SPEEDA INSIGHTS_A Brief Glance at Japan's Mobile Communications Related Industries

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A Brief Glance at Japan's Mobile Communications Related Industries
By Yo Yamadori - SPEEDA Analysis Team
Translated by Viktor Makhnutin
The following is a special edition for industries related to Mobile Communications, featuring the three
main telecom carriers in Japan and companies in the smartphone-related field. It is based on the value
chain provided in SPEEDA, as well as the fluctuations of fundamental figures disclosed in the securities
reports of companies across a ten-year period.
Mobile Communications Play a Key Role in Japan’s Communications
Infrastructure
Primary telecommunications operators, also known as telecoms carriers, handle data exchanges
amongst computers or multiple devices. The value chain centred on mobile communications is detailed
in the diagram below.
In Japan, with control over devices used in their networks, telecoms carriers have gained a foothold in
the networking business, thus exerting powerful influences over content providers.
A Brief Glance at Japan's Mobile
Communications Related Industries
20170627

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Japanese manufacturers have also established a presence in the hardware production segment, with
many electronic components produced in Japan being used in world-renowned, high-end smartphones.
Such high value-added products manufactured in Japan include sensors, camera components, and
connectors for telecommunication parts and devices, etc. Going forward, these products are expected
to demonstrate their supremacy in the IoT market, where growth is expected.

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Industry Trends: Area Expansion and Advancement of Telecommunication
Standards
The three leading telecoms carriers in Japan are NTT Group, KDDI Group, and SoftBank Group. They
handle fixed-line and mobile voice-calling services, and constantly competing for customers. As of end-
2016, the total number of mobile voice-calling contracts was 160.71 million contracts; breaking it down,
NTT DoCoMo led with 73.59 million contracts, followed by au at 47.83 million contracts, and SoftBank
(including Y!mobile) at 39.29 million contracts. In terms of market shares, NTT Group was ranked top
with a share of 45.8%, followed by KDDI Group and SoftBank Group at 29.8% and 24.4%, respectively.
Since NTT East and NTT West launched the optical fibre wholesale business in 2015, telecom carriers
began to provide service packages that combine optical fibre internet and mobile voice-calling services.
Furthermore, following the liberalisation of electricity retail in Japan in April 2016, they are now trying
to lock in customers by offering discounts for packaged deals that include electricity.

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MVNOs Growing in Presence
Mobile virtual network operators (MVNOs), who offer low-price smartphone services, have
experienced rapid growth since 2015. The number of such contracts reached 11.5 million as of
December 2015, constituting 7.2% of the total number of mobile contracts.
In 2015, the number of mobile phone users reached 99.44 million people, and 64.96 million of them
were smartphone users. The proportion of smartphone owners has been steadily expanding,
increasing by around 8% YoY to an estimated 53.1% share, and further growth is expected in future.
On the Path Towards 5G
In the medium term, the fifth-generation (5G) mobile network service is planned for deployment
towards the start of the 2020 Tokyo Olympic and Paralympic Games in Japan. The main prerequisites
for 5G network connections include 1) large capacity, 2) high speed, 3) low latency and high reliability,
4) simultaneous connections for an extremely large number of devices, and 5) low costs and better
power-saving features. The capacity of 5G, which is 1,000 times that of 4G, and its speed, which is 100
times higher than that of 4G, attract the most attention.
Telecom Carriers Taking Unique Moves with Telecommunication Business as the
Foundation
Each telecoms carrier is taking unique moves amidst the increasing maturity and structural changes of
the mobile communications industry.
NTT DoCoMo
NTT DoCoMo, one of the three biggest mobile communications operators in Japan, holds the top share
in the number of contracts domestically. NTT DoCoMo contributes more than 50% of the NTT Group’s
operating profit, and features an extremely low debt-to-capital ratio and high financial stability.
NTT DoCoMo’s operations include the mobile communications business and the smart life field
business, which includes the smart life business as well as international, value-added, and auxiliary
services. The company aims to expand its mobile communications business, as well as the smart life
business going forward. In addition to its “dmarket” service, which has yielded significant results, the
company also focuses on the “+d” service, a value-added service it co-created with outside partners.

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KDDI
KDDI offers mobile communication services for individual customers under the “au” brand, broadband
internet services, as well as ICT solutions for corporates both at home and abroad. It also has the major
CATV operator JCOM under its umbrella.
In the company’s fundamental domestic communications business, KDDI is advancing its 3M strategy
of “Multi-Use”, “Multi-Device”, and “Multi-Network”. Furthermore, it is also growing and expanding
its financial products, as well as electricity-related and payment services, aiming to maximise the “au
Economic Zone”.
SoftBank Group
SoftBank Group has achieved growth with the internet business being its business foundation. Within
the information and telecommunications sector, the company operates diversified businesses
including Domestic Telecommunications, Sprint, Yahoo, Distribution, and ARM. In June 2015, it
launched the sale of personal robot “Pepper”. The company also focuses on its investment business
and provided funding for multiple companies such as Alibaba, China’s largest auctions/e-commerce
website, and Supercell, a global games developer from Finland (sold all shares in 2016). Furthermore,
the company established “Vision Fund”, a high-tech investment fund with an asset of USD 100 billion,
and this calls for further attention.
Notable Smartphone-Related Hardware Manufacturers
The following section will outline the trends of smartphone-related companies.
 Alps Electric
Manufactures electronic parts for various fields leveraging its precision processing technology for
moulds. Stable quality and mass production are Alps Electric’s strengths. Receives a great deal of
orders from the automobile industry.
More than 50% of sales are automobile-related parts, but components for Apple products also
comprise a large share. Supplies various parts, such as geomagnetic sensors or camera shake
prevention systems for iPhones and smartphones in general, also offers parts for Android devices.

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 Murata Manufacturing
Manufactures major electronic parts such as ceramic capacitors and communication modules.
Based on Functional Ceramics, Murata Mfg. also develops its own production equipment. Handles
ceramic capacitors for automobiles and smartphones.
With the headphone jack gone since iPhone 7, the importance of wireless functionality is
increasing. The company's near-field communication module (Bluetooth) is indispensable for
future smartphones, and expected to play the same vital role in other IoT devices in general.
 Nitto Denko
Based on its core adhesive and coating technologies, Nitto Denko has developed more than 13,500
kinds of products for more than 70 industries. The company also launched its “Area Niche Top”
strategy centring on emerging markets.
It also has a “Global Niche Top" strategy, capturing leading shares with many of its niche products.
Nitto Denko boasts the top share in the global market of polarising plates for liquid crystal panels,
and also supplies transparent conductive films for iPhones.
 Japan Display
Established in 2012 as Sony, Toshiba, and Hitachi integrated their small and medium-sized display
businesses.
Japan Display holds a top share in the global market for small and medium-sized displays for
smartphones and automobiles. It also handles displays for existing iPhone and Android
smartphones, and is focusing on developing OLEDs that will become the next generation display.
 TDK
An electronic parts manufacturer with strengths in its wide range of product areas. Main products
are passive components. With efforts put into to the development of its global business, TDK's
overseas revenue share is about 90%.
Supplies high-frequency parts and rechargeable batteries (polymer batteries) for iPhones. Besides
components for iPhones, TDK also handles protection films for displays and speakers.
 Sony
As a comprehensive home electronics manufacturer, Sony has high brand power in the global
market. While the games and movie businesses are performing well, the mobile and others
businesses are struggling.
Sony boasts a 40% share of the image sensor market. Its image sensor and other parts are featured
in iPhone 's camera, and used in Sony’s own Xperia smartphones. In Japan, the share of iPhone and
Xperia is large, and it can be said that Sony's components are used in most smartphones.

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Ten Years Ago and Now: A Comparison of Figures for Leading Companies
The following section compares trends for leading industry players over the FY2005–15 period.
The graph below shows the trends in revenue, operating profit, and operating margins. The operating
profit value is on the vertical axis, the operating profit margin is on the horizontal axis, and the size of
the bubbles represents the amount of revenue.
 Minebea
Mainly develops electronic devices and precision motors. Minebea focuses on ball bearings,
composite products, lighting equipment, measuring instruments, and aircraft parts.
Minebea has announced its plans for management integration with Mitsumi Electric in 2017.
It holds the top share in the global market for miniature bearings. For smartphones, the company
offers backlights (lighting devices for LCDs), accounting for 70% of the world market share.
 NOK
Japan's first oil seal manufacturer, with a high market share of 70% domestically and 50% overseas.
Also focuses on flexible substrates and on rollers for office machines.
NOK’s oil seals hold a top global market share. Flexible printed circuits (FPC) are handled by its
subsidiary Nippon Mektron. These products are used for small-sized digital equipment, and a large
portion of them is supplied for iPhone.
 Japan Aviation Electronics Industry (JAE)
A major connector manufacturer. Overseas revenue ratio is high. Its main applications are mobile
phones and automobiles.
JAE supplies miniature components such as crystal oscillators used for communication devices and
also built into iPhones. In addition to automotive and aircraft equipment, it is expected that
components produced by JAE will be used for general IoT equipment in future.

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The following section shows trends in market capitalisation, earnings per share (EPS), research and
development (R&D), and the number of employees over the ten-year period.
The table above is a list of companies based on the market capitalisation value as recorded in each
company’s FY2015 statement. However, the latest figures (as of 21 March 2017) for the three telecoms
carriers were as follows: around JPY 10 trillion for NTT Group, JPY 9 trillion for SoftBank Group, and JPY
7.5 trillion for KDDI Group.

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Meanwhile, the EPS comparisons reveal that Murata Manufacturing experienced outstanding growth.
Conversely, the majority of the bottom five companies in EPS growth fell into the red.

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In terms of revenue per employee, many companies showed a decrease compared to the figures ten
years ago.
Note: Average salary is based on the data from the companies’ non-consolidated statements.

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In Closing: Circumventing the Dumb Pipe Operation Model a Challenge
Demand for smartphones came to a full circle, but there is no successor on this horizon as of lately.
Smartwatches and smartglasses may be considered valid candidates for that position, but it is unclear
whether they will gain traction going forward.
Meanwhile, on 27 February 2017, 22 global telecoms carriers and vendors announced their collective
support for the acceleration of the 5G commercialisation project by 3GPP to enable the deployment
as early as in 2019, instead of the originally proposed 2020. Going forward, 5G network is likely to be
a significant driver for the development of various trending technologies such as IoT, as well as self-
driving cars, drones, and VR.
Earlier, NTT DoCoMo’s former CEO, Ryuji Yamada, commented that when thinking as far ahead as 2020,
achieving revenue growth from communication charges will probably be difficult, and the telecoms
carrier business cannot prosper for that long. This indicates that avoiding the dump pipe operation
model, or providing a neutral networking service for simple data transfers, will be increasingly needed
and pose challenges to telecoms carriers.

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Tokyo
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