NEC Corporation

An Interview with the Management

Tadahiro Sekimoto
Chairman of the Board

Hisashi Kaneko

How would you characterize NEC's operating environment in fiscal 1996, ended March 31, 1996?

Despite the overall sluggishness of the Japanese economy, the electronics sector enjoyed continued growth. Due to the growing worldwide implementation of sophisticated computer networks and the rapid development of multimedia, electronics markets overseas also remained buoyant.

Against a background of "megacompetition" in the personal computer (PC) business, successive reductions in prices created new demand and PC markets around the world enjoyed rapid expansion. Moreover, fiscal 1996 saw active investment worldwide in next-generation communications infrastructure. Japan's mobile communications market, in particular, showed spectacular growth, due to such factors as the inauguration of personal handyphone system (PHS) services.

Reflecting the global expansion of electronics markets, demand for semiconductors, particularly dynamic random access memories (DRAMs), soared.

What effect did these developments have on NEC's business results?

In fiscal 1996, net sales grew 17 percent from the previous fiscal year, to 4,397.2 billion yen ($41,095 million), supported mainly by robust sales in the semiconductor, mobile communications, and PC markets. The ratio of overseas sales to net sales rose to 28 percent, from 27 percent in the previous fiscal year, due principally to an impressive gain in overseas sales of semiconductors.

Net income soared 119 percent, to 77.2 billion yen ($721 million), as a result of higher overall sales and Companywide rationalization, including the active reduction of costs from the design stage onward. Cash dividends per share of common stock were raised 1.00 yen ($0.009) from the previous fiscal year, to 11.00 yen ($0.103) per share, including an interim dividend of 5.00 yen ($0.047) per share paid in December 1995.

What was the major focus of NEC's capital investment during the fiscal year?

Our investment in plant and equipment in fiscal 1996 totaled 310 billion yen ($2,897 million), approximately two-thirds of which was directed toward improving our semiconductor manufacturing capabilities. NEC is developing facilities that employ next-generation 0.35-micron processing technology in the production of semiconductors. Toward this end, we constructed a new fabrication line at our plant in Kyushu, commenced the construction of a new plant at our Hiroshima facility, and continued construction work at our plant in the United Kingdom.

Looking ahead, NEC will continue to make investment in semiconductor operations and new business areas in order to maintain its competitive strengths in the coming multimedia age.

How much did NEC invest in R&D in fiscal 1996, and what trends were seen in such investment?

In fiscal 1996, we invested 298.7 billion yen ($2,792 million) in R&D, up 12 percent from the previous fiscal year. To build a solid base of new technologies to meet the requirements of the multimedia age, we vigorously invested in such leading-edge fields as new materials, microelectronics, optoelectronics, C&C systems, and software. We maintain a global R&D structure centered on core facilities in Japan, the United States, and Europe. In fiscal 1996, we enhanced that structure with the establishment of multimedia-related R&D facilities in the United States and Europe.

In light of intensifying international competition and the trend toward lower prices, what did NEC do to reduce its costs during the year under review?

As competition intensified worldwide, prices tumbled in markets for such products as PCs and mobile communications terminals. NEC succeeded in softening the impact of these price reductions on its business by implementing a thorough cost-cutting program. For instance, we introduced leading-edge, low-cost design methods and further developed the "system on silicon" concept in our products, whereby large-scale integrated circuit (LSI) technologies are used to incorporate multiple functions into a single chip.

Moreover, we revamped our low-cost production structure by promoting the use of highly efficient, "lean production" methods throughout the NEC Group and by working to shift production to the most appropriate locations, particularly in Southeast Asia. Also, through the implementation of business process reengineering methods and the rationalization of its sales and distribution channels, NEC worked to achieve the more-efficient deployment of personnel and reduce its cost of sales.

What steps did NEC take during the period to promote the globalization of its operations?

In its global operations, NEC's basic aim is to carry out development, production, and marketing activities in close proximity to its customers. In product development, we employ regionally focused systems designed to quickly and accurately meet the needs of local customers while endeavoring to fully exploit the strengths of operations in particular regions.

For example, we maintain R&D facilities in the United States, the world's most advanced market for C&C technologies. Our U.S. subsidiaries have also succeeded in the speedy development of products for use in next-generation communications networks, software, and other leading-edge products, which are now marketed globally. In manufacturing, our U.S. subsidiary NEC Electronics Inc. is an important center for the production of the latest 16Mbit DRAMs.

Furthermore, in Southeast Asia we expanded our manufacturing and materials and components procurement operations to strengthen our international cost-competitiveness.

We are placing particular emphasis on China, which is regarded as having huge growth potential. In fiscal 1996, we established additional communications- and PC-related joint venture operations in China and commenced manufacturing operations.

How did NEC develop its international alliances?

Based on its N&A (network and alliance) policy, NEC worked to further develop its international alliances. During the period under review, NEC expanded and strengthened its tie-ups with the French computer manufacturer Compagnie des Machines Bull. With Bull, we are participating in an increasing number of multimedia businesses in Europe.

Also during fiscal 1996, NEC acquired a stake in the U.S. company Packard Bell Electronics, Inc., a major supplier of home-use PCs. The two companies work together to realize economies of scale through the joint purchasing of components and have introduced codevelopment operations. With a view to ensuring a leading role in international PC markets in the coming multimedia age, in June 1996 NEC and Packard Bell agreed in principle to merge their PC operations outside Japan and China to form one of the world's most potent forces in the PC business.

What is the outlook for the electronics industry in fiscal 1997?

It is expected that the mild recovery in the Japanese economy and the overall steady expansion in world markets will continue. While the pace of growth in the electronics industry is likely to be slower than that in fiscal 1996, healthy demand for electronic products is expected to continue, and NEC anticipates a further improvement in corporate performance.

By product sector, demand for communications systems and equipment will likely remain strong, with growth in the mobile communications market and in the use of the Internet expected to contribute to high levels of investment in communications infrastructure in Japan. In the computer sector, further gains are forecast in the Japanese market for PCs and in corporate investment in computer systems. In semiconductors, although the prices of memory devices began to fall at the end of fiscal 1996, the overall expansion of the electronics market is expected to result in a continued rise in demand for semiconductors.

With the computer and communications industries evolving at a dizzying pace, what is NEC doing to remain at the cutting edge?

NEC's management strategies are focused on increased investment in high-growth fields and new markets, with greater emphasis on globalization and innovation in cost structures.

Looking at its various product areas, NEC is striving to develop and launch strategic products in the PC and mobile communications markets in addition to products that make significant contributions to the increasing sophistication of communications infrastructure.

We are also giving top priority to developing new markets in such areas as multimedia and networking. To meet the requirements of the multimedia age, NEC is striving to develop server computers and software that facilitate the provision of Internet services as well as placing emphasis on such operations as lithium-ion batteries and color plasma display panels (PDPs).

In semiconductors, we are working to strengthen our operational structure and minimize our vulnerability to changes in market conditions. Toward this end, while remaining responsive to market fluctuations, we are focusing on such high-value-added products as high-speed memories and logic products, including application-specific integrated circuits (ASICs) and microcomputers.

NEC intends to remain at the leading edge of technical progress in a wide range of fields, thereby maintaining the momentum of its corporate development, to the benefit of shareholders, customers, employees, and a global society.

June 27, 1996

Tadahiro Sekimoto
Chairman of the Board

Hisashi Kaneko

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