Bubble Bursts on Japan’s Top Computer Firms : Technology: Drop in demand for mainframes, by far the most profitable segment of the business, has analysts predicting big industrywide losses.

While American mainframe computer makers suffered huge losses in recent years as a result of battles with makers of smaller, cheaper machines, Japan’s big computer makers seemed to be living a charmed life.

Japanese makers doubled their computer production between 1986 and 1991 to an impressive $24 billion. And as sales boomed at home, they reached to flex their muscles worldwide. Fujitsu Ltd. acquired troubled British computer maker ICL, while NEC Corp. helped bail out Honeywell’s computer business with an equity investment.

But suddenly the future doesn’t look so bright. Japan’s recession is now tearing at the layer of insulation that protected Japan from the technological changes sweeping the rest of the computer world.

Japan’s production of mainframe computers, by far the most profitable segment of the business, will plummet 15% to $9 billion in the fiscal year ending March 31, estimates Takeshi Naruse, an analyst at Daiwa Research Institute.

A price war in Japan launched last fall by Houston-based Compaq Computer Corp. threatens to erode Japanese profits in the still relatively healthy personal computer business. And plunging computer sales, combined with weak semiconductor sales, are driving once-high-flying companies, such as NEC and Fujitsu, into the red.

Analysts predict that Fujitsu will lose more than $80 million in this fiscal year, while NEC is expected to lose about $120 million. Hitachi Ltd. and Toshiba Corp. are also expected to show sharp earnings declines in their computer businesses.

Nobody is counting the Japanese makers out. Fujitsu’s U.S. subsidiary, Amdahl Corp., recorded a surprising 48% jump in revenue last year, while Hitachi’s computer exports climbed 20%. And Japanese computer makers remain strong in the rapidly growing market for laptops and ultra-light, hand-held computers, where their strength in miniaturization and production of liquid crystal screens gives them an edge.

But in the traditional mainframe and medium-sized computer sectors of Japan’s domestic market, where Japanese computer companies get the bulk of their revenue as well as profit, the current financial troubles may be just a harbinger of worse to come.

Japanese banks, the biggest customers for domestically made computers, are still reeling from the plunging stock and real estate markets. Cutting back on computer purchases is among the measures they have taken to slash costs. “With profits squeezed, banks just aren’t buying any new (mainframe) computers,” says Naruse of Daiwa Research.

Lower budgets have speeded the arrival in Japan of a technological phenomenon called “downsizing” that began nearly a decade ago in the United States. Downsizing refers to the tendency of corporate computer users to gradually shift from large, expensive, centralized mainframe systems to networks of cheap but powerful workstations and personal computers.

Downsizing is one of the key reasons for International Business Machines’ recent financial problems, and it could soon be an albatross around the Japanese industry’s neck as well.

“Fujitsu has IBM’s problem in spades,” says Steve Myers, an analyst at the Tokyo office of the Jardine Fleming brokerage house. He notes that more than 60% of Fujitsu’s revenue comes from the vulnerable mainframe sector.

Another technological trend hurting Japan is a move toward the use of “open” computer systems that allow standard software packages to be used on the computers of several different manufacturers. Today, every Japanese computer company has several mutually incompatible lines of medium-sized office computers. But the $3-billion office computer market may be in danger as the products fall behind technologically and customers discover it is cheaper to buy the “open” computer systems that can use off-the-shelf software.

In an effort to cut costs, even large companies such as Nippon Steel and Mitsui & Co.--major customers for Japanese computer companies--are beginning to experiment with workstations and personal computers that run standard software and can be networked together to allow far-flung components of the companies’ operations to communicate.

“There is a huge amount of experimental activity going on that will turn into business down the road,” says Gene Banman, vice president at Sun Microsystems’ Japan subsidiary. Mitsubishi Bank, for example, recently installed 300 Sun Microsystems workstations to tie together its currency exchange trading operations. In the past, the business might have gone to a mainframe vendor. Consequently, while sales of Japanese computer systems languished, Sun’s sales in Japan shot up 30% last year, reaching nearly $700 million.

Japanese companies are responding to the downsizing trend by working with the enemy. Fujitsu and Toshiba are the largest resellers of Sun computers in Japan.

While recognizing that workstation sales may cut into their traditional business, the companies hope to earn more money by using their thousands of software engineers to help customers integrate new “open” systems into their existing computer systems. Fujitsu hopes this kind of software and service business will account for up to 43% of its total computer revenue in 1995, up from a current level of about 33%.

While being battered at the upper end, Japanese computer makers are also feeling the heat from the lower end of their business. Compaq kicked off a price war in the PC business last fall with a line of computers priced 50% below comparable Japanese models.

Although NEC and Fujitsu at first insisted they would not be drawn into the price war, both companies earlier this month unveiled new lines of lower-priced models. Compaq then fired back with further price cuts and an extended warranty on its products.

The price war will mean sharply lower profits for Japan’s computer companies. With the important exception of laptop computers, Japanese PC makers have never successfully competed in the American market. And years of selling in a protected domestic market have left the companies slow and fat.

Yuji Ogino, head of IDC Japan, a computer consulting company, notes that a typical Fujitsu PC contains 600 components. Compaq, forced to find ways to cut production costs to survive fierce competition in the United States, has managed to reduce the number of components in an equivalent computer to 350.

Japanese companies also have higher costs because their computers are based on proprietary designs and therefore cannot use standardized parts from low-cost Taiwanese suppliers to the extent that IBM-compatible computer makers, such as Compaq and Dell, use low-cost providers.

Japanese computer makers are also trying to restructure their organizations to put themselves in better shape to combat the competition. Fujitsu will cut its administrative staff by 20% over the next several years through attrition and by moving workers to subsidiaries. The company recently indicated that it will move away from a seniority-based pay system to rewarding managers for performance.

Companies are also trying to trim unprofitable lines that detract from the main focus of their business.

Fujitsu recently stopped selling facsimile machines in the United States, while NEC Corp. earlier this year quit producing videocassette recorders.

Major Japanese computer companies all have profitable telecommunications products. Earnings from that side of the business could help them avoid the deep cuts taking place at IBM, where tens of thousands of employees are being laid off.

But analysts say Japanese computer companies still face a long period of lean earnings and painful changes to adjust to the new realities in the computer business.