institut mines-télécom innovation and competition in global ict: telecom equipment marie...

Institut Mines-Télécom

Innovation and Competition in Global ICT:

Telecom equipment

Marie Carpenter, Télécom Ecole de Management, France

Japan Conference on Financial Institutions for Innovation and Development

Co-sponsored by the Ford Foundation and Ritsumeikan University

Ritsumeikan University, Osaka Ibaraki CampusJuly 30-31, 2015

Introduction Phase 1 Phase 2 Phase 3 Conclusion


The telecom equipment sector

National champions• ‘Fostered’ during roll-outs of national networks

Regular technological change • Hard to ‘predict’ winners

Cyclical nature of investments• New generations of technology require significant

capital investment followed by periods of low spending Increasing ‘globalisation’ of technological uptake

• Harder to spread risk across different markets as increasingly rolling out networks at same time (ex. 4G)

2



Telecom equipment – flashback to 1998

‘‘The Top 50 Telecommunications Equipment Companies in 1998’’• Concentration, Wireless, and Internet Protocol Drive

Largest Firms─ ‘‘The futures of the leading companies depend on their

ability to deliver new technologies at ‘Internet speed’. Strategic acquisitions are ever more essential’’

─ ‘‘With more than 8,000 IP developers at Cisco, and at least that many working at Nortel and Lucent (combined), the 1,000 or so at Alcatel, GEC [Marconi], and Siemens are insufficient to deliver on their ambitions.

─ Ericsson, Fujitsu, and NEC face a similar task but are further behind.’’ (p.100)

3



Top 15 telecom equipment suppliers in 1998

4

7 from North America• Lucent• Motorola• Nortel Networks• Cisco Systems• 3Com• Hughes Electronics• Qualcomm

5 from Europe• Ericsson• Alcatel• Siemens• Nokia• GEC Marconi

2 from Asia• NEC• Fujitsu



At first glance, European equipment manufacturers appear to have lost ground

Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.

5


Percentage of revenues of top 20 firms ($m): 1995-2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Asian telecom equipment suppliers North American telecom equipment suppliers European telecom equipment suppliers


However, equipment manufacturing and handset manufacturing have become distinct activities

6


Revenues of top 20 firms ($m): 1995-2014


0

50000

100000

150000

200000

250000

300000

350000

400000

450000

Total of all telecom equipment suppliers including handset manufacturers

Total of telecom equipment suppliers (without Apple, Samsung, LG Uplus)


Without handset manufacturers, the situation appears less clearcut

7



Percentage of revenues of top 17 firms ($m): 1995-2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asian telecom equipment suppliers (no Samsung, LG Uplus)North American telcom equipment suppliers (no Apple iPhone)European telecom equipment suppliers


20 years of convergence towards an IP-dominated fixed & mobile telecom network

Phase 1• 1995-1999: boom times• Financialisation of North American telecom equipment

firms as they seek to emulate Cisco Phase 2

• 2000-2008: bust and recovery via mobile in emerging markets

• Disappearance of Lucent and Nortel (and Marconi)• Growth of pratice of stock buybacks in some firms

Phase 3• 2009-2014: stagnation in telcom equipment and growth in

mobile driven by iPhone & emerging markets• Motorola Mobility sold to Google in 2012 • Nokia’s terminal business sold to Microsoft in 2013

8



Phase 1: 1995-1999 Cisco’s ‘New Economic Business Model’ (NEBM)

9

Cisco• world’s fastest growing company , dominated enterprise networking equipment

and moved into service provider market• Broad-based stock option compensation, innovation through ‘Aquisition &

Development’

Lucent : 100-year old ‘start-up’• Acquired Ascend for $24 billion (1999)

Nortel: ‘90-degree turn’,• Acquiring Bay Networks for $9.1 billion (1998)

Alcatel: ‘fabless’• Acquired Newbridge Networks for $7.1 billion (2000)

Marconi• Acquired Fore & RELTEC for $6 billion (1999) in cash!

NEC & Fujitsu (Kushida, 2011)

• ‘Galapagos effect’ of tough national competition and strong national standards



Value of acquisitions $bn: 1997-2000

0

5000

10000

15000

20000

25000

30000

35000

1997 1998 1999 2000

Nortel

Lucent

Alcatel

Cisco

Source: adapted from Carpenter, M., Lazonick, W and O’Sullivan, M., ‘The stock market and innovative capability in the New Economy: the optical networking industry’, Industrial and Corporate Change, Vol. 12, N° 5, p.1006.

10

‘Old economy’ companies need to supportstock price to ‘finance’ acquisitions

10



March 2000: Cisco is the world’s most valuable company: $541 billion capitalisation

Market capitalisation index, 100 = January 1998

11



Unlike what was predicted and despite their lack of IP competencies, EU and Asian equipment suppliers are better positioned to survive the bust than Lucent and Nortel

12

Phase 1: 1995-1999 Impact of the NEBM on NA firm performance


0

20000

40000

60000

80000

100000

120000

140000

1995 1996 1997 1998 1999 2000 2001 2002

European telecom equipment suppliersNorth American telecom equipment suppliers Asian telecom equipment suppliers



Phase 1: 1995-1999 The impact of the NEBM on firm performance

When the bubble burst… Lucent and Nortel had destroyed themselves by trying to adopt the

stock-market oriented NEBM model • (Lazonick & March, 2011 and Lazonick & March, forthcoming)

European companies, Alcatel and Ericsson, resisted the adoption of the stock-market (financialized) dimensions of NEBM, and were much better positioned to navigate the collapse of the market in 2001 and 2002, but had to lay off tens of thousands.

Alcatel was able, in 2006, to take over Lucent Ericsson, focusing on wireless infrastructure, emerged as the leading

global competitor Siemens merged its telecom equipment division with Nokia’s in 2007

(and pulled out in 2013)

1313



Phase 2: 2000-2007EU equipment suppliers benefit from mobile

Nokia and Ericsson benefit from roll-out of mobile networks in emerging economies

Developed markets suffer from over-investment in fixed network during the telecom boom of the late 1990s

Certain firms begin to use share repurchases

14



0

20000

40000

60000

80000

100000

120000

140000

2000 2001 2002 2003 2004 2005 2006 2007

European telco suppliersNorth American teclo suppliersAsian telco suppliers


Ironically, Cisco’s lack of success to date in penetrating the operator market shielded them from worst effects of fall-out from telecom ‘bust’:

- $2.2 billion inventory write-off, due to contracts signed with subcontractors- 2001: beginning of share buy-back ‘habit’

Stock price

1515

Phase 2: 2000-2007The telecom ‘bust’ and Cisco?


Institut Mines-Télécom 1616

Cisco: an obsession with stock buybacks since 2002= $6.85 billion/year on average (2002-2014)



Who else was pursuing buybacks during this phase (2001-2008)?

17

Stock repurchases $m: 2001-2008


0

1 000

2 000

3 000

4 000

5 000

6 000

2001 2002 2003 2004 2005 2006 2007 2008

Nokia Motorola RIM (Blackberry)

Source: annual reports

Institut Mines-Télécom18

Nokia

0

2000

4000

6000

8000

10000

12000

2001 2002 2003 2004 2005 2006 2007 2008

20-F SEC Filing 2004: ‘‘In 2004, we introduced

performance shares as the main element to our broad-based compensation programme..to further emphasize the performance element in employees’ long-term incentives’’ (20-F, p.100)

‘‘A smartphone is a new category of mobile device’’ (p.26)

A period of successful growth on the part of mobile device companies accompanied by massive stock repurchases




Motorola

-5000-4000-3000-2000-1000

0100020003000400050006000

2001 2002 2003 2004 2005 2006 2007 2008

Motorola Press Release, July 24 2006

"Motorola remains committed to providing growth and value for our stockholders. We have completed our first-ever share repurchase program almost 2 years ahead of schedule and we are immediately instituting a second share repurchase program”, Press Release, July 24 2006





-8000

-6000

-4000

-2000

0

2000

4000

2007 2008 2009 2010 2011 2012 2013 2014

RIM (Blackberry) Toronto stock exchange forbade RIM from continuing to buy its own stock in May 2011 (Milstead, ‘‘RIM needs a software boost, not a share buyback’’, The Globe and Mail, May 2011)





Repurchases of stock followed by significant loss of revenues

21

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000 20

01

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Nokia

Motorola

BlackBerry



0

20000

40000

60000

80000

100000

120000

140000

160000

180000

Performance of 'financialised' firmsPeformance of 'non-financialised' firms

Phase 3: 2009-2014Growth of telecom equipment firms who have been building innovative capabilities

2222

CiscoJuniper

MotorolaNokia

MarconiLucentNortel

EricssonAlcatelFujitsuNEC

HuaweiZTE

Source: compiled by author from various databases with estimates for certain years for

Fujitsu, NEC ZTE and Huawei.

Revenues ($m): 1995-2014



• On Apr. 5, 2011, after “disappointing the market” for two quarters, Cisco CEO Chambers told employees: “we have lost the accountability that has been the hallmark of our ability to execute consistently for our customers and our shareholders.”

• From 2002 to 2014, Cisco expended $89 billion, 110% of net profits, on stock buybacks in an effort to boost its stock price.

• Its buybacks over the 12 years were 1.45 times its R&D expenditures.

• In Nov 2014, Cisco’s stock price was just 75% of its post-2001 peak (Nov. 6, 2007)

• & below that of its peer group

• 18,000 jobs eliminated between 2011 and 2014• “Restructuring” to optimise headcount

(Even) Cisco CEO’s mea culpa



Despite $32 billion in buybacks (2009-2014)

24



5/12/2012

“Oops! Five CEOs Who Should Have Already Been Fired (Cisco, GE, WalMart, Sears, Microsoft)”

1.Steve Ballmer, Microsoft2.Edward Lampert, Sears Holdings3.Mike Duke, Walmart4.Jeffrey Immelt, General Electric5.John Chambers, Cisco Systems

“Mr. Chambers appears to have been great at operating Cisco as long as he was in a growth market. But since customers turned to cloud computing and greater use of mobile telephony networks Cisco has been unable to innovate, launch and grow new markets for cloud storage, services or applications. Mr. Chambers has reorganized the company 3 times – but it has been much like rearranging the deck chairs on the Titanic. Lots of confusion, but no improvement in results.”

25

Cisco’s missed opportunity



Source: compiled by author from various databases with estimates for certain years for Huawei.

Cisco’s missed opportunity: Huawei’s opportunity


0

10000

20000

30000

40000

50000

60000

Huawei revenuesCisco revenues

Institut Mines-Télécom 27

Source: Infonetic’s Telecom Vendor Scorecard, August 2013

Huawei: n° 1 telecom equipment manufacturer in 2014

27



Cisco’s difficulties entering new segments:Example of the optical networking sector

Poor integration of acquisitions post-bubble

Pushing all-IP solution, not wanted by telcos

Reluctance to invest in plant and equipment:• testing of complex systems

• Upstream components

Unwilling to acquire ‘incumbent’ Nortel in 2009

Withdrawal of R&D resources from sector before return in 2012 with Coreoptics acquisition

Cisco and Huawei’soptical-related patent applications

(1993-2012)

Source: USPTO.

2828



ON market share remains stagnant for Cisco but grows for Huawei (& ZTE, Infinera, Ciena)

Optical Transport Equipment Market Share (1998-2010)

Source: Dell’Oro

2929



Existing businesses also at threat as internal R&D ‘in competition’ with spin-ins

Mario Mazzola, Prem Jain, and Luca Cafiero• Crescendo• Andiamo• Nueva• Insieme

$2.38 bn for their companies Jayshee Ullal, VP of Cisco’s

Data Center Tech Group left in 2011: “it's a nightmare when the guy in the next cubicle is a multimillionaire and you aren't, because you weren't chosen”

30



Technology leaders in telecom equipment, 2013

31

Cisco appears in 3 out of 16 categoriesEricsson appears in 8Huawei appears in 10

31



2015-2025…who has the innovative capabilities needed for the converging landscape?

Huawei’s phenomenal (mostly organic) growth continues

Cisco struggles with its ‘‘growth through

acquisition’’ strategy



Ericsson’s 10-year transformation, 2003-2013 from hardware to software

33

Source: Steve Saunders ‘My Ericsson Epiphay’ Light Reading, April 2 2015 http://www.lightreading.com/data-center/cloud-strategies/my-ericsson-epiphany-/a/d-id/714836

33



0

50000

100000

150000

200000

250000

300000

350000

400000

450000

Asian telecom equipment suppliers

North American telecom equipment suppliers

European telecom equipment suppliers

Conclusions & further research

34


34


0

50000

100000

150000

200000

250000

300000

350000

400000

450000





35

Phase 1

New economy business m

odel

impacts NA firm

s who want to

support share price fo

r A&R

Phase 2 Phase 3


35


0

50000

100000

150000

200000

250000

300000

350000

400000

450000





36

Phase 1 Phase 2

Mobile firms in

EU & NA adopt

repurchasing practices

Phase 3



odel

impacts NA firm

s who want to


r A&R

36


0

50000

100000

150000

200000

250000

300000

350000

400000

450000





37

Phase 1 Phase 2

Mobile firms in

EU & NA adopt

repurchasing practices

Phase 3

‘Old economy’ firms f

rom NA,

Asia & Europe prosper



odel

impacts NA firm

s who want to


r A&R

37


Why (and how) does this financialisation happen?

In Dec. 1999, the Spectrum report that questions what to do with the ‘‘unprecedented industry prosperity [that] is fueling a pile of more than $20 billion in liquid assets on the balance sheet of the leading equipment suppliers?’’• pay dividends but few of these companies do

• purchase of small companies but prefer to use stock

• buy back debt but most companies have avoided

• a cushion for bad times but ‘no sign of a downturn’ (!)

• ‘top up’ earnings but already robust

• buy back shares in a soft market but ‘little need’

• make more investments in equipment but not necessary

• invest in start ups but firm becomes a venture capitalist

‘’What is the purpose of keeping so much cash? No one is saying’’

38




Buybacks limit resources available to acquire necessary architectural control & account control

Buybacks erode organizational integration of personnel into cumulative and collective learning process

On-going study of Cisco and its move into SDN & the cloud In-depth comparative studies of Huawei (Feng, Lazonick & Li), Ericsson

(Glimstedt) and Alcatel-Lucent (Carpenter)

39

Enter lower margin businesses to develop customer solutions (Huawei handsets)

Manufacture key components for differentiation

Propose solutions that solve customers’ problems even if heavy investment necessary

Build work-force skills in move from hardware to software

Reward employees equitably

Keep sufficient level of manufacturing of critical technologies in-house

Seek high-level competencies in product/service overlaps


39



Buybacks limit resources available to acquire necessary architectural control & account control

Buybacks erode organizational integration of personnel into cumulative and collective learning process

On-going study of Cisco and its move into SDN & the cloud In-depth comparative studies of Huawei (Feng, Lazonick & Li), Ericsson

(Glimstedt) and Alcatel-Lucent (Carpenter)

40

Enter lower margin businesses to develop customer solutions (Huawei handsets)

Manufacture key components for differentiation

Propose solutions that solve customers’ problems even if heavy investment necessary

Build work-force skills in move from hardware to software

Reward employees equitably

Keep sufficient level of manufacturing of critical technologies in-house

Seek high-level competencies in product/service overlaps


odel:

downsize & distr

ibute

Old economy business m

odel:

retain & reinvest


40

institut mines-télécom innovation and competition in global ict: telecom equipment marie...

Documents

cisco phase

conclusion slide

tlcom ecole

telecom equipment suppliers

nec zte

certain years

various databases

largest firms