Phone deal prises open Japan’s market

Date: 24/06/1999

By Tim Jones

EU TRADE negotiators believe they are on the verge of prising open Japan's telecommunications market following Cable & Wireless' €500-million take-over of a domestic long-distance phone operator.

The victory of the UK's second largest telecoms firm in an unprecedented hostile bid for a Japanese company could herald greater openness in Tokyo to foreign competition and, more importantly, to EU political pressure, according to officials and European telecoms executives.

"This bodes well for the EU's deregulation agenda in Japan including really hot issues like construction costs, interconnection, cross-subsidy and the transparency of accounts," said a Union official. "Until now, there has only been significant foreign direct investment in areas where Japanese business is in trouble. This is a first in Japanese cor-porate history."

In March, C&W bid for the 82.4% it did not already own of International Digital Comm-unications (IDC), a long-distance carrier created in the mid-Eighties by the British firm, Toyota Motors and the Itochu Corporation.

Under IDC's founding agreement, any of these three had the right to match an outside bid and the other investors were obliged to sell their stock to a founder-shareholder rather than a third party.

However, when Japan's giant 65.4%-state-owned domestic carrier Nippon Telegraph and Telephone made a counter cash-and-stock bid worth €505 million, the IDC board recommended the NTT offer.

C&W was outraged and enlisted the help of the British government as well as the European Commission, which conducts the market access negotiations with the Japanese government and monitors implementation of World Trade Organisation telecoms rules.

UK Prime Minister Tony Blair wrote to his Japanese counterpart Keizo Obuchi and his officials kept in close contact with Acting Trade Commissioner Sir Leon Brittan, who was preparing an updated list of the EU's priorities for the deregulation of Japan's telecoms and drugs markets.

This kind of pressure is usually only applied by the Clinton administration, which has led to fears in European capitals that the Japanese telecoms market could open up lopsidedly in American carriers' favour.

The C&W breakthrough suggests otherwise. By the time UK Trade Minister Stephen Byers visited Tokyo to press C&W's case, the battle was already over. NTT president Junichiro Miyazu complained that the fight over IDC "could not drag on any longer" as the price had gone too high.

"NTT's case for taking over IDC was based on the way the Japanese corporate system has always worked; it is all about deep business relationships rather than who owns whose stock," said a European telecoms company official in Japan.

NTT is excluded from competing for long-distance services overseas until next month and IDC would have given the national champion an instant foothold in international markets. Instead, said Miyazu, the company will establish a new arm dealing with long-distance calls business.

Commission and industry officials are hopeful that a new post-IDC climate will strengthen the EU's arm in dealing with the Japanese ministry of post and telecommunications over the rates NTT charges for switching operators on and off its network ('interconnection') and the terms of the company's restructuring. "Japan is lagging behind in implementing WTO cost-based interconnection," said an industry source.

The ministry has approved a cost-based interconnection system for NTT but tariffs still include the company's high historic costs and the regime limits interconnection for the full range of modern telecoms services including toll-free dialling and directory services.

"The costs of building a network are prohibitive," said an EU official. "What would cost €50,000 to build a kilometre of network in London would cost €1 million in Tokyo."

US company Global Crossing announced this week that, together with local firm Marubeni Corporation, it would build a new network without accessing NTT's infrastructure, with the aim of reducing international bills by as much as 30%.

So far, no European companies have taken an equivalent plunge. But Japanese Trade Minister Kaoru Yosano said this week that he would "sincerely welcome" foreign bids for domestic companies or direct investment in profitable sectors.