpose computers to be
introduced in 1987 and 1990 for use by NTT in its
integrated information network system. According to
press reports, the later series will incorporate revolu-
tionary changes in computer technology using ultra-
high-speed components and a radically new design.
We believe the new NTT programs will have signifi-
cant commercial implications for Japan's computer
industry. As in past programs, we expect Fujitsu,
NEC, and Hitachi to produce their own commercial
versions of NTT's planned computer systems. NTT
technical plans, in fact, delineate the similarities
between new DIPS models and new commercial
computers by the manufacturers.
Telecommunications
By helping to upgrade the technological level of
family firms and providing a guaranteed market
largely protected from outside competition, NTT has
been a vital factor in the development of an interna-
tionally competitive telecommunications industry.
The opportunity to work closely with NTT for product
design and to have access to NTT facilities for field
trials and advanced engineering developments has
provided invaluable support for family firms. NTT
provides technology, systems definition, and operating
test opportunities to manufacturers for the develop-
ment of telecommunications products that will be
used in the NTT system (table 3).
The competitiveness of Japan's optical communica-
tions, for example, has been greatly enhanced through
NTT actions. Although the basic research for fiber
optics was done almost exclusively in the United
States and Western Europe, the Japanese have be-
come a world leader in this area. This has resulted, in
part, from NTT's provision of technology and systems
experience, and its willingness to assume developmen-
tal risks. NTT was a major supplier of this technology
to Japanese firms in the 1970s through its relationship
with Bell Laboratories, through its own internal R&D
work, and through work contracted out to industry.
NTT was also instrumental in forging a national
consensus to try to achieve world leadership in fiber
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optics. This consensus led to substantial government
25X1 funding of fiber optics by MITI and other government
agencies and the stimulation of a wide variety of early
commercial applications.F---]
NTT continues to direct research on fiber optics, light
sources, integrated optics, and new materials for
advanced telecommunications systems. The vapor
phase axial deposition (VAD) process developed by
NTT, for example, may emerge as the world's most
efficient process for making the single mode fiber that
will be the heart of the next generation of fiber optic
systems. A probable motive for pursuing this work
was to develop a process that would be an alternative
to the modified chemical vapor deposition process
developed by US firms. Ultimately, the NTT network
may benefit from the development of the VAD proc-
ess, but the main beneficiaries will be the Japanese
companies exporting optical fibers and systems.
When joint R&D with NTT has been unavailable,
Japanese telecommunications firms have had consid-
erable problems developing specific products. In tele-
communications close relations with an operating
company are critical in product design and field
testing. For example, because NTT was slow to
develop digital switching technology during the 1970s,
both NEC and Fujitsu developed local and private
branch exchange switches independently to address
the burgeoning world market. The resulting switches,
however, had multiple design problems. US purchas-
ers of NEC's switches have complained of poor
software design, reliability problems, insufficient con-
necting cable, and the warping of printed circuit
boards from excessive heat. The system documenta-
tion has also been criticized as having inaccurate and
incomplete wiring diagrams.
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There are two forces that will influence the future of
NTT and its role in promoting the Japanese electron-
ics industry. One is the planned Information Network
System (INS), which is viewed as the infrastructure
needed to support the "advanced information society"
of the future. This system will require huge invest-
ments in future plant and equipment as well as in
R&D and would thereby strengthen the Japanese
communications industry significantly. The other is
the proposed restructuring of NTT, which throws into
question its future leadership in guiding technology
developments in the electronics industry and in the
kinds of services it can provide. F__1
INS: Leading the Way Into the Next Century
Japanese telecommunications developments through
the rest of this century will be guided by the INS.. The
INS will merge computers and communications
equipment and integrate voice, data, video, informa-
tion processing, and other communications services
within a single advanced network. Current NTT plans
call for the system to be largely completed by the end
of the century at a cost usually estimated at $100
billion.
By being one of the first to conduct tests of a fully
integrated services digital network, Japan is position-
ing itself to set international industry standards and to
compete in what Western industry analysts agree is
one of the largest and fastest growing markets in the
world. NTT is building an INS test facility in the
Tokyo suburbs; it will be the largest single project
ever undertaken by NTT. The facility is intended to
provide a proving ground for technology and to gain
experience working with digital communications sys-
tems. Specific tests of digital switching equipment are
already under way, and operations with subscriber
connections are scheduled for fall 1984.
We believe NTT will use the INS to further its
control over Japan's telecommunications industry.
NTT has publicly argued that the hardware and
infrastructure should be in place before opening the
telecommunications services market to private-sector
competition.
this will enable NTT and its supplier companies to
develop their own systems software and services and
limit foreign entry into their private market. In
addition, the program serves as a means to continue
supporting the Japanese semiconductor and computer
industries. NTT, for example, believes that the tele-
communications industry will have requirements for
microelectronic devices 100 times faster than those
currently used in telephone networks. This leads to
requirements for ultra-high-speed computers, which
in turn can be used to justify a wide range of R&D on
non-silicon-based components.
INS, if fully implemented, will lead to.a tremendous
demand for a wide range of telecommunications
products; those companies that are able to participate
in.the R&D and procurement process will benefit
greatly. NTT has already selected Japanese firms to
develop equipment technologies jointly for the next
five to 10 years-virtually locking US firms out of
initial INS sales. Since INS will lead to a tremendous
demand for a wide range of telecommunications
products, the extent to which Japanese firms maintain
this hold on the INS program will have a significant
impact on Japan's future competitiveness. Nonethe-
less, US firms' current lead in software technologies
needed for communications networks could provide
them with some foothold into this market.
The Moves Toward Breakup
NTT's declining profits have led many Japanese
officials to conclude that the corporation must be
reorganized and privatized before it becomes a finan-
cial drain on the government. The NTT financial base
may not support the investment needed for developing
the high-level information systems planned for the
future. Although NTT currently shows a profit, its
annual revenues have been rising at an annual rate of
4 percent and its expenditures at 5 to 6 percent (figure
8). Income is unlikely to grow because the demand for
new telephones has peaked, and the market for new
services and products is still undeveloped. On the cost
side, NTT has large long-term liabilities and associat-
ed financing expenses. Continued large investments-
which are likely to be made for new information
systems-would put additional pressure on profits.
Moreover, labor costs represent one-third of total
25X1
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Figure 8
NTT: Trends in Growth Rates of
Total Revenues and Expenses
Proposed changes in the laws and regulations to
permit private enterprises to enter many aspects of the
telecommunications industry, however, may severely
limit the operations of foreign firms in Japan. Al-
though MITI has promoted complete deregulation
and the Administrative Reform Committee has rec-
ommended a steady transfer of control of telecom-
munications services to the private sector, the Minis-
try of Posts and Telecommunications-the
government regulator of the industry-is currently
pushing a bill that would permit only firms with less
than 20-percent foreign equity participation.to sell in
the Japanese market. If passed, such legislation could
severely cripple the operations of many firms, such as
multinational banks, airline companies, and credit-
card financial firms, already established in Japan and
preclude the participation of other potential competi-
tors in this rapidly growing market. 25X1
25X1
The restructuring of NTT is highly likely,
25X1
.Revenues .Expenses
Source: NTT Annual Report
costs and reflect the huge bureaucratic nature of the
organization. NTT has been slow in reducing excess
labor.
as private companies.
Current government plans seek to reorganize the
company in steps, first dividing the company into a
special corporation and several regional companies
and eventually moving to full private ownership. The
special corporation, similar to the Bank of Japan, is
envisaged as the central company and would be owned
by the government. The regional companies would be
either jointly owned by the government and private
interests or completely privately owned. Under the
currently planned restructuring, data communications
and the household equipment divisions will be set up
but opposing factions have already delayed its
implementation and lengthened its planned change
into a private company. Originally, the Committee on
Administrative Reforms recommended in July 1982
to break the present system into central and regional
companies within a five-year period. After consider-
able debate, a new LDP Reform Draft Bill now
recommends that NTT should be first placed under
private management (special corporation), and then
divided and reorganized within 10 years. Industry
analysts believe the Japanese will use this delay to
assess the impact of the AT&T divestiture on the US
telecommunications industry before major changes
are made. At a minimum, however, we expect NTT to
be converted into a special corporation. NTT appears
to be taking steps in preparation for reform:
? An industrial communications system service divi-
sion is to be established to offer consulting services
to private industry and to design and develop com-
munication systems, such as local area networks and
value-added networks, in competition with family
firms.
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? A home services division is being set up to unify
home service operations, including materials pro-
curement, equipment development, sales, installa-
tion, and maintenance.
? Plans to begin independent development and sales of
commercial products related to INS have been
initiated.
? NTT has begun setting up and/or activating organi-
zations that would control the diffusion of its tech-
nologies to private companies. The prime examples
are Nippon Denshi Gijutsu, which has been set up
to produce prototype components based on NTT
technology, and NTEC, which sells NTT
technology.
? NTT has begun expanding the number of firms
25X1 from which it buys products and with which it
performs joint R&D.
The Diet is expected to discuss the reform plan soon
and could make a decision as early as spring 1984.
alization.
Reorganization could set in motion changes in NTT's
relationships with its suppliers. Competition in areas
where NTT has traditionally been a monopoly provid-
er of services will force the company to seek tighter
control of costs. This, in turn, will probably force
NTT to reduce the subsidy included in its procure-
ment and seek ways to improve the efficiency of its
R&D effort. In seeking low cost suppliers, NTT may
well be broadening the base of firms with which it
does business. Consequently, benefits of association
could be shared by a larger number of Japanese firms.
Firms with established relationships, on the other
hand, could well see their benefits diluted..In addi-
tion, because NTT is moving into new business areas,
some family firms may come to view NTT more as a
competitor than as a partner. On the trade front, we
believe reorganization is unlikely to result in a mas-
sive opening of the Japanese market to foreign suppli-
ers. Although some loosening is likely, traditional
supply patterns will probably rule out complete liber-
Implications for the United States
NTT's involvement in various electronics programs is
providing Japanese electronics firms with the produc-
tion capability and technologies necessary to compete
more effectively against US firms. NTT's ability to
diffuse know-how and provide a guaranteed market
has upgraded Japanese firms' capabilities, making
them comparable, and in some instances superior, to
US firms. As a result, many US executives believe the
US balance of trade in electronics will continue to
deteriorate. These effects will intensify not only as
NTT continues to provide large government resources
for the development of new technologies under the
INS program, but also if foreign firms are allowed
only limited participation in the communications
equipment and services market. Looking further
ahead, industry analysts believe the growing competi-
tiveness of Japanese telecommunications equipment,
along with continued NTT support of the semiconduc-
tor and computer sectors, will have direct effects not
only on the electronics industry but on other indus-
tries as well.
Although efforts to liberalize NTT's procurement
practices under the US-Japan Bilateral Agreement
have resulted in opening up procurement to nonfamily
firms, imports of US products will not necessarily
increase. We believe that many of the new opportuni-
ties are likely to be exploited by nonfamily Japanese
firms. As NTT broadens the number of firms partici-
pating in its R&D and procurement process, more
firms are likely to gain technical capabilities, result-
ing in increased competition for US firms. Moreover,
US firms are likely to find that large investments will
be required to compete effectively for NTT busi-
ness-particularly for participation in joint R&D
projects. Nonetheless, a number of US executives
believe that they must compete with the Japanese
firms in their own market in order to gain an under-
standing of their competitors and to limit as much as
possible any financial and technical strength the
Japanese could obtain in an otherwise protected do-
mestic market.
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Proposed changes in the laws and regulations govern-
ing telecommunications services could also limit the
operations of existing US firms in Japan and the
activities of potential competitors in this market. The
current plan advocated by the Ministry of Posts and
Telecommunications to maintain government jurisdic-
tional control of the private enhanced services mar-
ket' and to limit participation in this market to
majority-owned Japanese firms (80 percent or more)
could enable NTT to continue to maintain its monop-
oly position. In addition, industrial experts believe
that the growth in equipment sales will peak over the
next few years as most public telephone and telegraph
companies complete the upgrading of their facilities,
which in turn will lead to major growth in sales of
enhanced services.
We believe that a restructured NTT will continue to
enhance the international competitiveness of Japan's
electronics industry. Indeed, industry observers be-
lieve NTT will use its $100 billion, 20-year INS
program as a vehicle to continue support of family
firms and to minimize electronics imports. Even
though procurement is being liberalized, NTT has
already selected most of the firms to participate in
joint R&D under the INS program; they are all
25X1 Japanese. Since US firms are not participating in the
R&D process, it is unlikely that a significant amount
of US equipment will be sold to the INS market. n
We believe NTT's continued technology and market
support will contribute to the erosion of US domi-
nance in the world electronics industry. Unlike many
US competitors, most of the major Japanese compa-
nies are highly integrated and have significant capa-
bilities in all the major components of the information
industry. Because of this advantage, the Japanese are
well positioned to enhance their market position. As
the Japanese capture export markets and make in-
roads in the US market, there will be significant
pressures on individual US companies. To the extent
that losses in market share erode the profitability of
US manufacturers, their ability to develop new tech-
nologies and product lines will suffer. The implica-
tions of a reversal in electronics leadership from US
producers to highly integrated Japanese firms could
be far reaching. In particular, the soaring develop-
ment costs of the latest equipment, such as computer-
controUed digital switching systems, are forcing all
telecommunications companies to search for foreign
business. The world market may not be large enough
for all manufacturers, however, and most industry
executives believe this will cause the world's commu-
nications industry to consolidate.
NTT will remain an important stimulator of new
technological developments, many of which have dual
uses in commercial and military applications. The
increased technical capability that NTT is developing
could frustrate US efforts to control the flow of
important military technologies. Specifically, NTT
has taken the lead in some research areas of military
significance and of interest to the Soviets including:
? Gallium arsenide devices for digital and optoelec-
tronics applications.
? Advanced semiconductor design, manufacturing,
and test equipment.
? Computer networks.
? Digital switching.
? Fiber optic communications systems.
As NTT continues to develop these dual-use technol-
ogies, we expect the Soviet Union increasingly to
target NTT and its suppliers for important military
technologies. The Soviets have already attempted the
illeeal acouisition of advanced technoloe~
U 25X1
dependency on Japanese suppliers could develop for
certain key military components as NTT leads the
development of advanced technologies.
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