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Siemens may exit NSN as market looks to Ericsson results
Published: 21 October, 2009
Tags >> M&A | Europe | Nokia Siemens Networks | Ericsson | UMTS
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NSN has been successfully shifting the balance of its business towards services, which will enable it to reduce costs, attract higher value deals and, over time, improve margins, but in the short term services deliver lower upfront profits. In its core business, network equipment, it faces a dual challenge. At the low end, it sees massive price pressure, especially from the Chinese majors but also from Ericsson, which leverages its scale and its ability to bundle, to compete aggressively on price in markets like India. NSN has tried to maintain its margins - for instance by refusing to bid on some Indian deals as they would be loss leaders - but appears to be fighting a losing battle. In market share terms, at mid-year it had 20%, down from 21% when it was created - but in the same period, Ericsson's has risen from 26% to 32%.
At the high end, NSN has made a slow start in next generation systems. It has pulled out of WiMAX, and not yet gained a high profile LTE trial, while - unlike Ericsson, with its large deals at Verizon and Sprint, and its purchase of Nortel's CDMA and LTE assets - it also remains weak in north America, despite an increasingly valuable contract at T-Mobile. "They're neither fish nor fowl, neither a technology leader nor a cost leader," said Richard Windsor at Nomura Holdings in London.
As for Ericsson, the Swedish leader is expected to continue to suffer from the weak results at its own JV problem child, Sony Ericsson, and from high restructuring costs as it engages in major cost reduction. A survey of 14 analysts by SIX Estimates revealed forecasts that Ericsson will report a 31% fall in pre-tax profit, excluding extraordinary costs, to SEK4.3bn ($619m), on sales up 3% to SEK50.6bn ($7.3bn).
Evli Bank analyst Michael Anderson said he has high expectations for Ericsson. "I am fairly optimistic, considering that the operators cut back their investments extensively during the first half of the year," he said. "I think we will see signs of somewhat better markets now that the operators are catching up." He also expects the cost savings to start to have a positive impact on margins, though Ericsson could suffer from a stronger Swedish kroner. After its disappointing second quarter, Ericsson's share price fell nearly 8% to SEK71.5 and has remained low but stable since, trading between SEK71.9 and SEK73.8 last week.
According to dell'Oro, as of September Ericsson had grown 32% year-on-year in sales of its key product, W-CDMA, driven by deals at AT&T and T-Mobile USA (US W-CDMA sales were up 117% in the same period), and a hefty share of the China Unicom roll-out. NSN remained in second place in W-CDMA, but with only 2% growth, while Huawei overtook Alcatel-Lucent to take third position, with a huge 85% surge in share, buoyed by Unicom and by significant international expansion.
