Fourth in a series

Staff writer

The newly reorganized Nippon Telegraph and Telephone firms say they will continue to treat domestic and foreign suppliers equally in their procurement practices, just as the former NTT was obliged to under a 1981 Japan-U.S. agreement.

But will they?

The subject has prompted the Japanese and U.S. governments to lock horns this week in yet another trade dispute.

Tokyo insisted that such government-level arrangements are outdated in an era of deregulation, and that competition determines NTT's procurement practices.

Washington meanwhile has argued that government supervision is needed until the domestic market truly breaks free of NTT's tight grip.

The latest round of the Japan-U.S. telecom talks, held in San Francisco, ended Wednesday with a compromise that will let the NTT group set voluntary procurement rules but still allow the two governments to keep monitoring its implementation.

The dispute has thrown into focus Washington's lingering doubts over whether the NTT breakup will promote competition in Japan's telecommunications market, as it is touted to do.

Rival Japanese carriers and critics share Washington's skepticism and worry that NTT may actually build up its domestic might under the guise of restructuring, with the holding company still pulling the strings of the operational units.

"There's no doubt that there will be a change. But it remains to be seen whether or not this (restructuring) will promote competition," a U.S. government official said prior to the San Francisco talks.

"NTT is going through a period of greater uncertainty. So we feel that during this period, having some degree of government oversight is important," the official added, noting the government still owns 60 percent of the NTT firms.

Indeed, government supervision to enforce the bilateral agreement appears to have contributed to an increase in NTT's procurement from foreign suppliers.

Since NTT was privatized in 1985, its purchases of foreign products such as digital transmission equipment and optical fiber cables have quadrupled, from 36.9 billion yen that year to 185 billion yen in fiscal 1997. More than 1,000 foreign companies sold their products to NTT in 1997.

Imports accounted for 430 billion yen of Japan's roughly 3.1 trillion yen telecom equipment market in fiscal 1998, according to data released by the Communications Industry Association of Japan.

The 1981 agreement, renewed six times, has obliged NTT to hold open bidding to ensure fairness in its procurement and to submit procurement data annually to be scrutinized by the Japanese and U.S. governments.

NTT has complained that the bidding process was so rigid and time-consuming that it was unable to make efficient and speedy procurements.

"The bilateral arrangement made sense when trade imbalances existed between Japan and the U.S. in the telecommunications equipment sector," an official at the Ministry of the Posts and Telecommunications said.

But the official said the pact has become obsolete and now makes procurement "unequal" in that it places the practices of a privately run company in the hands of the state.

In 1981, Japan's imports of telecom equipment stood at 24.2 billion yen, compared with 185 billion yen in exports. In 1998, imports reached 250.8 billion yen, only slightly below the export figure of 260.8 billion yen.

"What more can we do to satisfy America?" the official asked.

But experts and industry people point out that the 1981 pact has encouraged NTT to opt for cheaper foreign products than those provided by so-called "NTT family suppliers," like NEC, Hitachi and Fujitsu, which had close ties with NTT when it was a state-run telecom monopoly. They engaged in joint research and development of specific types of equipment for use by the telecom giant, thus holding an advantage over would-be competitors.

Such practices, long safeguarded against foreign competition by the Japanese government, contributed to NTT's structural cost inefficiency, said Satoshi Daigo, an economics professor at the University of Tokyo.

But, an NTT spokesman claimed, procurement practices now are guided by market principles.

"With or without the arrangement, we'll just continue our efforts to procure better things at better prices," he said.

Hidenori Fuke, executive researcher at InfoCom Research Inc., said that because the industry is rapidly shifting from conventional telecommunications networks to next-generation information infrastructure, the reorganized NTT firms will have no choice but to purchase more state-of-the-art standardized equipment from competitive U.S. and European suppliers.

NTT's domestic rival carriers, which account for two-thirds of Japan's procurement of telecommunications equipment, are also increasing their purchase of foreign equipment to stay competitive.

DDI-Cellular Group, in cooperation with IDO Corp., has succeeded in introducing cdmaOne -- a new high quality cellular service -- by adopting the U.S. system in a bid to challenge dominant rival NTT DoCoMo, according to DDI spokesman Mamoru Mishina.

Professor Daigo said that no matter how much NTT has increased its purchases from foreign suppliers, the telecom giant has not done enough to pass on the savings to its customers.

"It's not really relevant to focus on whether there should be a procurement agreement," he said. "The best solution is to put more competitive pressure on the NTT group."

But the NTT restructuring is likely to spur less competition, as the two NTT regional carriers are basically allowed to continue to cooperate through personnel exchanges and joint procurements via the holding company, Daigo added.

One quick fix would be a reduction in the stiff interconnection fees NTT charges its competitors to lease its exclusive local network directly linking individual users, said Yosuke Gomi, an assistant planning manager at Tokyo Telecommunication Network Co., a rival carrier of the newly created NTT-East.

"We're hoping for fair and square interconnection rates to be implemented in 2001 as planned (by the government)," Gomi said. "The lower the rates are, the more competitive the market will become."