Despondency still remains an overwhelming emotion in the global
telecommunications equipment business. You just have to look at the latest
quarterly results of some of the big telecom infrastructure vendors to know what
exactly is happening. Big vendors like Lucent, Nortel, and Ericsson continue to
post losses, and there seems to be no end to downsizing, or, rightsizing. It is
the same scenario worldwide. And it is so bad that Michael K Powell, chairman,
US Federal Communication Commission, had to appeal to the US carriers to spend
more on new equipment, so that big suppliers could avoid bankruptcy. While the
global economic uncertainty continues to be an important factor in the current
state of affairs, a continued contraction in carrier spending is the real
culprit. The collapse of some of the leading carriers like Worldcom, Global
Crossing, Teleglobe, KPN Quest, and Qwest have added to the gloom in the
equipment market. Besides, consolidation in the service provider business has
also hit the vendors.

of the recently declared quarterly results and warnings point out that recovery
may not be around the corner and the telecom equipment market may continue to
witness bad news for some more time. For example, Lucent Technologies, which
posted a net loss of $2.88 billion (its tenth straight quarter in the red), has
warned that sales may drop by 10 percent in the fourth quarter, as customers
continue to slash spending. Lucent is expected to eliminate 25,000 jobs in the
next couple of months, reducing its workforce to 35,000. Market analysts feel
Lucent would soon be forced to cut another 5,000 to 10,000 employees. And many
investors fear it is moving closer to bankruptcy.

Nortel Networks, another major vendor, which has been in red for months now,
continues to cut jobs. Since 2001, as the recession in the industry spread
through telecom, Nortel has announced job cuts four times now, with the most
recent one in late August, when it announced a plan to cut its workforce to
35,000. Currently, Nortel employs close to 39,000 workers. The company continues
to lose both money and market share, and its stock price is hovering around $1,
down from an all-time high of $143 in March 2000. Revenue from continuing
operations was $2.36 billion for the period ended 30 September 2002, a 15
percent drop from Q2. Pro forma net loss for the third quarter was $420 million,
or $0.10 per share, a penny better than the $.11 per share loss expected by the
analysts. Still, the Q3 loss was 30 percent greater than Q2’s $323 million, or
$.09 per share loss.

F Russo,
and chief executive officer, Lucent

Similarly, Ericsson, the world’s largest supplier of cellular phone network
equipment, has posted a Q3 loss of about $540 million, as sales tumbled by 38.5
percent and orders sank, but said it still hoped to return to profitability next
year. Ericsson said it incurred a loss of nearly 5.0 billion kronor in the third
quarter of 2002 as compared to a net loss of 3.96 billion kronor in the third
quarter of 2001.

Even though Motorola succeeded in breaking a run of six consecutive quarters
of losses, it has lowered its forecast for Q4. It now expects Q4 sales to be
about $7.1 billion and not $7.5 billion as estimated earlier. The company says
it lowered its revenue and earnings guidance because of slowing industry demand
in a number of its end markets, particularly wireless infrastructure, broadband,
and semiconductor businesses.

The French telecom giant, Alcatel, recently notified that further
restructuring measures would be required due to the continuing weakness of the
worldwide and domestic telecom market. As a result, the program of cost
reductions will be intensified and staff will be adapted to market conditions.
In particular, this will lead to 1,060 redundancies in 2003.

Even though Nokia posted a 16 percent rise in its net profit in Q3, beating
both its own targets and market expectations, 80 percent of its revenues and 90
percent of its profits came from mobile handsets. In fact, Nokia had to
write-off 306 million euros in one-off charges linked to the failed German
telecom operator, Mobilcom.

Solace from Asia
The only bright spot amid all this is the fact that the two of the fastest
growing telecommunications markets in the world–China and India–continue to
create demand for network infrastructure equipment. In fact, in the month
of  October, global vendors have clinched a series of big orders in both
the countries. For example, Lucent Technologies recently signed deals with the
two Indian telecom companies–Reliance Infocom and Tata Teleservices–to
provide wireless equipment and services, estimated to be worth hundreds of
millions of dollars over the term of those contracts. It signed a five-year
contract with Reliance Infocom to deploy a wireless network designed for voice
and high-speed data services. Its contract with Tata Teleservices is for
deploying high-speed wireless networks in several Indian states.

Hong Liang Lu, founder president and CEO, UTStarcom

In China, Lucent recently signed a contract to supply CDMA wireless frame
worth hundreds of millions of dollars to China Unicom, a leading service
operator in China. Under this contract, Lucent will provide CDMA 1X equipment to
help China Unicom offer high-speed wireless data services, such as e-mail and
Internet access at speeds of up to 153 kbps.

Motorola too has signed contracts valued at $446 million for the deployment
of CDMA 1X networks for China Unicom. The vendor has also won a major contract
from China Mobile. Alcatel has also got some orders in China. It won a
multi-million dollar contract from China Telecom for its G655 fiber, Teralight.
This was the first major contract for its G655 fiber in China and was won in
collaboration with Alcatel Shanghai Bell, Alcatel’s Chinese flagship company.
Gnasu Unicom, a subsidiary of China Unicom, has awarded it a $11-million CDMA-network
contract. In all, China Unicom has signed deals to buy telecom equipment worth
$1.2 billion from four suppliers.

In fact, it is the continuing demand in China that has helped UTStarcom to
remain one of the rare telecom equipment manufacturers meet revenue guidance for
the last ten quarters and revise future guidance upwards in most of these
quarters. UTStarcom has recorded a substantial growth over the last 2—3 years
as against a sharp drop in revenues, steep losses and substantial staff
reductions, posted by the larger vendors like Lucent Technologies and Nortel
Networks. The vendor, which had posted a sales growth of 70 percent in 2001 over
the previous year, posted a sales growth of 54 percent, 65 percent and 56
percent in the Q1, Q2, and Q3 of 2002. During the past three months, the vendor
has bagged orders worth more than 120 million dollars in China. UTStarcom says
100 percent of its third-quarter revenues are from the previous orders, and 50—70
percent of the Q4 sales are already booked. The company is expecting some good
deals in the Indian market as well.

Industry analysts expect demand for telecom infrastructure equipment to fall
by 25 to 30 percent in 2003. RHK, a market research firm, believes that the
total worldwide capital spending on telecom equipment, which has fallen by 29
percent since 2000, will slip further to $190 billion in 2003, from $199 billion
this year. This would be largely because carriers are going to remain
conservative and overcautious in their spending. Even though carriers will
continue to focus on increasing revenue and differentiating offerings, they are
unlikely to invest in expensive gears. In fact, their objective would be to
achieve all this by lowering operational expenditure. Among other things,
equipment makers may soon enter a phase of consolidation and it would not be a
surprise if the big vendors start looking at each other for help. Nortel said
recently that it was shutting the operations of CoreTek, an optical components
maker that it bought for $1.3 billion in 2000. Lucent is reportedly also
considering selling its ATM business to Cisco. Many of the smaller vendors have
already vanished or have been acquired by the larger ones.

As telecom equipment vendors post huge losses and service providers cut
spending, it is unlikely that long-term technological innovations in the telecom
industry will get affected. However, this may not be true for all segments. Some
observers feel that particular solutions for problems like signal switching,
high-speed connections or turning on new services may disappear for lack of
investment, but newer solutions would continue to arrive. Market research firm
Render, Vanderslice & Associates projects that one emerging technology that
is going to create huge demand in the next twelve months in the US market (and
may be elsewhere) is fiber-to-the-home (FTTH). FTTH is the residential broadband
alternative that enables service providers to offer voice, video, and data
through a green-field installation or a complete overbuild of the local phone
and cable TV network. Another key trend that is likely to emerge is that as
traditional giants like Lucent and Nortel keep getting into trouble, primarily
data networking vendors like Cisco, Foundry Networks, and Extreme Networks will
find a significant place in the carriers market.

Ravi Shekhar Pandey

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