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UNCLAS SECTION 01 OF 02 TOKYO 003509 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/J - PLEASE PASS TO USTR MCHALE 
COMMERCE FOR ITA DICKSON, LEE, AND HEINEMAN 
 
E.O. 12958: N/A 
TAGS: ECPS ECON JP
SUBJECT: Why did Vodafone fail in Japan? 
An insider's take on the failure of Japan's largest foreign 
investment. 
 
 
¶1. (SBU) Summary: Vodafone Japan's CFO blamed the failure of the UK 
mobile phone operator, which was the largest foreign investment in 
Japan on: 1) bad managers brought in by Vodafone who never 
understood the local environment; 2) the difference in shareholder 
expectations of profitability in Europe and the United States 
compared to Japan; and 3) the unfair allocation of spectrum in 
Japan, which made it very costly for Vodafone to operate 3-G phones 
efficiently. 
End Summary 
 
------------ 
Background: 
------------ 
 
¶2. (U) Vodafone sold its Japanese business (Japan's third largest 
mobile phone company) to the Tokyo-based Internet company Softbank 
in April 2006 for 1.75 trillion yen (about 15.4 billion U.S. 
dollars).  Vodafone-Japan which has about 15 million subscribers , 
had represented the largest foreign investment in Japan since 
Vodafone bought J-Phone in 2001.  Because Vodafone retains 400 
billion yen (about USD 3.5 billion) in shares in the Japanese 
company, the British parent company remains one of the largest 
foreign investors in Japan. 
 
¶3. (SBU) Vodafone Japan's Chief Financial officer, John Durkin, who 
first came to Japan about 15 years ago and had earlier worked as CFO 
for Nike Japan, shared his views on the reasons Vodafone retreated 
from the Japanese market with the embassy on June 2 
 
--------------- 
Bad foreign management 
--------------- 
 
¶4. (SBU) The most important reason, according to Durkin, was that 
Vodafone brought in the wrong people to manage the company and kept 
bringing in new teams to fix the problems created by the last 
management team.  Durkin said he had worked for five presidents in 
five years at Vodafone.  Worried about sinking profits in early 
2005, Vodafone brought in a new management team that was 
particularly dysfunctional.  The British and Dutch managers were 
culturally insensitive to the point of racism, Durkin asserted.  The 
Japanese managers and engineers were aware of the company's problems 
but were discouraged from saying anything and chose to keep silent. 
As a result, the company simply stopped functioning for about 9 
months, according to Durkin.  The entire management team -- except 
for Durkin -- was fired in late 2005, but it was too late for 
Vodafone to turn things around.  (Note, in a previous conversation, 
Durkin had talked about Vodafone's botched roll-out of its 3G phones 
in Japan and the fact that the 3G handsets, which it had 
successfully marketed as expensive, high-end devices in Europe, were 
regarded as clunky and poorly designed by Japanese consumers.  End 
Note.) 
 
----------------------------------- 
Higher Foreign shareholder expectations 
----------------------------------- 
 
¶5. (SBU) The second problem for Vodafone was the higher expectations 
of profitability from the start among U.S. and Europe shareholders 
compared to Japanese shareholders.  Japan was Vodafone's largest 
mobile market in terms of subscribers, but compared to other markets 
in which the company operated, the profit margins in Japan were very 
low, about ten per cent.  However, in Japan, that ten per cent 
profit margin put Vodafone among the top class of Japanese 
companies, Durkin claimed.  Still, from early 2004 Vodafone felt 
considerable pressure from shareholders to increase its 
profitability or hang up on its mobile phone business in Japan. 
 
------------------------------ 
Unfair allocation of Spectrum 
----------------------------- 
 
¶6. (SBU) Even if Vodafone had not had such serious management 
problems, Vodafone Japan would have had a hard time succeeding 
because of the unfair allocation of spectrum by the Japanese 
government, Durkin contended.  He believed that the spectrum problem 
seriously hindered Vodafone's ability to grow and succeed in Japan. 
Durkin explained that the 2.1ghz allotted to Vodafone was too high 
for the efficient 3G wave propagation and made it difficult to 
penetrate walls.  Vodafone estimated it would need 25,000 base 
 
TOKYO 00003509  002 OF 002 
 
 
stations to overcome the problem.  Vodafone Japan had invested 600 
billion yen (about USD 5.2 billion) in upgrading its systems and had 
already built 14,000 base stations at the time of its sale to 
Softbank. 
 
¶7. (SBU) Durkin said that Softbank needs to get access to the 800 
MHz spectrum to operate efficiently, but that the Ministry of 
Internal Affairs and Communications (MIC) did not like Softbank's 
Chief Executive Masayoshi Son, and "was not inclined to do him any 
favors."  Son also told him that he would like to use GSM, Durkin 
added.  However, MIC was giving Son, a self-made billionaire of 
Korean ancestry, "a hard time", said Durkin.  (Note: GSM refers to 
the Global System for Mobile Communication which is the most popular 
standard for mobile phones in the world and is used, for example, in 
Europe, Asia, Latin America, and in the U.S. by Cingular and 
T-mobile among others. End Note.) 
 
--------------------------------------------- --- 
More troubles ahead for Japan's mobile operators 
--------------------------------------------- --- 
 
¶8. (U) Durkin predicted that as IP (internet protocol) telephony 
grows and has a greater impact on the mobile phone market, within a 
few years' time companies will  make most of their money in 
providing content and services.  Softbank, with its tie-up to Yahoo 
Japan was in a good position as a content provider, he pointed out. 
(Note: In May, Softbank also announced an agreement with Apple to 
develop jointly cellular phone handsets that have built-in iPod 
digital music players and can download songs directly from Apple's 
iTunes Music Store.) 
 
¶9. (U) DoCoMo, NTT's mobile phone subsidiary, would like to turn 
itself into a credit card company through its "electronic wallet" 
phones, claimed Durkin.  (Note: In March 2006 DoCoMo teamed up with 
Mizuho Bank to allow its cell phones to be used as full-fledged 
credit cards.  DoCoMo phones had already had the capability to work 
as prepaid wireless cash cards.  In May, DoCoMo bought two per cent 
of Lawson, one of Japan's largest convenience store chains, another 
signal of its intention to strengthen services based on cell phones 
equipped with "mobile wallets," which have built-in chips for 
storing electronic money and function as credit cards.  These moves 
are a part of DoCoMo's overall strategy of seeking new ways to make 
money as its mobile phone revenues decline.  End Note.) 
 
¶10. (SBU) As for the future of Vodafone Japan, there is, on paper, a 
Vodafone-Softbank joint venture to develop technology and content 
and to invest in start-ups, and in China and India. However, the 
joint venture so far remains unfunded and with only tentative plans. 
 As CFO, Durkin was spending most of his time handling the personnel 
issues of laying off all of Vodafone Japan's management.  He 
expected to be one of the last employees of Vodafone Japan and 
intends to leave Japan for a year in order to avoid the massive tax 
headaches of a foreigner no longer working for a foreign company in 
Japan. 
 
SCHIEFFER