Toronto — It's a paradox: The world is rushing to embrace mobile communications, but some of the biggest suppliers of telecommunications equipment are struggling to stay ahead.
For Nortel Networks Corp., survival is no longer even an issue. The company has agreed to sell its lucrative wireless business for $650-million (U.S.) to Nokia Siemens Networks, and is in late-stage negotiations to sell its corporate networks unit to another firm, most likely Avaya Inc. In the months ahead, a group of several dozen executives, lawyers and accountants will preside over a transition services group to dispose of Nortel's last asset. Creditors will be left to fight over the financial remains.
The giants still standing in the West include Telefon AB LM Ericsson, Alcatel-Lucent SA, Nokia Siemens and Cisco Systems, Inc. They're presented with huge opportunities from new wireless technologies. But they also face serious challenges, including declining sales from telecom carriers and businesses that are struggling in the recession, and aggressive competition from Chinese vendors, principally Huawei Technologies Co. and ZTE Corp., each of which have a reputation for undercutting competitors by as much as 50 per cent.
What are the key criteria for success in this environment? Two senior executives from two major players have different agendas, but they agree that future profitability requires a strong global presence and the ability to create unique products.
Nokia Siemens aims for next-generation broadband innovation and a services sweet spot
Luca Maestri, chief financial officer of Nokia Siemens Networks, points to two distinguishing factors between success and failure in the industry today. The first involves having a global presence.
“Scale is huge, because the amount of R&D you need to put into this business is huge,” he says. “Frankly, if you start scaling back on R&D, you start having a portfolio that doesn't meet all the needs of your customer, and then it becomes a spiral.”
Nokia Siemens Networks, a joint venture of Finland's Nokia Corp. and Germany's Siemens AG, spends in excess of $2.8-billion (U.S.) on research and development each year. Its recent effort to grab Nortel's wireless assets is designed to establish a firm footing in the North American telecom market; until now, Nokia Siemens has garnered most of its sales in Europe and Asia.
The second factor is the ability to compete aggressively on either cost or product differentiation.
“It is quite obvious to us that we cannot compete on cost with the Chinese,” Mr. Maestri says. “Where we believe we have a really strong story is on services.”
Traditionally, equipment companies have supplied a mixture of hardware and software for communications networks. But recently, there has been a move to expand from simply building the network to priming it with intelligence, such as security technology or tools to mine customer data.
Fully 40 per cent of Nokia Siemens' revenue comes from services, such as integrating systems, hosting operations and designing networks. Broadly speaking, the opportunities lie with helping operators run their networks more efficiently and manage relationships with their customers more closely.
“That is a business that the Chinese today cannot replicate,” Mr. Maestri says.
Beyond scale and differentiation, Nokia Siemens also wants to get a jump on other industry developments: Deployment of the next-generation wireless standard is the main one.
LTE, or long-term evolution, promises download speeds up to 10 times faster than the latest offerings. It's not simply that LTE is faster: The new industry standard is also much more efficient than so-called 3G (third generation) networks today.
Nokia Siemens expects that half the world's cellphone users will be using high-speed wireless data connections within five years, taxing the capacity of telecom operators around the globe. Phone companies are already seeing that growth in network traffic far exceeds any increase in revenue from wireless services, which means they will need to find new ways to make money and offset the expense of network upgrades. LTE will help operators provide mobile broadband at the speeds consumers demand, while cutting costs and keeping up profits, Mr. Maestri says.
Nokia Siemens has been developing its own LTE technology for several years and hopes to take a leap forward by acquiring Nortel's LTE unit, which includes several hundred specialized engineers in Ottawa.
The dynamics of emerging markets require new business models from Western suppliers
Nearly three years in Bangalore overseeing development of Cisco Systems' 6,000-person office campus has given Wim Elfrink a vision of the future of his industry.
Most growth will now come from emerging markets and the dynamics of those markets require new business models from Western suppliers, says the chief globalization officer and executive vice-president of services at Cisco.
“Most international companies don't work globally, they just sell what they make around the world,” he says.
He is determined that Cisco will break that pattern, and from his post in India he gathers local market intelligence from which the California-based network equipment maker can construct new ways to do business.
A large bank in India, for example, is talking about adding 60 million new customers in the next two years. That's the equivalent of the entire clientele in France, Mr. Elfrink says during a stopover in Cisco's Toronto office.
“If you sit here, you don't come up with innovation, because you don't see it, you don't feel it.”
Another statistic at the top of his mind is the 500 million people that are expected to move from rural areas into developing cities over the next five years. That is the equivalent of 30,000 individuals a day.
“How do you register them, how do you get them in your tax system? By embracing technology, there will be much more sustainability in cities management – from a social, economic and governance point of view,” he said.
As India, China and Indonesia and other emerging economies build cities from the ground up to accommodate the massive influx, planners are seeing that information technology systems are as essential as traditional infrastructure such as roads and sewers, Mr. Elfrink says.
Cisco is keen to push that vision, connecting billions of people, devices and buildings to new networks built on Internet technology.
This week it announced its first emerging technology venture out of its Bangalore campus, called Smart Connected Buildings. The product connects building systems such as heating, air conditioning, lighting, and security over an IP network and lets operators manage how the energy is used. For an average building holding 1,000 people, the cost of the system runs about $2-million and will produce payback through energy savings in just eight months, Mr. Elfrink says.
Utilities management is just one of the huge opportunities in the region today. In wireless, phone companies in India are adding eight million new mobile customers a month. That's the equivalent of the entire subscriber base of Canada's largest wireless player, Rogers Communications Inc.
But the challenges are also enormous. The average revenue generated per user is less than one-tenth what Canadian operators collect. “Are we ready for that kind of model?” Mr. Elfrink says.
Cisco approaches the problem looking for three different things in the emerging markets: growth, innovation and talent. The company has set a goal of recruiting 20 per cent of its talent from the region.
In Malaysia it is part of a contract to build, operate and transfer a new network for a local carrier – something it has never done for customers in Europe or North America. New steps include managing services and entering revenue-sharing agreements with partners.
Cisco is trying to build its emerging-markets operations for speed and scale to meet local demands, Mr. Elfrink says.
“These countries' economies move fast, and they use technology as my children do. They think much more aspirational.”
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