January 24, 2013 / 7:40 AM / 7 years ago

Telecom firms' spending on network gear seen picking up in 2013

PARIS (Reuters) - Telecom network operators are expected to increase their spending on equipment this year, giving a boost to vendors like Ericsson and Alcatel-Lucent after economic weakness caused a sharp market contraction in 2012.

The logo of Alcatel-Lucent is pictured at the entrance of its Paris headquarters December 12, 2008. REUTERS/Charles Platiau

Industry executives and market researchers give varying forecasts for the size of the jump ahead, but all expect equipment demand in the United States, Brazil, and China to fuel growth as operators step up their investments in faster fourth generation (4G) wireless broadband networks.

Europe is expected to stagnate again this year after the debt crisis and economic woes caused operators to sharply cut network spending last year. Although groups like Vodafone and France Telecom are building 4G networks, they are more cautious than U.S. counterparts such as Verizon and AT&T because of fears that the extra investment won’t pay off in Europe where mobile prices are lower.

The trends have led market research group Gartner to predict sales of network equipment to carriers to rise 2.3 percent to $79 billion in 2013, after falling 6.6 percent to $77.3 billion last year. North America and Latin America will grow by 4 percent, while Asia excluding Japan will be up 3.6 percent.

Infonetics Research is far more bullish - forecasting up to 13 percent growth this year after a flat 2012 - because analyst Stephane Teral expects to see significant catch-up spending by operators who delayed network investments last year.

Huawei Technologies, the second-biggest equipment vendor by sales after Ericsson but effectively shut out of the U.S. over security concerns, said the overall network equipment market will grow by 5 percent this year.

Other vendors may give their own predictions when they report annual results, with Nokia Siemens Networks (NSN) due to report on January 24, Ericsson on January 31 and Alcatel-Lucent on February 7.

“The trend of telecom operators being prudent about their overall capex envelopes is here to stay. I don’t think the major equipment vendors will get a lot of relief in terms of top-line growth this year,” said Deborah Kish, analyst at Gartner.

“Where the carriers need the most help is designing and integrating their increasingly complex networks and minimizing outages from mobile traffic peaks. That often requires software solutions and technical advice, not only the hardware the big five vendors are used to selling.”

Ericsson, NSN, and Alcatel-Lucent do make software and manage operators’ networks via outsourcing contracts, but are not always at ease in providing a consulting role compared with new competitors like IBM and Wipro.


Network operators globally are currently in a multi-year investment cycle to upgrade mobile networks to 4G technology, known as LTE, which offers up to 10 times faster download speeds. With data traffic from video downloads and on-the-go web surfers clogging up telecoms networks, operators also need to spend to avoid outages and improve customer service.

Yet the smartphone and tablet boom, which has lifted profits at companies like Apple and Google, has not yet proven to be such a boom for the groups that actually make the equipment for the networks.

Brutal competition for contracts, often sparked by low-cost Chinese players Huawei and ZTE, has caused several years of price deflation and eroding margins.

Some price pressure has eased because Huawei has largely stopped competing on price in contract bids because it no longer needs to gain share at the expense of margins. But industry executives say challengers like ZTE and Samsung still lower prices to win initial contracts.

Ericsson and NSN have also at times undercut on price to keep key customers, according to industry sources, accepting lower margins on 3G network modernization contracts in Europe.

As a result Ericsson’s operating margin had nearly halved from six years ago to just 10 percent for the first nine months of 2012, while Alcatel-Lucent hasn’t been able to return to steady profitability since it was formed from a transatlantic merger in 2006.

Meanwhile Huawei’s overall operating profit margin went from 7 percent in 2006 to 15-16 percent in 2009-2010 before slipping to 9 percent in 2011, the last year for which figures are available. The privately owned group does not detail profits for its network gear business.

But the fundamental pressures on equipment vendors are not expected to change significantly this year, according to analysts and industry executives.

“It’s highly unlikely that there will be a significant change in 2013 market trends from 2012,” Alcatel-Lucent’s chief executive Ben Verwaayen said last month.

To reverse two quarters of losses last year Alcatel-Lucent, which is in fourth place in terms of market share for mobile networks equipment with a strong presence in the lucrative U.S. market, is cutting 1.25 billion euros in costs and raising debt.

However, NSN has emerged stronger from last year, helped by a major restructuring which aims to shed units unrelated to the core mobile broadband business and cut 17,000 jobs to save $1.34 billion by the end of 2013. It posted an operating profit in the last three quarters.

“I strongly believe NSN is in as number two or three (in industry rankings) depending on how market dynamics affect the coming quarters,” said Teral.

Editing by Greg Mahlich

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below