"Indians - They have more and more Ph.D.'s and they're very dedicated."
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their home markets much faster than Nortel anticipated. "We see them
in the United States, we see them in British Telecom," he said,
alluding to recent purchases of Chinese equipment by the BT Group.
"Their cost structures are low, they have smart people, they have more
and more Ph.D.'s and they're very dedicated."
The New York Times
September 13, 2004
Nortel, Under Deep Scrutiny, Now Faces Chinese Competition
By IAN AUSTEN
TTAWA, Sept. 12 - Nortel Networks is mired in an accounting scandal
that has led to criminal and securities investigations, numerous
lawsuits and a purge of top management. But for its chief executive,
William Owens, these may be the good days.
As Mr. Owens struggles to restore the company's financial reputation
while leading it through the latest round of staff and spending cuts,
he is aware that another potential problem is lurking over the
horizon: Aggressive and successful moves by Chinese companies into the
telecommunications equipment market may soon force industry mergers
and are likely to bring further corporate revamping.
"It is almost certain there will be consolidation in the
telecom-Internet equipment provider marketplace," said Mr. Owens, a
former Nortel director who became chief executive after the unexpected
firing of Frank A. Dunn in April. "It's hard to see exactly where it
will occur. But if we are able to solve the basics of doing business,
then we will participate effectively in the consolidating of the
business."
Continued delays and restatements of Nortel's financial results make
it hard for analysts and other outsiders to assess the company's
ability to successfully withstand the long-anticipated revamping of
the communications equipment business. But some argue that the new
competition from companies like Huawei Technologies is a much more
significant threat to established equipment makers than messy
accounting or depressed share prices.
In the second quarter of this year, RHK, a telecommunications research
firm in San Francisco, ranked Huawei, based in Shenzhen, China, second
only to Alcatel in worldwide revenue from optical networking
equipment. Lucent Technologies placed fifth.
"It's very analogous to what happened in the electronics industry in
the 1950's and 60's with the competition from Japan," said Dennis
Mendyk, managing director of Heavy Reading, a telecommunications
market research firm in New York. "It's not good news if you're an
incumbent vendor in the West."
Mr. Owens acknowledged that Chinese companies had already moved beyond
their home markets much faster than Nortel anticipated. "We see them
in the United States, we see them in British Telecom," he said,
alluding to recent purchases of Chinese equipment by the BT Group.
"Their cost structures are low, they have smart people, they have more
and more Ph.D.'s and they're very dedicated."
After the technology stock price collapse in the West, Nortel and
competitors like Lucent, Cisco Systems and Alcatel saw China's large
and fast-growing equipment market as a potential source of rescue. To
enter the Chinese market, Western suppliers had to show that their
equipment was compatible with Chinese-made products.
But, Mr. Mendyk said, those demonstrations were quickly used by the
Chinese companies to show Western customers that their products could
operate just fine alongside equipment from the incumbent producers.
"They're getting some short-term advantage by competing in the China
market," Mr. Mendyk said of the Western manufacturers. "By opening the
door to the marketing opportunities in China, they've also opened the
door to competition."
Mr. Owens said Nortel's ability to compete would depend on getting its
finances in order and further reducing its costs. He also plans to
hedge the company's bets. To increase its sales to the United States
government, Nortel, based in Brampton, Ontario, will start bidding
directly for contracts to build and operate communications networks.
In the past it has been mostly a supplier of equipment and software to
companies like EDS and Accenture. Mr. Owens also plans to aggressively
market technology Nortel is developing for weeding out computer
viruses as they travel through networks.
Initially, Chinese exporters concentrated on becoming low-cost
suppliers of products like optical networking equipment. But a study
by Heavy Reading found they are increasingly moving into new product
areas that Nortel and its competitors have marked for growth.
According to Heavy Reading, Huawei, UTStarcom and ZTE have all sold
voice-over-Internet equipment to telecommunications service providers
in Europe and North America. "Anyone who thinks these companies will
just produce cheap garbage is mistaken," Mr. Mendyk said. "They have a
strategy of competing on price first and then following up by
demonstrating quality and innovation."
He acknowledged that for now, Nortel and other Western manufacturers
have a major advantage over their Chinese competition: They suffer
less from language barriers that can create customer service
difficulties.
Some Western companies will fare better than others, said Shin Umeda,
an analyst at the Dell'Oro Group. Relative newcomers like Cisco, he
said, are not burdened with older product lines that will see rapid
revenue drops because of the heightened competition. But Nortel and
Lucent are again likely to be forced to re-evaluate their structures.
"They have to ask what is the direction of their company and if they
can get there with the customers and technologies they have," he said.
"These are tough questions that haven't been answered."