Questions dog Nokia-Siemens networks

Nokia seems to be doing everything right in the mobile handset business, but in its lower-profile telecom infrastructure unit, the Finnish company is demonstrating that it's mortal, too. Nokia Siemens Networks (NSN), a 50-50 joint venture with Germany's Siemens (SI) that is managed by Nokia (NOK), is suffering some of the same problems as its beleaguered rival, Alcatel-Lucent (ALU).

NSN's problems are not as grave (, 9/28/07) as Alcatel-Lucent's. But like the Franco-American venture, NSN is trying to manage the aftermath of a merger while coping with increased competition from Asia and severe price pressure. And NSN has a problem Alcatel-Lucent doesn't: a major bribery scandal inherited from the Siemens half of the business.

Nokia watchers are concerned. Jari Honko, deputy head of research at Helsinki-based eQ Bank (EQO1V.HE), cut his rating on Nokia shares to 'reduce' on Sept. 21 in part because of worries NSN could burden Nokia earnings. 'Nokia is doing so well in handsets, that's where the big money is looking at the moment,' Honko says. 'I'm nervous investors haven't paid that much attention to NSN.' Honko expects NSN to post a loss of $60 million in the third quarter on sales of $5 billion.

An exit for Siemens‾

To be sure, that result would be a vast improvement over the $1.8 billion loss NSN reported in the second quarter, which was loaded with restructuring charges and other costs associated with the newly consummated merger. But the loss stands in stark contrast to the $2.7 billion operating profit generated by Nokia's other divisions in the second quarter. Nokia will report third-quarter earnings Oct. 18.

To further complicate the situation, Siemens may be trying to exit the tieup. New Siemens Chief Executive Officer Peter Löscher, barely three months in office (, 7/2/07), may try to sell the company's stake in NSN and other noncore units to concentrate on more profitable businesses such as power generation and medical technology, German business magazine Wirtschaftswoche reports in its Oct. 1 issue.

If so, Nokia might have little choice but to buy the stake, draining cash resources from faster-growing businesses just as the company is pushing hard to move into mobile Internet services (, 8/29/07). Spokesmen for Siemens and Nokia declined to comment.

Exploited by rivals

Even if NSN weren't dealing with partnership issues, it would be facing a tough market. The emergence of Asian infrastructure providers, particularly China's Huawei Technologies, has put pressure on prices, making it difficult for companies to be profitable even when sales are rising. 'The competitive environment is expected to continue keeping a leash on margins,' says Devina Mehra, chief global equity strategist at Mumbai's First Global Securities.

At the same time, Sweden's Ericsson (ERIC) has been gleefully exploiting its rivals' weakness to expand its lead in wireless infrastructure, the fastest-growing part of the telco equipment industry. Ericsson commanded 28% of the $60 billion wireless market at the end of last year, according to market watcher Gartner (IT).

And Ericsson is particularly strong in fast-growing emerging regions, holding more than half of the African equipment market (, 9/18/07), for example. Siemens and Nokia combined were a close second in wireless equipment globally, with 27% of the market at the end of 2006, but have probably given up share since then.

Cleaning up its reputation


For the NSN marriage to work, Nokia must employ the same management skill that gave the company dominance (, 7/19/07) in handsets. A quick turnaround will be difficult, because phone companies replace equipment more slowly than consumers replace phones. But there may be some factors in NSN's favor. Price pressure in Europe, the largest market for equipment, may be easing. Huawei is finding it can't afford, long term, to buy market share by undercutting rivals on price, says Gartner analyst Sylvain Fabre.

And while Siemens CEO Löscher's possible plans to get out of the NSN venture may be a headache for Nokia, he is moving decisively to clean up a massive bribery scandal that weighs on the business. Managers of Siemens' former communications division, most of which is now part of NSN, face accusations they paid hundreds of millions to foreign officials to win business. The scandal is a distraction for NSN management and delayed completion of the merger for several months.

Löscher seems determined to expose internal wrongdoing"”in September, he appointed a new Siemens board member to tighten internal controls. As long as he can restore calm in the former Siemens units, the effect on NSN sales should be fairly limited. Customers look first and foremost at the products, and NSN's products are competitive, analysts say. 'Hardly anyone would question the technology,' says Dan Bieler, director of consulting, European telecommunications & networking, at IDC in Munich. But in a tough market, that's no longer enough.

Ewing is BusinessWeek's European regional editor.

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