MANUFACTURING: It’s a Whole New World

The dynamics of the global equipment business has undergone a sea change

since the downturn that started overwhelming it in 2000. The downturn forced a

number of fundamental changes in the equipment industry forcing vendors to

completely overhaul their strategies.

On the one hand, large telecom equipment vendors, including some of the

handset vendors began to significantly outsource manufacturing to contract

manufacturers, even as they themselves focused more on product development,

marketing, and brand management activities. On the other hand, vendors like

Lucent, Ericsson, and Alcatel began focusing on services like network management

and maintenance for service providers.

Contract Manufacturing



Contract manufacturing or electronic manufacturing services (EMS), made

famous in many ways by the networking vendor Cisco, became mainstream with more

and more large vendors hiring outside manufacturing capacity instead of owning

them. Cisco is said to have saved somewhere between $900 million and $1.3

billion by outsourcing more than half the manufacturing of its routers and other

equipment. Earlier, original equipment manufacturers (OEMs) outsourced

manufacturing only when they experienced an unexpected upswing in demand or to

fill overflow orders.

Now, vendors like Lucent, Nortel, Alcatel, Ericsson, and Siemens have started

outsourcing substantial parts of their manufacturing as a strategy. With some of

the vendors, the decision to outsource was primarily borne out of the necessity

to cut costs, which later on became a key business strategy. For many,

outsourcing was strategic to their business from the very beginning.

The necessity to cut costs apart, the European and US vendors’ leaning

towards contract manufacturing was also driven by the rise of Asian vendors like

Huawei, ZTE, Samsung, and LG who began leveraging on their low-cost capabilities

to give the likes of Lucent and Alcatel a run for their money.

As contract manufacturing gained ground, contract manufacturers or EMS

providers–as they prefer calling themselves–became a thriving industry worth

billions of dollar and spread across the world.

In 2002, the top four EMS providers (Flextronics, Solectron, Celestica, and

Sanmina-SCI) earned $21.5 billion by manufacturing telecom products for various

vendors. This constituted almost 50 percent of their total $44.3 billion

revenues.

Scores of contract manufacturers today make a wide range of telecom products

from routers, switches, RF equipment, transceivers, satellite receivers, and

wireless base stations and right up to intelligent optical switches, long-haul

transport metropolitan transport optical switch, and VoIP equipment.

According to analysts, the EMS industry would comprise approximately 19

percent of the total electronics manufacturing by 2005. As the EMS industry

matures, leading industry players are continuing to expand their services from

value-added offerings such as design, PCA, and after-market services to also

include procurement, logistics, and business process outsourcing offerings.

Services: The New Savior



As service providers began scaling down their capex and linked their

infrastructure investment to revenues, equipment vendors also began focusing on

services. Even though global equipment market has more or less stabilized after

all these years of decline, equipment vendors are far from returning to the kind

of profits they booked during the pre-2000 years.

So, even though equipment sales remain the key to their existence, vendors

have realized that survival would become a tall order unless they got into

service relationships with service providers.

In fact, for many large vendors service has been the brightest star in their

business and has played a key role in stabilizing their business in the current

milieu. For example, Lucent’s 21 percent sales in 2003 came from services.

Similarly, Ericsson, that has around 15,000 people globally devoted to

services, earned $4 billion in revenues. These vendors are betting heavily on

network management services to make profits.

Besides these two trends, there are two other areas where the global

equipment vendors have focused their energies on in the past couple of years.

One, vendors are building an ecosystem of partners consisting of other vendors,

with even bitter rivals coming together.

For example, Lucent’s recently launched Accelerate IMS (IP Multimedia

Subsystem), a service delivery solution that enables third-generation (3G)

mobile operators in introducing the voice-over-IP (VoIP) and multimedia services

incorporates the Cisco MGX 8000 series media gateways. Lucent and Cisco signed

an agreement last year aimed at leveraging each other’s core strengths.

Similarly, Siemens acted as an integration partner for Juniper in a recent

Telecom Italia order to install and integrate Juniper Networks solutions into

the operator’s broadband network.

Besides tying up with competing vendors, vendors have also focused on working

more closely with system integration companies like IBM. Secondly, vendors have

also reorganized their sales and distribution model, leveraging both on direct

sales and channel sales more effectively. Most vendors have now a more focused

channel strategy than they had earlier. Some like Lucent have taken a strategic

decision to limit their direct sales force.

Ravi Shekhar Pandey