The plush corporate office of Gurgaonbased Nokia Siemens Networks (NSN) India is abuzz with energy. Barely a year into operations and NSN has contracted some of the largest network expansion orders from Bharti Airtel, Idea Cellular, Vodafone Essar and, more recently, from Bharat Sanchar Nigam Limited (BSNL).
Obviously, the chemistry between Nokia, the Finnish specialist in wireless communications, and Siemens, a German company strong in fixed line telecom gear, is working well for now. In 2007, the two companies agreed to pool their network equipment divisions to form a joint venture (JV), NSN. Other units of Nokia, such as mobile handsets, were not part of the deal.
The merger was the last of a series of high-profile consolidations that took place in the telecom space, starting with Ericsson buying Marconi’s broadband internet and telecom assets for ??1.2 billion and Alcatel putting in $13.4 billion to acquire Lucent.
According to market analysts, the coming together of Nokia Networks and Siemens Communications was well timed and perhaps, necessary. With the equipment manufacturing segment getting increasingly competitive, combining technologies and customer lists could improve the company’s position considerably while taking on rivals Ericsson, Motorola, Alcatel-Lucent and low-cost Chinese manufacturers like Huawei and ZTE.
Besides, as telecom consulting firm Ovum points out, by sharing the high fixed costs of research and development and reducing overheads, NSN stood a better chance of weathering periods of slow growth that were inevitable in more mature markets. Around early 2006, Siemens was already feeling the heat of aggressive competition. It had sold off its handset business to Taiwan’s BenQ. At the same time, Nokia was looking to strengthen its network business to compete better with Motorola and Ericsson. By joining forces, NSN brought to the table more than $2 billion in annual savings, just by cutting back-office costs and creating other efficiencies. The merger also made NSN the second largest company in the telecom infrastructure space.
“We see only positives in the merger. The synergy has improved our cost position in many areas. Today, we can rightfully say that we have created an NSN identity,” notes Michael Kuehner, country head, India and Nepal, NSN.
While it is still too early to say that the merger is a success or that the sum is greater than the parts, the indications from global contracts clinched recently are encouraging. NSN closed its first year as a joint venture by picking up a leading role in Latin America’s 3G rollout. It also acquired a DSLAM supply contract from China Telecom’s subsidiary, Hunan Telecom, wherein NSN will increase network capacity and gear up for future VDSL2 deployment. It has further clinched a deal with Chunghwa Telecom to put up a next-generation IMS network in China. In Saudi Arabia, NSN will roll out a mobile network as part of a $935 million contract from Kuwaiti mobile operator Zain.
India chapter
India is a key focus area for NSN. With service providers on a massive expansion drive and operators demanding innovative telecom services, India presents a huge opportunity for network equipment manufacturers. And with several new players signing up to enter the sector, the requirement for networks will only head northwards. It is estimated that over the next two years, $12$15 billion will be invested by new telecom players, over and above the $12 billion being invested by existing players such as Bharti Airtel, Vodafone Essar and Aircel.
According to the Department of Telecommunications (DoT), revenue from the telecom manufacturing sector crossed $6.5 billion in 2007-08. At the current growth rate, the Indian telecom equipment manufacturing sector is set to become one of the largest globally by 2010. For Nokia, India represents a key growth market, contributing about 7.2 per cent to its overall revenue. In fact, it is the second largest market for the company after China.
NSN has bagged several key contracts in the country. These include a contract from Bharti Airtel to deploy voice service delivery platforms across all 23 circles. In another deal, worth $500 million, NSN will expand Idea Cellular’s GSM/GPRS/ EDGE networks across six circles. It has also won a greenfield tender from BSNL for 448 K ports to deploy broadband access across 7,000 villages in Madhya Pradesh.
India’s importance on NSN’s growth radar is evident from the fact that it has decided to base its global headquarters for the services business in the country with Rajeev Suri in charge. As a telecom analyst from Mumbai-based Enam Securities puts it, “Basing the business unit in India is an important step towards actually changing and transforming business processes. While in the past, companies were looking at India and China as a way of reducing costs, now it is about being close to the market.”
Ashish Chowdhary, head, global managed services division, NSN says, “We strongly believe that the India growth story has just begun. NSN is a leader in managed services in the country and it is investing further to tap future opportunities.”
On his visit to India, Olli-Pekka Kallasvuo, president and CEO, Nokia Corporation, too emphasised the importance of the Indian market: “We will offer services and software out of India. We also want to leverage the talent pool here for our global operations. In R&D, for example, we want to give our Indian teams complete, viable projects.”
A 150-year-old one-time lumber company, Nokia has been present in India since 1995. It has been operating in the country through two divisions: handsets and networks. Over the years, it has steadily consolidated its position. In 2006, it put up a manufacturing facility in Chennai to make handsets and base station controllers at an initial investment of about $150 million. This was followed by a manufacturing facility for wireline network equipment in Kolkata. To support manufacturing and services, the company increased its investment in its development centres in Bangalore, which focuses on radio and core networks, network management, application and platforms, and billing and charging.
To fund future growth, NSN has announced plans to invest $100 million in India over the next three years. A part of these funds has been set aside to establish a manufacturing facility in Tamil Nadu for wireless network equipment, develop the existing R&D centre and expand its Global Network Solutions Centre.
The merged entity is planning to leverage its expertise in both fixed and mobile networks to offer a product portfolio that includes radio access, service core and applications, operation support systems, broadband access, IP transport and services. It will also offer quadruple-play services, low-cost solutions for GSM and Wi-Max for the rural areas.
Handsets
Nokia is the undisputed leader in the handset business while it trails Ericsson in the network segment. In 2007, the company’s global mobile handsets volume stood at 437 million units, representing a 26 per cent growth over the previous year. Its global market share rose to 38 per cent in 2007 from 36 per cent in 2006. In the first quarter of 2008, however, Nokia’s overall share of handset shipments slipped to 39 per cent from 40 per cent in the previous quarter.
In India, Nokia continues to lead the segment. It has the lion’s share (60 per cent according to market experts) of the handset market, and is way ahead of rivals Motorola, Sony Ericsson, Samsung and LG. A few years ago, Nokia’s share of this market slipped with LG, Samsung and Motorola’s Razr series gaining popularity. However, with the launch of its N and E series, it soon regained its position. Over the past few years, it has specially improvised its handsets keeping the pricesensitive Indian customer in mind. Today, the company has about 110,000 retail stores in the country, of which around 70,000 are single-brand shops, which stock and sell only Nokia devices and accessories.
Driven by the Indian and Chinese markets, Nokia recorded impressive sales of 51,058 million euro in 2007. Sales in India rose by 36 per cent from 2,713 million euro in 2006 to 3,684 million euro. The country’s contribution to total sales was next only to China’s, which contributed 5,898 million euro.
In the coming years, Nokia is looking to expand its volumes manifold given the huge opportunity in the Indian handset market.
The mobile segment is adding over 8 million connections every month, translating into potential sales of 8 million handsets a month. And this is just the tip of the iceberg, excluding as it does the replacement market which constitutes 20-25 per cent of total handset sales. During 2008, Nokia plans to launch 30 new handsets and set up over 700 exclusive outlets in the country. It has so far set up 100 branded outlets.
Analyst viewpoint
While Nokia handsets seem set to rule the roost for some time yet, analysts believe the company needs to pay greater attention to battery-related problems. Nokia’s lithium-ion batteries have been in the spotlight for the second time in two years, with the BL-5C batteries needing to be recalled in 2007.
According to company officials, the issue is complicated as the batteries are outsourced. They believe that as devices get more sophisticated, they consume more power. The problem needs to be managed either through better battery technology or by optimising power consumption, both of which options the company is looking into.
Meanwhile, in 2007, NSN decided to pass up the chance to participate in BSNL’s over-$2 billion GSM network contract as the price per line was too low. Ericsson had won the bid to supply 60 per cent of the 22.5 million cellular lines while NSN was the second lowest bidder. However, at $90 per line, NSN decided not to service the contract. On the face of it, NSN was within its rights to take such a stand. However, analysts feel that its backing off at such a late stage put BSNL’s entire capacity expansion project in jeopardy.
In fact, some analysts suggest that the company should take a relook at its strategy, especially in light of the fact that Ericsson is emerging as a particularly strong player in such fast growing markets.
“It has to be seen whether the two companies can work as a team. In the Nokia Siemens merger, the former clearly has more marketing savvy in terms of go-tomarket. It may want to employ the same management skills that have given it dominance in handsets in the networking segment as well,” says Romal Shetty, executive director, KPMG.
This may be difficult though, as telecom companies replace equipment more slowly than consumers replace handhelds. Moreover, with telecom operators increasingly sharing network equipment, network equipment manufacturers have been suffering from cost cutting globally. For instance, Vodafone, the world’s largest operator by sales, has announced that it will start sharing networks with Orange in Spain and with Bharti in India. Some European operators are also considering rolling out their 3G mobile networks more slowly than initially planned and are looking at possible consolidation. This is pinching technology.
In light of these developments, “NSN should make the most of the available opportunities and fill the gaps in its product line,” observes telecom analyst Mahesh Uppal. “The jury is still out on whether the merger has got any substance or not. Obviously, the two companies have saved costs and gained economies, but other than that, you don’t get the sense that two major companies have come together.”
A senior analyst from Ernst & Young, however, views it differently. “NSN will be much better placed than Alcatel-Lucent because of the strong presence of Nokia in India. Together, Nokia and Siemens form a strong force to counter Alcatel. Ericsson will remain dominant on the wireless side though. While it is too early to comment on the success of the joint venture, NSN will continue to be a major player in the Indian market. The biggest challenge for NSN, however, will be pricing, because Ericsson, its biggest competitor, is very aggressive on the pricing side.”
Future prospects
Indeed, price is an area the company intends to focus on. While all its major offerings ?? 3G, Wi-Max, IP transformation, NGN, TV on mobile, and IPTV ?? have tremendous potential in India, this is an extremely price-sensitive market. Telecom tariffs are among the lowest in the world and the average ARPU hovers around $8. The market thus requires lowcost solutions and new innovative business models, which NSN is focusing on.
Going forward, 3G and rural solutions will be the thrust areas for NSN. There are several challenges, of course. As Kuehner points out, in the context of declining equipment prices, the key challenge for equipment suppliers will be to provide quick and cost-effective rural network rollout and simultaneously invest in creating products/solutions that enable viable business models that drive down the total cost of ownership for operators and the affordability barrier for the common man.
NSN is addressing this through serviceand product-level innovations. It has, for instance, launched a low-cost wireless communication solution that enables operators to offer mobile services for as low as $3 a month. The NSN Village Connection envisages building rural connectivity through a franchisee business model between an operator and local village entrepreneurs. The company is looking to source the equipment required to set up the rural communication system locally.
In all, NSN is on steady ground. Its strategies are well defined and should help the company in securing healthy returns in the future.
