The Deah of Network Infrastructure Companies- Will Only 3 remain standing?

Most network infrastructure equipment companies, with the exception of Chinese based Huawei and ZTE, seem to be either losing money or exiting the business.This includes the big three of Alcatel-Lucent, Nokia-Siemens and Ericsson, but also a whole lot of niche market players that have been around for a very long time, e.g. Fujitsu, NEC, Hitachi, ADC Telecom, ADTRAN, etc.

The telecom infrastructure market seems to be dominated now by tje Chinese dynamic duo of Huawei and ZTE which are breathing down LM Ericsson’s neck to be the leader in wireless infrastructure gear.  Chinese upstart UT Starcom is not too far behind them.

Many U.S. and European companies that were keen on telecom equipment have quit in the last few years.  After making many acquisitions in the late 1990s, Cisco has pretty much exited the telecom transmission business (they still sell some optical network gear and switches + routers to telcos). Intel spent over $10B on telecom equipment company acquisitions but sold those all off at a loss. Motorola Networks is being sold to NSN, but that’s being contested by Huawei. The smaller players have just disappeared.  It is not clear what the strategy is for NEC and Fujitsu, but we guess they are concentrating on sales in their home market in Japan and also looking to sell equipment in Asia-Pacific region (especially China).

Huawei

Network Computing reports, “Huawei is taking the wraps off of its 2-year-old presence in North America, with the unveiling of its cloud computing strategy and the opening of an R&D facility. The China-based telecommunications equipment vendor has been averaging annual growth in the 30 percent range, says John Roese, who was recently appointed head of R&D in North America for Huawei.

Serving 45 of the top 50 global telecom operators, the company had revenues of $22.8 billion in 2009 and was expecting revenues of $27 billion for 2010. Its mobile device subsidiary was predicting revenues of $4.5 billion, up 21.6 percent year-over-year. North American revenues are expected to exceed $1 billion in 2011.

Roese, who was previously the Nortel CTO, says Huawei is heavily focused on R&D and disruptive technologies. Our culture tells us it is a great thing to do something disruptive, he says: “I tend to seek out places that will have a lot of action … disruptive innovations.”

Almost half of the company’s 100,000-person global staff–47,000–are engineers, including almost 1,000 technical staff in North America. When the company was deciding where to base its disruptive expertise, North America was the choice, Roese said. After setting up operations in Canada in 2008, the company has been tripling its staff every year, hiring expertise from both the telecom and computing fields and looking for people who want to reinvent the industry.

Historically, Huawei has been focused on the carrier infrastructure space, with a strong device component including smart phones and smart cards. Going forward, the company is looking to move up the stack. “

http://www.networkcomputing.com/wireless/huawei-comes-out-of-stealth-mode.php

ZTE

In an article today, Reuters Canada states, “ZTE is gunning to be among the world’s top three telecom equipment makers in the coming years, a wireless executive told Reuters on Monday Feb 13, 2010.  It would be a major move for ZTE, which is smaller than its better-known Chinese counterpart Huawei, and holds roughly 5 percent market share in wireless gear, according to Bernstein Research.

“We want to be in the top three in terms of revenues and market share,” said Xu Ming, vice-president of wireless services in an interview with Reuters-Canada at the Mobile World Congress in Barcelona.

Founded in 1985 in the southeastern Chinese city of Shenzhen, ZTE earned about half of its revenues outside China last year by selling both handsets and fixed and wireless network gear. It benefits from a low-cost base like Huawei, but its margins are lower because of its lack of scale in many business lines, according to analysts.  ZTE’s ambitions could be bad news for other telecom gear makers, notably the smaller European vendors Nokia Siemens Networks and Alcatel-Lucent, which have lost market share to low-cost Chinese rivals in recent years.  ZTE posted 2010 revenues up about 16.7 percent at $10.67 billion last year, while operating profit was up 26 percent at $396.5 million. Analysts called the results positive, given tough conditions in China, where operators cut spending by 20 percent after a binge in wireless buildouts in 2009.

Xu Ming, vice-president of wireless services for ZTE told Reuters, “”We want to be in the top three in terms of revenues and market share. Xu said international expansion was a major priority for the company. “Our strategy for the wireless business in the past 10 years has been to gain critical mass in China, then we expanded into emerging markets like Africa, Asia, and Latin America. Now we are bringing that push into developed markets like Europe.” 

Xu said he was confident ZTE could make its goal of reaching the top three.  “The trend is very clear. If you look at Alcatel Lucent or Nokia Siemens Networks, their growth rate is flat or shrinking, and even market leader Ericsson has a slow growth rate. For ZTE, if we can continue to grow at the very rapid rates that we have seen in recent years, we will soon take over one of the major vendors in terms of revenues.”

http://ca.reuters.com/article/technologyNews/idCATRE71D3U020110214

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LM Ericsson

Ericsson, still the world’s leading telecom infrastructure vendor, must surely be worried about the rapid ascent of Huawei and ZTE.  We believe Ericsson is in a better position than its European- American and Japanese rivals to resist the Chinese led onslaught, as its economies of scale give it higher sales and better profit margins.

Note: LM Ericsson is not to be confused with ST Ericsson, which is a joint venture of STMicroelectronics (NYSE:STM) and Ericsson (NASDAQ:ERIC).  For the latest financial results of the latter company, please visit:

http://www.ericsson.com/thecompany/press/releases/2011/01/1481961?WT.mc_id=hugin_press_rss

Expert Analyst Comment

Tim McElgunn, Chief Analyst, Pike & Fischer had this to say:

“Yes, it has been a hard few years for network equipment vendors and some companies have exited or pulled back, but the trends are looking up somewhat.   Alcatel-Lucent  and NSN both turned in profitable 4Qs; Ericsson reported profits up more than tenfold in the fourth quarter, boosted by a jump in mobile broadband sales.  Adtran had a great year, and Ciena reported very strong revenue: its loss was primarily due to the costs of integrating its chunk of Nortel.

As for the myriad small guys who disappeared, most were acquired and the technology continues on as part of larger NEMs’ portfolios.

Rapid growth in HD video, wireless broadband, more symmetrical traffic patterns on the up and downstream, etc are all driving bandwidth demand and the resulting demand for infrastructure and integrations services at all points of the network.

No doubt, all need to improve efficiencies and cut costs. Alcatel-Lucent particularly has struggled to find the synergy benefits promised at the time of the merger.

Huawei and ZTE are obviously significant competitors, but I don’t think they are quite ready to take over the world. Like everyone else, they must compete on technology, product quality and innovation. They also face barriers created by national security concerns and other, less open protectionist concerns. Specific to the Moto acquisition, Huawei has raised some objections but is unlikely to have enough political juice in either the U.S. or EU to scuttle the deal.

The total number of broadband subscribers continues to expand, just more slowly.  That said, growth drivers include commercial services, advanced advertising, and content. Additionally, we are seeing valued added services coming to market, such as premium support (see Time Warner Cable Signature Home) or home security and automation, etc. that should help maintain ARPU and margins going forward.

In addition, if they are successful with their emerging strategies, service providers will be among those who benefit from OTT, leveraging their dominance of broadband access, existing content relationships, increasing multi-screen capabilities, and (reportedly) improving interfaces and ease of use to attract and retain users that might otherwise go to more pure play OTT options. Still, companies like Roku and Boxee at the new/small end and Google and Apple at the established/huge end will all benefit from over the top. Other beneficiaries include other tablet makers and consumer electronics companies, who are adding features to take advantage of OTT directly into their gear.  The business models for service providers are evolving incredibly quickly. Nearly all of that evolution translates into increased pressure on infrastructure. Smart companies on both sides of the equation will find ways to turn the resulting disruption to their advantage, those that cannot will lose ground rapidly.”

For a review of P&F 2011 Broadband Outlook report please go to:

http://viodi.com/2011/02/13/pf-2011-broadband-outlook-examines-over-the-top-vs-pay-tv-services/

Bottom Line

In conclusion, we wonder if only three players- Ericsson, Huawei and ZTE- will be the only dominant telecom equipment infrastructure vendors in coming years or if  there’ll be room for more vendors (as Tim McElgunn suggests) .  And what new services/technologies will drive revenues and profits?  What do you think?