From 2000 to 2005, Japanese service provider capex was regularly about 10% of the global total and NEC had a commanding share of most market segments domestically. Since then, Japan has slowly declined in global importance, and foreign vendors (even ZTE and Huawei) have improved their luck in Japanese markets.NEC announced a long-term growth strategy in February 2010, aimed at revamping the competitiveness and profitability of its Carrier Network division. Recently, NEC updated analysts on its progress: so far, so good.
It is focusing on business areas best primed for global expansion: wireless broadband access, mobile backhaul, submarine systems, and services/software. However, attaining its goal of a roughly 2.5x increase in overseas carrier infrastructure revenues, between fiscal year 2010 (ended March 2011) and fiscal year 2012, comes with many challenges.
A significant one: like Huawei, NEC should expect little from the US market.
Even today, most service provider capex in Japan is directed at the largest four local vendors: NEC, Fujitsu, Oki, and Hitachi (“NFOH”). Products often are customized for local applications. This complicates Japanese vendor’s efforts to go global, especially as Japan has shrunk relative to growth markets such as China and India.
Another challenge to NFOH: foreign suppliers are making progress. For example:
- Devices: Carriers used to work primarily with Japanese manufacturers on highly customized devices. But Apple’s iPhone has altered this. Softbank has offered the iPhone for over two years, and Softbank and KDDI now sell the iPhone 4S. By one measurement, the iPhone accounted for 38% of Japan’s smartphone market in FY2010–11, with 3.23 million units shipped locally.
- Chinese vendors: Huawei and ZTE have made some breakthroughs. Huawei is selling its PTN backhaul series to KDDI and ZTE is selling WiMAX base stations to UQ Communications. But the biggest breakthrough came this month, when Huawei and ZTE shared Softbank’s TD-LTE–compatible RAN build out. Ericsson is providing the mobile core.
Local vendors still have a firm lock on domestic capex. But this may start to dwindle as Chinese vendors, along with other international infrastructure vendors such as Ericsson, NSN, and Samsung put pressure on the market.
NEC targets growth in four areas
Between fiscal 2010 and fiscal 2012, NEC hopes to increase its carrier networks revenues by 49% to 900 billion yen (€8.5 billion). NEC expects roughly 75% of the growth to come from overseas markets. From $1.63 billion (€1.1 billion) in overseas carrier infrastructure revenues in fiscal 2010, NEC aims for roughly $4.2 billion in fiscal 2012.
NEC is making progress in each of the four segments identified as growth drivers:
- Wireless broadband: NEC now has 51 femto commercial or trial customers globally, from 26 in July 2010. It is shipping LTE commercially to DoCoMo and KDDI, promoting TD-LTE with a Chinese joint venture, and pushing small cell overlays. It expects revenues to roughly double in fiscal 2011.
- Mobile backhaul: The popularity of NEC’s old Pasolink microwave platform has extended into its packet version, iPasolink. Over 40% of iPasolink revenues are overseas, and are expected to exceed 50% in FY2011. NEC now has an iPasolink factory in India, to save costs and position itself for local sales in India, where local content rules are tightening.
- Submarine: NEC has a strong pipeline of small projects; is moving into upgrades, and is pursuing projects in the Atlantic region.
- Services and software: NEC is looking for growth from M2M, its smartphone service platform, carrier cloud services, and next-generation OSS/BSS services. Revenues increased approximately 30% in fiscal 2011, but the overseas component is still under 20%.
NEC has many challenges ahead. First, we don’t expect NEC to have much luck in North America. NEC tried to penetrate the US market in the 1990s, had some luck, but remained too reliant on Japanese HQ; rival Fujitsu truly localized operations as FNC, and succeeded.
Second, the cards are stacked against NEC in mobile infrastructure markets. It is positioned well in Japan, but:
- NSN and Samsung are both gaining traction in Japan. Samsung is the lead WiMAX RAN vendor for UQ, for instance.
- NEC has made little progress in growing its LTE business outside of Japan, with only two announced trials and no commercial wins.
- NEC’s vision of LTE being primarily small cells and deployed as an overlay network is not universally accepted.
- NEC lacks a large 3G installed customer base to leverage for future LTE contracts.
- NEC is late with TD-LTE and hasn’t announced any updates since the initial joint venture with WRI in China.
However, we certainly don’t dismiss NEC’s aspirations. It has strong R&D, great experience with core customers, and is open to M&A, overseas manufacturing, and other techniques to improve competitiveness. Its mobile backhaul offerings are strong, though this has become a crowded space.
It is one of only a few turnkey suppliers in the undersea cable business, and it is expanding adjacently (e.g. to the Atlantic region, and to earthquake detection projects).
NEC will need some very big wins, though, and with tier-1 carriers, in order to reach its ambitious fiscal 2012 goals.
Matt Walker is principal analyst for network infrastructure at Ovum. For more information go to http://ovum.com/section/home/