As world economies and businesses wake up to the reality and scale of the global financial crisis, there is a growing realisation that a recovery is still some way away. If 2008 was bad, 2009 promises to be worse.
Practically no industry segment has been left unscathed. The direct impact or the trickle-down effect of the crisis is being felt across all industries in the world, in some more than in others. Telecom, while bracing itself for a slowdown, is perhaps better off than many other sectors such as real estate. After all, as a telecom analyst points out, people do not stop making calls, using telecom devices or the internet due to a financial crisis.
As providers of essential services, telecom operators will be shielded from the worst effects of the downturn, believes global management consulting firm Booz and Company. However, handset and network vendors may not be as fortunate, as users are likely to put off upgradation of their devices or networks. On the capital spending front, operators wanting to conserve cash will rethink plans to invest in infrastructure in developed markets and review the pace of rollout of next-generation technologies.
Some of these effects are already visible. Equipment manufacturers are seeing delays of six to nine months in implementing projects, including IPTV and next-generation build-outs by operators like AT&T, Verizon and BT. According to research firm Ovum, revenues of a group of telecom equipment manufacturers ?? Nokia/Nokia Siemens Networks (NSN), Cisco, Ericsson, Motorola, and Alcatel-Lucent ?? as well as smaller suppliers like Juniper, Tellabs, JDSU and Ciena decreased by 17 per cent (year on year) during the October-December 2008 quarter to $49.9 billion, due to the global economic situation as well as the end-of-year dollar appreciation. Preparing for the worst, companies like Alcatel-Lucent, NSN, Motorola and Ericsson have had little choice but to cut back jobs and save cash. Nortel, meanwhile, which was already on the brink of financial collapse, has had to file for bankruptcy for some of its subsidiaries.
Compared to their Western counterparts, Chinese vendors like ZTE and Huawei seem better placed as their products are cheaper. Suppliers such as Juniper, Ciena and Tellabs are also in a strong position. Juniper has high margins (14 per cent for the fourth quarter of 2008), a good cash position and 14 per cent revenue growth.
The handset segment will take the biggest hit within the telecom sector. As evident from the results of the fourth quarter ended December 2008, companies like Nokia, Motorola, Sony Ericsson and Samsung have all registered a visible slowdown in sales, especially in high-end devices and extended replacement cycles. Despite growth in emerging markets, all companies have reported a decline in sales. During 2009, the market is likely to shrink 5 per cent year on year based on optimistic estimates, while companies like Nokia predict it could be more like 10 per cent.
In India, however, the situation is somewhat different. The telecom sector has remained comparatively insulated from the crisis. With a subscriber base of over 350 million and adding about 10 million mobile subscribers a month, the Indian telecom industry continues to be the fastest growing telecom market in the world. It is now in the process of embarking on the next level of growth with the launch of 3G and Wi-Max services.
According to Nripendra Misra, chairman, Telecom Regulatory Authority of India, the demand for connectivity in the country is not likely to diminish soon.With a teledensity of only 32 per cent, there is a huge population that is yet to be covered. The existing operators have outlined investments of $15-$20 billion to create capacity for 250-350 million subscribers in rural areas, while the new entrants are likely to invest $12-$15 billion in setting up greenfield networks. Global players like Alcatel-Lucent, Nokia, BT and Ericsson are looking at the India opportunity to tide over the rough times.
The main problem with the Indian telecom space, however, is the lack of funds for expansion in the current economic climate. Debt-based expansion will be impacted as the liquidity crunch and high interest rates will reduce debt funding and increase the cost of debt, which in turn will squeeze margins. Also, with nearly 95 per cent of the private equity (PE) money coming into India originating from either the US or Europe, PE interest in telecom may get impacted in the short term. However, in the long term, with the sector expecting capital investments of over $25 billion, private equity will continue to be a popular means of raising funds for telecom.
For now, established players like Reliance Communications (RCOM), Bharti Airtel and Idea Cellular are not looking to curtail their upgradation plans. Besides, most have made provisions for future expansions by way of stake sales or debt funding, and are likely to continue with long-term strategic investments. Incumbent carriers Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) are in any case cash rich and are not likely to face any major issues in raising capital. BSNL plans to award a contract for 93 million lines to extend its GSM coverage, at an estimated investment of $10 billion over three years. The company has also made ambitious plans for its CDMA foray.
While the credit squeeze may affect merger and acquisition (M&A) activity in the short term, analysts expect that in 2009, stronger operators in India will accelerate consolidation by acquiring marginal players in distress. There may also be an increase in cross-border M&As as wellestablished companies in the US and Europe look to expand into developing markets. Some relatively cash-rich companies in developing markets of the Middle East, Africa and Asia may also explore M&A opportunities.
tele.net assesses the impact of the global financial crisis on the telecom industry and the emerging scenario in 2009…
Nortel files for bankruptcy
The global economic crisis has nudged the decade-long decline of Canada’s leading telephone equipment maker Nortel Networks down the slope to bankruptcy. The Nortel board took a unanimous decision to file for bankruptcy for some of its subsidiaries in the US and Canada, which was the company’s only hope of salvaging its one-time high-flying business. The step will certainly allow it to decisively deal with its cost and debt burden.
“It was important,” said officials at Nortel. The global financial crisis and recession had compounded the company’s financial challenges and directly impacted its ability to effect any kind of a transformation. “Nortel had to be put on a sound financial footing once and for all so that it can build on its core strengths and become a highly focused and financially sound company,” stated Nortel’s president and CEO, Mike Zafirovski, in a press release.
The company intends to build on its cash reserves of $2.4 billion (as on December 31, 2008) during its restructuring process. It also intends to exit from non-lucrative business lines. For instance, it has announced its intention of entirely getting out of the mobile WiMax business, which would mean ending a seven-month-old strategic partnership with Alvarion.
While the process of re-emerging from bankruptcy protection as an intact company will take time, the company is pressing hard to reassure its customers in other countries of its commitment. It has given its commitment that affiliates in the Caribbean, Latin America and Asia, including LG Nortel as well as Nortel Government Solutions, will not be subject to the bankruptcy proceedings.
In India, it looks as though it will be business as usual for Nortel. The company has considerable business interests in the country. It works closely with leading carriers in both the public and private sectors. Its clients include RCOM, BSNL, Bharti Airtel and GAIL (India). Also, outsourcing firms, Tata Consultancy Services, Wipro, Infosys and Sasken Communication Technologies are some of Nortel’s bigger clients.
NSN banks on developing markets
NSN saw its fourth-quarter sales for 2008 fall by 5.7 per cent to 4.3 billion euro, hurt mainly by lower demand in Europe and China. Operating profits rose 15.4 per cent to 225 million euro, helped by substantial cost cuts through the year.
The company met its targeted annual savings of 2 billion euro, but expects the global telecom equipment and services market to fall by at least 5 per cent in euro terms in 2009 in the wake of the market meltdown.
In India, the company has tie-ups with Bharti Airtel, RCOM and BSNL, among others. With the demand for telecom equipment manufacturing pegged at $34 billion in the coming years, the industry is not likely to take a huge hit even in the present market environment. In light of this, it makes sense for companies like NSN to focus on developing regions.
Ericsson remains insulated for now
For Swedish vendor Ericsson, India is an important growth market. The company, which focuses largely on mobile infrastructure, has alliances with all the leading operators in the country.
Though globally it has laid off 5,000 workers as a cost-cutting measure, its CEO, As providers of essential services, telecom operators will be shielded from the worst effects of the downturn. Vendors may not be as fortunate. Carl-Henric Svanberg, maintains that the mobile infrastructure market is not particularly affected by the economic slowdown. The paring down of employees, he claims, is “only to make sure that we’re prepared for tougher times. We are not changing our strategy. We are not losing any of our capabilities by doing this.”
According to Svanberg, telecom operators are in good shape and there has not been much impact on mobile network investments. There is huge demand for 3G capacity, he believes, and this is driving new infrastructure and upgrade contracts. The problem, according to him, is on the fixed line side where demand has been declining rapidly for years. Svanberg sums up the situation thus: “This is not a telecom crisis; this is a financial crisis that has turned into an economic slowdown.”
The company’s fourth-quarter financials have been good, with a 23 per cent increase in year-on-year sales. Profit, however, is down by 39 per cent, as its handset venture, Sony Ericsson, has been eating into its bottom line.
In fact, Sony Ericsson has been struggling to hold on to its market share even as it posted a second straight quarterly decline in sales. During the fourth quarter, Sony Ericsson reported a loss of 185 million euro, with phone shipments falling 21 per cent in 2008.
Still, Ericsson is optimistic and believes that the demand for mobile equipment can only increase with new high speed packet access networks, IP architectures and 3G networks waiting to be rolled out. In short, for Ericsson and the rest of the infrastructure industry, more networks will be built on common platforms, requiring fewer boxes which the R&D and product development will reflect.
Huawei sees an opportunity in crisis
Chinese vendor Huawei has fared relatively well. End-2008 saw the company achieve steady growth despite trying times. Global sales reached $23.3 billion, up 46 per cent year on year. Income from the international market exceeded 75 per cent of the total.
Though the net profits have not been declared, the company is believed to be facing heavy cost pressures as its asset-liability ratio had reached nearly 67 per cent in 2007. In light of this and the financial crisis adding uncertainty to its product mix, there is speculation about Huawei’s funding plans.
Still, Chairman Sun Yafang remains optimistic: “The global economic situation may be very complicated in 2009. But for us, this is an opportunity as well as a challenge. Our global sales are expected to be over $30 billion in 2009.”
To reach this goal, the firm needs to have a growth rate of 28.8 per cent, which is possible given that between 2005 and 2008, Huawei achieved growth rates of 40 per cent, 45 per cent, 48 per cent and 46 per cent. Analysts expect that in 2009 the growth rate will be about 30 per cent ?? for the first time in five years. However, even at this rate, Huawei’s growth would still be higher than that of other international equipment manufacturers.
The advantage that Chinese companies like Huawei and ZTE have over their global counterparts is that they offer products at much lower costs. “As all operators want to cut investments, there will always be a market for lower-cost products,” points out telecom analyst Mahesh Uppal. Besides, with Chinese telecom operators now investing in 3G upgrades, the increase in sales in the domestic market will offset the sluggish sales in overseas markets for Huawei and ZTE.
Alcatel-Lucent still hiring in India
Despite the global gloom, leading equipment manufacturer Alcatel-Lucent remains bullish on the Indian telecom market. While the company has brought down the global headcount by 1,000 over the past few months, in India, it is planning to hire a similar number of people this year. Says Vivek Mohan, president, Alcatel-Lucent India: “India is an important market for the company. It presents a huge untapped potential. We have about 70,000 employees globally and though we have cut 1,000 jobs, the attrition rate is less than what one sees overall. In India, however, I would like to hire another 500-1,000 people in the next one year for our operations.”
With former BT chairman Ben Verwaayen at its helm, a major strategic reorganisation is under way. The company, which has been facing a serious internal crisis since Alcatel and Lucent came together, is being regrouped into three divisions, serving telephone network carriers, businesses and vertical industries supplying the latest network technology based on internet protocol, wireless, optic fibre and fixed line broadband and software applications for operators.
Alcatel-Lucent is also planning to reduce its activity in older-generation networks based on legacy standards like CDMA, the first generation of GSM, WiMax and ADSL.
The company hopes to save 750 million euro in 2009 by cutting back 1,000 management jobs and 5,000 contract workers. The company is also focusing on reducing its discretionary spending and operating costs through stricter price discipline and prioritising its research and development activities.
Alcatel-Lucent expects to reach “about break even” at the operating level in 2009 and generate an operating profit margin of 5 per cent. It is targeting growth from mainly the Chinese and Indian markets by leveraging its new streamlined organisation and through its current product por folio that includes Wi-Max on enhanced DSL network and LTE. It is also exploring co-sourcing and partnering opportunities. In India, it is in talks with other firms for deployment of low-cost Wi-Max devices.
Motorola to shut down sales unit
US-based Motorola, a leading equipment and handset manufacturer, recently announced its intention to cut a further 4,000 jobs with demand diminishing under the strain of the recession. The company shipped half as many phones in the fourth quarter of 2008 as compared to the same period a year earlier. It also reported a loss, with revenue falling as much as 27 per cent. For the quarter ended December 2008, it reported sales of 19 million units, down from 25.4 million in the previous quarter. The figure for the quarter ended December 2007 was 40.9 million.
Amid dwindling sales and increasing competition, the troubled handset maker is now shutting down its distribution division in India ?? a contrast to the scenario three years ago, when Motorola envisaged a bigger role for itself in India and emerging markets through a focus on lowerend products. Distribution will now be done out of Singapore.
While it is not yet clear as to how many people work in the division and will have to quit, roughly 150 people are known to have been informed. While the layoffs have so far been restricted to a few people in the distribution segment, it could extend to other divisions as well, including research and development.
Retrenching apart, there has been an exodus of some top executives from Motorola India, following uncertainty about the future of the mobile division in the past few months. The company’s senior director, sales and marketing, mobile devices, Lloyd Mathias, left to join Tata Teleservices Limited while the corporate vice-president and managing director for software and services, Mohan Kumar, quit and joined Norwest Venture Partners. Country president Firdose Vandrevala had left in 2007 to head Hiranandani Constructions.
Unfortunately for Motorola, though it has a strong global brand and a fairly healthy balance sheet and cash position, it has not been able to insulate itself from the global economic upheaval. It has lost its number two position in the international handset market to Samsung. The company that took the mobile market by storm with its Razr model in 2005 has failed to repeat that success thereafter. It had planned to spin off the handset business, but has now postponed it.
According to analysts, 2009 will continue to be bleak for the company, despite efforts to streamline operations, improve profitability and offer a better product base.
Nokia
The global crisis has caught up with world number one, Nokia, as well. The company has taken a serious hit, with net income from devices and services slumping nearly 27 per cent from 11.1 billion euro to 8.1 billion euro in December 2008, its lowest since 2001. Net profit has plunged 69 per cent. In the quarter ended December 2008, net profit fell to 576 million euro from 1.84 billion euro in the December 2007 quarter, owing largely to dwindling consumer demand in China (36 per cent), the Middle East, Africa and North America. The company sold 113.1 million units during the quarter, which was 15 per cent lower than the December 2007 quarter, and cut its industry sales forecast for the third time since November.
Nokia has proposed to slash its dividend for the first time in seven years and has forecast a 10 per cent slide in industry sales for 2009. The company’s chief financial officer has reportedly stated that the company will lower its dividend and put share buybacks on hold to reflect lower earnings and to preserve cash. This, according to analysts, reflects the company’s fears that demand will not pick up as quickly as it had hoped. It estimates a market share of 37 per cent in the quarter, down from 40 per cent a year before. In other words, Nokia expects performance to be unpromising through 2009.
“In recent weeks, the macroeconomic environment has deteriorated rapidly, showing even weaker consumer confidence, unprecedented currency volatility and credit tightness that continues to impact the mobile communications industry,” states Nokia chief executive Olli-Pekka Kallasvuo.
While the company does not expect a snap revival, it is trying to work towards it. It is taking action to reduce overall costs and preserve its strong capital structure. To begin with, it aims to cut annual costs from the devices and services unit by more than 700 million euro by 2010. This will mean a reduction of 1,000 positions. The company will also need to reduce capital spending to preserve cash. Analysts feel that this could also be a good time for Nokia to fix its relative weakness ?? its high-end portfolio ?? for markets such as Western Europe as it competes with Apple’s iPhone and other smartphones in this category. Meanwhile, the only drivers of growth it can hope for are new subscriptions in South Asia and Africa, and those too mostly for basic and low-feature handsets.
It will no doubt be a long haul. But given its economies of scale, distribution channel and product portfolio, Nokia should be able to turn the corner.
Conclusion
Overall, across the telecom sector, it is the handset makers that have been the most impacted by the global economic crisis, followed by equipment manufacturers and service providers. The latter two are banking on demand from developing economies to salvage their situation, hopefully by end 2009. Handset makers, on the other hand, may have to wait longer. With handset majors like Nokia, Motorola, Sony Ericsson Mobile Communications, LG and Samsung all cutting costs, there may be some hope yet.
Ovum states that the cash plus liquid assets relative to monthly opex of companies increased slightly in the fourth quarter of 2008, which indicates that cost-cutting efforts are starting to take effect. The year 2010 will perhaps bring better tidings.
