December 21, 2008 6:11 pm

Equipment makers edge towards the end of the line

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The world’s leading telecoms equipment makers are braced for a painful 2009, with Canada’s Nortel looking the most vulnerable to spending cuts.

Nortel is taking legal advice on the merits of filing for bankruptcy, with some industry analysts warning the company is not big enough to compete with larger rivals.

Nortel’s woes point to how the equipment makers expect customers – the fixed-line and mobile phone operators – to cut spending on telecoms gear in 2009 because of the global recession. The only question is whether operators will axe spending or merely reduce it.

Some analysts say Nortel’s customers are starting to lose confidence in the company. In the three months to September 30, sales fell 14 per cent and it recorded a net loss of $3.4bn.

Richard Nespola, chief executive of TMNG, a consultancy that advises some of the leading fixed-line and mobile operators, says: “Customers need to know that the company they are doing business with is going to be around for them.

“Unfortunately the future for Nortel does not look very bright.”

Vittorio Colao, chief executive of Vodafone, the world’s largest mobile operator by revenue, last month highlighted how its European networks were far from being overwhelmed by customers using their handsets to surf the web and other bandwidth-hungry activities.

He says networks are running at only 32 per cent capacity, which suggests Vodafone has little or no need to upgrade its networks to offer higher online connection speeds, especially if the recession means consumers are less willing to spend money on handsets capable of web browsing.

Given that Vodafone’s stance reflects the thinking of many fixed-line and mobile operators, the equipment makers are making increasingly gloomy forecasts for 2009. The makers can only hope that contracts in emerging markets continue to offset at least some of the cut by customers in western markets.

Alcatel-Lucent, the Franco-American company that is still struggling to make a success of its 2006 merger, last week predicted the sector’s sales of fixed and mobile infrastructure would fall by 8 per cent to 12 per cent next year compared with 2008.

Nortel was once the standard-bearer of Canada’s technological prowess, but the Toronto-based company has stumbled badly over the past decade because of management misjudgment and an accounting scandal.

Mike Zafirovski, Nortel’s chief executive since 2005, has sought to improve the group’s profitability through a series of cost-cutting programmes. The company’s mobile strategy, however, has increasingly looked in disarray.

In 2006, Nortel sold its third-generation mobile networks business, based on WCDMA technology, to Alcatel-Lucent. This technology is the most popular 3G platform in the world. Nortel has been left with a 3G technology known as CDMA 2000, which is used by only two of the leading four US mobile operators.

In July, Nortel announced it would devote more research resources to LTE, a fourth-generation technology. Previously, Nortel had focused heavily on Wimax, an alternative 4G technology that looks likely to be less popular than LTE.

Nortel reported a net loss of $3.6bn for the nine months to September 30, when it had $2.3bn of cash, compared with $3.1bn at the same time last year.

While Nortel should not run out of cash in 2009, Nikos Theodosopoulos, a UBS analyst, says it could make sense for the company to file for bankruptcy.

He says: “Filing early with ample cash on hand would allow the company to recapitalise and run its business without additional funding.

“Unless Nortel can make an asset sale in 2009, or possibly receive financial assistance from the Canadian government, it appears the risk of a bankruptcy may be increasing.”

Nortel’s woes may be severe, but they are not unique. All western equipment makers have suffered in the past two years, partly because their Chinese rivals are offering cut-price contracts to new customers.

Huawei Technologies became the third-largest supplier of mobile networks this year. The Shenzhen-based business has proved a ferocious competitor. Against this background, equipment orders have started falling.

Andy Perkins, analyst at Société Générale, identified mobile network contracts worth $2bn that were announced in the three months to September 30, compared with $7.7bn in the same period last year.

He says growth in several markets may need to be revised downwards as the credit crunch begins to affects the telcom companies.

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