(Article pour une fois en anglais, comme demandé maintes fois par certains lecteurs anglophones)
Survival of the fittest…When Herbert Spencer first used the phrase in the nineteenth century after reading Charles Darwin's On the Origin of Species, his intention was to apply the “natural selection” thesis to economics. What Darwin meant by “natural selection” was "better adapted for immediate, local environment" by differential preservation of organisms that are better adapted to live in changing environments. Is this theory applicable to the wild world of telecom equipment supply ? Which companies would then be better adapted to survival in a rapidly evolving technological landscape ?
Nortel Networks’ breakdown last year has shown the world that large telecom equipment suppliers could indeed collapse and be “eaten” by competition. How did this happen ? In the early nineties, new predators appeared in China: Huawei and ZTE quickly became powerful outside their home market and are today in a position to force Western suppliers to adapt to low pricing strategies and lean cost structures. In some countries however, like US or India, these new powerful predators have not yet found the appropriate business climate, whereas they seem to well develop in EMEA regions. Take Huawei alone: its sales were multiplied by ten in seven years (table 1). And between 2005 and 2009 the operational margin of market leader Ericsson was divided by three, while still over performing by far those of competitors Nokia-Siemens, Alcatel-Lucent or Motorola. Call it reckless competition…or fight for survival!
With its undisputed leadership over mobile infrastructure and its large customer base, Ericsson is probably among the fittest and most capable to survive the teeth of eastern assailants. Market interest for mobility solutions is just in its early stages, the internet of objects being the next worldwide revolution with huge impacts of networks and associated services. Adaptability to new vertical markets will be key: networking solutions and applications like smart grids, intelligent transport solutions or e-health will drive new revenues and create new growth territories. This fight for value is also at the forefront of Alcatel-Lucent’s new strategy, positioning itself to support "Web2.0, Web3.0 and beyond" business models and combining web-based applications with "trusted" network and communications services. Other competitors also struggle for survival: Motorola is preparing to divide its capital into two parts, moving a lot of cash into its terminal business while leaving its pension obligations and all its other liabilities to the part which caters to enterprise customers and sells network equipment to operators. The loss-making Nokia-Siemens joint venture could also become too high a burden for its two shareholders who may jointly decide to divest from telecommunication network equipment supply. Members of the species seem to be on the brink of extinction.
But mixing of closely related species may occasionally provide the energy to impel rapid evolutionary change. It is therefore possible that the dismantling of Nortel’s asset is only the start of what could become a more important consolidation wave, building giants able to overcome the increasing power of Chinese predators. These new breeds would also gain more negotiation power towards global service providers and benefit from higher economies of scale. The best placed to grow externally is that arena is certainly Cisco, whose CEO John Chambers recently declared that Huawei had become their number one competitor: with $35b cash reserves Cisco can easily target the best assets to take the leadership in service provider equipment supply. Its recent move to acquire Starent, and the set-up of a Mobile Internet Technology group in Massachusetts could be the start of a strategy to ultimately control the mobile internet infrastructure supply.
The next few years will tell if Darwinism is applicable to telecommunications equipment makers. The exponential growth of data on mobile and fixed networks will maybe help suppliers survive longer than expected, but it is likely that Motorola’s network solutions spin-off in 2011 could launch mergers and acquisitions on a larger scale. Time will tell who were the dinosaurs, and who are the tigers.