The need for change

The ever-evolving telecom sector and the economic downturn has led to a rapidly changing landscape for vendors

Tags: Alcatel-LucentDownturnEricssonHuawei Technologies CompanyInfrastructureManaged servicesNokia Siemens NetworksUnited Arab EmiratesZTE Corporation
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The need for change Rajeev Suri, CEO, Nokia Siemens Networks, says the vendor needs to “engage in issues well beyond a traditional discussion of technology”.
By  George Bevir Published  December 7, 2009 Communications Middle East & Africa Logo

Sales are down, cost cutting is a priority and the reliance on new lines of business is only set to increase. That was the overriding message from almost all telecom infrastructure vendors in their third quarter results.

Despite the best attempts of politicians and business leaders around the world to talk up the possibility that the world's economy is starting to recover, the effects of the economic crisis are still being felt in many industries, and certain sections of the telecom industry are no exception.

"The downturn has forced telecom operators to reduce spending, explore ways to cut operational costs, and defer or reduce capital expenditures. These pressures extend along the value chain," says Ghassan Hasbani, partner and head of the Communications and Technology practice at Booz and Company in the Middle East.

The leading vendor by market share, Ericsson, said that network sales in July, August and September declined year-on-year by 8%. Alcatel-Lucent also suffered from a decline, with revenue down 9.3% year-on-year, while Nokia Siemens Networks reported a loss of $836 million for the third quarter.

In contrast, Chinese vendors Huawei and ZTE performed strongly during Q309. According to Reuters, China's commerce minister said in March that Huawei and rival ZTE would see 2009 sales rise 30%.

ZTE's real strength is in its home market of China, which the vendor said was the main driver of its 47% year-on-year growth in carrier network segment of network equipment, optical transmission products and data communication products.

ZTE's senior vice president for the Middle East and Africa, Zhang Renjun, told CommsMEA that in the MEA region "business is still going up". However, with most contracts for ZTE in the region being signed in 2008, according to ABI Research's wireless infrastructure senior analyst Nadine Manjaro, it is starting from a smaller base.

Simon Kerton-Johnson, partner for technology, media and telecommunications at Deloitte, says that of all the vendors, Chinese rival Huawei is best suited to the new era that has dawned on vendors. "Although the integration deals of Alcatel-Lucent and NSN are two to three years old now Huawei is well-placed simply because it doesn't have the integration distraction," he says. "And it has an awful lot of state support, is aggressive on pricing, works hard and as a result has been very successful in the Middle East."

Regional resurgence

In Ericsson's third quarter results, the Middle East, Africa and Central and Eastern Europe region, where sales decreased by 11% year-on-year, was described as "presently most impacted by the economic climate including credit constraints". However, there were bright spots; Egypt, Nigeria and Saudi Arabia were highlighted as growth markets, while the Turkish market is said to be particularly strong with a continued fast rollout of 3G networks. New licenses have also been issued in the region, with Ericsson selected as one of the main suppliers of a new 2G and 3G network in Tunisia.

Kerton-Johnson says that all vendors face challenging times, but demand driven by data through 4G or NGN for fixed line in response to increased capacity demand is there. A Booz and Company report on the effect of the downturn on the telecom sector noted that equipment manufacturers are moving to promote innovation to counter commoditisation and in spite of the current financial difficulties. Next-generation technologies must offer high-speed access and support differentiating services and applications. Solutions that allow for user-generated content, facilitate the convergence of low-cost services and applications, and enable innovative pricing plans will be increasingly in demand, the report claims.

For the more advanced telcos the move to 4G is now becoming a reality. Alcatel-Lucent says that the total number of LTE trials it is involved in is 16, with UAE incumbent Etisalat one of the operators it is working with. But the first deal to be signed was in Bahrain, and NSN's activities with Zain in Bahrain are among the most advanced in the region. At the start of November, it announced that work had begun on upgrading Zain Bahrain's network to an all-IP, flat network through the introduction of internet High Speed Packet Access (I-HSPA) as a first stage, and then what it describes as "the Middle East Region's first Long Term Evolution (LTE) technology".

The deals for LTE contracts are not coming as fast as in other, more developed parts of the world, and China and India are seen as the key growth areas for 3G rollout, but as 3G networks in the Middle East and Africa mature and telcos record a return on their capital spending more deals to upgrade are likely to be announced.

Reduction and realignment

With falling revenue and profit combined with rising competition, the introduction of a raft of cost cutting measures always seemed inevitable. Ericsson started "cost reduction activities" at the start of the year, with targeted annual savings of SEK10 billion ($1.4 billion). From the second half of 2010, and it said that cost reduction activities are "ahead of plan with further opportunities for efficiency improvements and savings." More recently, Nokia Siemens Networks (NSN) announced that it would cut costs by EUR500 million ($753 million) by end 2011, with a plan to cut almost 10% of its workforce and what it described as "extensive operating expense and production overhead reduction, including a global personnel review together with ongoing purchasing savings".

As well as reducing the size of their workforce, vendors are also reorganising their businesses in a bid to get in shape. According to Ben Verwaayen, CEO of Alactel-Lucent the vendor "continues its transformation journey" as it looks to win contracts in what he describes as "areas of differentiation", such as IP transformation, next generation broadband and wireless, application enablement and services.

"Evolving from network rollout in infrastructure build to managed services is driven by operators' demands to reduce costs," Kerton-Johnson says. "Vendors need to adjust to meet those demands."

Kerton-Johnson says that in more mature markets it is about optimisation, and that opex imperatives means that there is a drive to consolidate networks. Although many of the telecom markets in the countries of the Middle East could not be described as ‘mature', the change in focus is something that vendors in the region are preparing for.

Mouien Al Madhoun, head of HR for NSN in the Middle East and Africa, says that from the second quarter of the year, the vendor has started to recruit principal consultants, people who used to work for companies such as IBM, Accenture and Deloitte, to help it drive into areas it did not used to focus on.

That shift has gathered pace and in the vendor's third quarter announcement it was revealed that NSN's cuts and restructuring plan includes "reorganising the company's business units to better align with customer needs". Rajeev Suri, chief executive officer of NSN, refered to a "changing market", which he said necessitated changes to allow NSN to "engage in issues well beyond a traditional discussion of technology".

As of the start of next year, NSN's five business units will be reduced to three. ‘Network Systems' will box shift focus on providing both fixed and mobile network infrastructure. ‘Business Solutions' will focus on helping customers generate new revenue and ‘Global Services' will focus on helping customers improve operational efficiency through outsourcing of their non-core activities.

There is an ever increasing appetite for network sharing as operators look to share the burden of capital expenditure. In mid- October, NSN took over the management, operation and maintenance of Zain Nigeria's backhaul network  in what NSN's Ashish Chowdhary described as NSN's "first outside plant managed services contract in Africa".

And at the end of October, Ericsson and UAE operator Du signed a three year managed services agreement, which Ericsson said would reduce Du's opex and enable the operator to focus on providing new services to customers. Valter D'Avino, Ericsson VP and head of managed services said the deal was further evidence of a shift toward managed services in the region.

For Ericsson, ‘Professional Services' sales increased 9% year-over-year, and it confirmed that "in the present financial climate there is strong demand for services targeting the operational efficiency of operators such as managed services and consulting".

"The very different environment that telecom industry leaders will face once the recession ends and the recovery begins demands that every player make a conscious decision about its future role in the industry.  And the capabilities it will need to succeed," says Booz and Company's Hasbani.

Come together?

Strength can be gained by joining forces, but according to Deloitte's Simon Kerton-Johnson, we are unlikely to see the larger vendors unite to build strength through consolidation.

"Alcatel-Lucent and NSN did come together out of merger, and consolidation has happened, but the global market can probably support the likes of NSN, AL, Huawei and Ericsson," Kerton-Johnson says. "I don't expect to see more consolidation, I'd be surprised if we saw another mega deal in the next few years.

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