Major job cutting program expected at NSN

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Major job cutting program expected at NSN

Company needs to reduce cost and headcount to remain competitive as a standalone player, but its productivity lags behind Ericsson's

By CAROLINE GABRIEL

Published: 18 July, 2011

Having failed to find a buyer for a stake in Nokia Siemens, the infrastructure vendor's parents are expected to pile on the pressure for cost reductions and job cuts. Although options such as IPO, or selling the whole joint venture, remain possible, the stated objective is to strengthen NSN as an independent entity, which will likely mean cash injections from both its troubled co-owners - and a significant efficiency drive.

Analysts, as well as executives within Nokia and Siemens, believe NSN needs to be more radical about cost cutting. Its productivity figures are lower than those at Ericsson, and both firms face rising competition from the cost efficient Huawei. Even Alcatel-Lucent has completed a stringent efficiency program and is returning to financial health. NSN has only achieved one profitable quarter since it was formed in 2007, yet needs to achieve sustained profitability to pursue future options such as IPO and give its owners a good exit route.

According to Bloomberg, NSN generated sales of about $254,000 per employee last year, 19% less than Ercisson's record - and both giants are suffering declines in revenue per capita, because of falling prices of key equipment lines. NSN said last week - when it announced the end of talks with private equity firms about a possible stake sale - that it planned to improve its competitiveness "as a standalone entity". But it is currently integrating the wireless networking activities it recently acquired from Motorola Solutions.

Its headcount has increased, during its lifetime, from 60,000 to 73,000, partly because of the Motorola purchase - although it did initiate a headcount reduction in 2009, to axe 7% to 9% of posts and save €500m a year in costs by the end of 2011. It has reported more than €1.05bn in total operating losses since that job cuts announcement, at which time its headcount stood at 64,000. Some of the non-Motorola increases since then have been for growth sectors, notably managed services, in which NSN is investing heavily. However, the venture also suffers under the legacy of its history, having inherited many staff, and protective employment practices, from its Finnish and German parents. It has almost 10,000 staff in Germany alone.

"They haven't fired enough," said Standard & Poor's analyst James Crawshaw in the Bloomberg report. "Siemens historically over-engineered their products and in certain industry verticals people will pay for that, but the telecom sector isn't prepared to pay that premium for German engineering when Chinese engineering gets the job done."

"The current focus is on improving profitability and managing costs," said a Nokia spokesman. That will almost certainly incur costs for Nokia and Siemens, which have a combined total of €26bn in cash and short term investments - some of which may be called upon for severance payments, further acquisitions, or vendor financing to secure major deals. NSN is at least seeing its market share rising - it had 20.4% of the wireless equipment market in the first quarter, up from 18.2% a year earlier, according to analysts at Dell'Oro. Huawei had about the same share at 20.3% while Ericsson had 34.5% and ALU 13.7%.