Global Vendors: Selling Gets Tougher

We all know these are bad times for the global communications equipment

business. The all round economic gloom, falling demands and profits, and failing

carriers have all added to their woes. That is one side of the story. The other

side of the story is that carrier equipment vendors have been or are being

forced to bring out fundamental changes in the way they operate internally as

well as the way they deal with their customers, partners and suppliers. Not all

the changes though, have been driven by the current economic despair. Service

providers as well as new age vendors like Cisco, Juniper, Unisphere etc, have

forced many of those changes.

Service providers are spending less: What has the collapse of the telecom

business meant to equipment vendors? First things first. Almost every big

service provider (except in countries like India and China where most services

are still in the rollout phase) has put an unofficial freeze on capital

expenditure. The telecoms equipment business has now become a demand-driven

business from being largely supply driven. Gone are the days of vendors

aggressively pushing their products and solutions and even forcing service

providers into deploying their products by offering attractive finance schemes.

Most of those carriers who were always eager to deploy untested technologies

have either vanished or are gasping for breath. Others, both traditional and

new, are deploying solutions only after being convinced of their ability to

deliver services with proven demand or to reduce network-operating costs. In

other words, service providers are more engaged today in creating services for

which demand exists rather than building capacity. Moreover, service providers

are not investing in long-term requirements but only short-term needs. Return on

investment is now the key concern of telecom carriers, something that has

dampened vendor enthusiasm. Service providers are not relying much on feature

functionality for buying products. Only solutions that promise enhanced revenues

in a shorter cycle time are finding buyers with service providers insisting on

near immediate break-even points.

Pointing out that spending patterns have compressed over the past year, Adam

Stein, director (global corporate marketing), Juniper Networks, observes that

the pattern today is purchasing gear with greater frequency but in smaller

quantities as network capacities are reached. "The fundamental change

occurring with PTTs and service providers centers around a lower total cost of

ownership and simplified operations while maintaining robust functionality. This

is a significant change from adhoc equipment addition to service provider

networks that adds significant operational costs. PTTs are looking at lowering

operational costs and developing a closer relationship not based strictly on

capital equipment expenditures," he points out. Explaining why equipment

manufacturers have been affected, Enis Erkel, vice president, (carrier VoIP

products and network planning), Asia-Pacific, Nortel Networks, agrees that the

recent economic slowdown has impacted these changes. "However, we have to

look at the main reason, which is the shrinking profit margin of telcos.

Newcomers to the market, riding on technologies like VoIP, are proving very cost

competitive for the incumbents. They are forcing incumbents with their legacy

gear with high opex and capex to sacrifice their profit margin and thereby

revenue in order to remain competitive. Also, the market downturn has left them

with less cash to do any investment easily. Now they think twice before

spending," he adds.

Vendor financing is not a dead horse, yet: Till less then two years ago,

everybody from Lucent to Cisco Systems used vendor financing to ramp up sales

and keep sales growth high. This strategy increased risk and telecom equipment

vendors, such as Lucent, experienced huge losses. The most notable failure was

Winstar Communication, Inc. which secured vendor financing agreement of $2

billion from Lucent and $500 from Cisco Systems. These equipment makers came

under scrutiny after Winstar filed for bankruptcy in July 2001.

However, Shirish Kanetkar, country manager, India, Unisphere Networks, puts

it, "It is not that vendors have stopped financing the service providers,

but they are more careful now in choosing whom to finance." He adds that

vendors in many cases are refusing to finance the purchase of their own

equipment by service providers even if that means loss of business. However, it

is also a fact that the global economic recession is forcing new converts to

vendor financing. Look at Alcatel for instance. Vendor financing was a strict no

for it at a time when rivals like Lucent were burning billions of dollars. Now

Alcatel says it is left with no alternative but to finance its customers (though

on a highly selective basis) when its customers do not find support from banks

and financial institutions due to the global telecom gloom.

Narrowing down the focus: The more fundamental change, not necessarily

because of the slowdown, has been in the business model of equipment vendors.

The most important change here has been with regard to their relationship with

small but fast growing vendors who were once looked upon as threats. Also, most

of the traditional and large vendors like Alcatel, Lucent and Nortel have begun

outsourcing their core manufacturing functions to third-party contract

manufacturers like Celestica and Solectron. Large vendors are also outsourcing

production of specialized gears such as frequency converters and Internet

security systems, creating significant opportunity for smaller, more focused

players like Somera Communications and SonicWALL. Similarly, vendors like

Alcatel, Nortel, Siemens, Lucent and Ericsson have all tied up with

comparatively far too small niche vendors like Juniper and Unisphere to fill in

the gaps. Areas that the large vendors themselves wanted to explore earlier are

now being served by the likes of Unisphere and Juniper and that too with active

support from the large traditional vendors.

Changes are also being driven by service providers. "As more and more

service providers look for best-of-the-breed solutions, vendors are being forced

back to core competencies," Kanetkar observes. Vendors are now increasingly

looking at partners who can add value to their core products. This also means

finding out system integrators who can fill in the gaps.

"Concentrating on their core competencies gives big vendors a chance to

utilize their core resources more efficiently," Karthik Natarajan, sales

manager, Juniper Networks India, says. Natarajan points out that vendors are

either spinning off their non-core businesses or trying up with niche players.

Alcatel and Nortel are now happily reselling Juniper products. Natarajan is not

off the mark. Only a year ago, large equipment vendors were trying to be

one-stop kind of shops to service providers, offering everything from optic

fiber cables to power solutions. No more. The change has set in.

Ravi Shekhar Pandey