UK Post Office scandal exposes risks of Fujitsu’s hands-off approach

Fujitsu’s 1990 announcement that it was taking over International Computers Limited, then the UK’s largest computer maker, shocked the technology industry and was seen as a “daringly ambitious” attempt to take on IBM.

For decades, the deal was seen as a crucial gateway into Europe for the Japanese conglomerate. But now there are fears that its ambitions for the continent could be thwarted if it fails to stem the financial and reputational fallout from the Post Office Horizon scandal.

Shares in the $28bn group have fallen nearly 4 per cent this week after Fujitsu Europe’s chief executive Paul Patterson apologised on Tuesday for the company’s role in the scandal and pledged to contribute to the compensation of more than 900 sub-postmasters prosecuted in Britain using data from its Horizon IT system.

Fujitsu also told the UK government on Thursday that it would suspend bidding for public contracts, pending the conclusion of a public inquiry into the scandal.

The troubles engulfing Fujitsu’s UK subsidiary have revived scrutiny of the group’s historically arms-length relationship with ICL — rebadged Fujitsu UK in 2002 — and follow a series of lapses in the IT systems used in its domestic market, including by the Japanese government, Mizuho Financial Group and the Tokyo Stock Exchange. 

“The Post Office issue is quite old, so fresh reputational damage may be limited, but there could be questions raised about Fujitsu’s technology in general since they have had high-profile system errors in recent years,” said Citigroup analyst Kota Ezawa.

Shares in Fujitsu soared 21 per cent in 2023 — before UK public outrage over the Post Office scandal erupted in the new year. With Japanese shares riding to a 34-year high on hopes for governance reform, chief executive Takahito Tokita had also won over investors by selling off non-core businesses and strengthening the company’s focus on information technology services, artificial intelligence, supercomputer chips and quantum computing.

“We have strong technology capabilities and that’s Fujitsu’s DNA,” he told the Financial Times last month.

Analysts warn the scandal’s broadening fallout could undercut the narrative that has supported Fujitsu’s share price. One analyst at a large brokerage who spoke on condition of anonymity said he was flooded with calls from concerned investors, not just in the UK but also in Hong Kong, Singapore and Australia. “Even in Japan, where more and more media are reporting about this case, people are getting serious about it,” he said.

The political risks and management issues exposed by the scandal could also have wider implications for corporate Japan, as the country’s cash-rich companies aggressively return to the global mergers and acquisitions market in search of growth outside their shrinking home market.

Soon after the ICL acquisition, which was done in phases during the 1990s, serious concerns emerged within Fujitsu over whether it had the governance structure and knowhow to manage a company that large.

“The people at Fujitsu kept on saying, ‘Let’s keep [ICL] at arm’s length’, at the time . . . and Fujitsu management was not able to touch ICL,” said Yutaka Nakashima, a former Fujitsu employee who handled human resources following the ICL acquisition.

“There was really no knowhow” on international governance standards and compensation packages, added Nakashima, who is now chair of Japan Society for Human Resource Management. “Even now, there are few Japanese companies that have a firm grip over their overseas operations and governance tends to be weak, which poses the common challenge of properly integrating an overseas company.”

People close to Fujitsu said the Japanese group had started tightening control of its overseas subsidiaries, especially those that were underperforming, in recent years. But the company was caught off guard by the political storm sparked by the ITV drama Mr Bates vs The Post Office, which depicted the tragic fate of hundreds of sub-postmasters wrongly accused of theft owing to flaws in the Horizon IT system.

Horizon was conceived in the late 1990s to replace the UK’s paper-based social security payment system. The project was beset with technical failures and the UK’s benefits agency withdrew from the scheme in 1999 at a cost of £720mn to the taxpayer.

The public inquiry into the sub-postmasters scandal has heard that Fujitsu leaned heavily on the UK government to shoulder losses over the benefits system, with Michio Naruto, Fujitsu’s former vice-chair, threatening to withdraw from the country. Horizon itself was resurrected as an accounting system for the Post Office.

Patterson appeared at the public inquiry into the affair on Friday, the first Fujitsu executive to do so since it commended hearings two years ago, and said both Fujitsu and the Post Office were aware of faults in the Horizon system from the start.

“All bugs and errors have been known at one level or not, for many, many years. Right from the very start of deployment of the system, there were bugs, errors and defects, which were well known. To all parties,” he said.

In a statement on Thursday, the Japanese group said it would work with the UK government on “appropriate actions” based on the findings of the inquiry but declined to confirm the sum it intended to contribute. “The Fujitsu Group hopes for a swift resolution that ensures a just outcome for the victims,” it added.

Analysts said the financial impact of the scandal was likely to be limited since Fujitsu UK generated only about 5 per cent of the group’s annual revenue of ¥3.7tn ($25bn).

“As not all businesses are public sector, we ‘guesstimate’ the maximum negative impact will be, at most, 3-4 per cent in sales, even if we assume penalties, contract suspension and compensation,” Macquarie analyst Hiroshi Yamashina said, as he downgraded the stock from buy to neutral this week. “But uncertain negative financial impact could make investors risk-averse.”

Analysts said the growing reputational damage from the scandal was the greatest risk, especially at a time when Fujitsu executives had hoped that geopolitical tensions would help the Japanese group sell its products to European companies seeking alternatives to US and Chinese technologies.

In an interview last year before the Post Office scandal blew up, Vivek Mahajan, Fujitsu’s chief technology officer, had pointed to strong interest from potential European clients in its AI platform and other offerings. “The only company that’s a non-American company that has [a technology line-up] right from the chips all the way to the solution is Fujitsu,” he said.

While some investors view faults with the Horizon system as a legacy issue, Atsushi Osanai, a professor at Waseda Business School, warned that the scandal was still very much alive. “Whether Fujitsu can respond to this problem carefully from the viewpoint of moral responsibility will have an impact on Fujitsu’s brand as a whole,” he said.

Additional reporting by Euan Healy in London and Leo Lewis in Tokyo