Profitability call

Nokia Siemens Networks aims to cut about 23 percent of its workforce and focus on more profitable mobile broadband equipment and services.

The company, jointly owned by Finland's Nokia and Germany's Siemens, plans to eliminate 17,000 jobs from its current 74,000 workforce in a move to improve profitability by reducing operating expenses and overheads by 1 billion euros ($1.3 billion) by the end of 2013.

The job cuts follow Nokia Siemens' $1.2 billion purchase of Motorola's mobile network business last year, a move that added staff. Earlier this year, the parent companies were forced to inject 1 billion euros after attempts to sell their joint venture to a private equity group failed.

'Regrettable but necessary'

"As we look towards the prospect of an independent future, we need to take action now to improve our profitability and cash generation," Nokia Siemens CEO Rajeev Suri said in a statement. "These planned reductions are regrettable but necessary."

The company also plans to refocus on mobile broadband infrastructure equipment and services, the fastest growing segment of the market and the one promising the highest margins. It is expected to sell or close non-core business, like its fixed-line operations.

"We need to take the necessary steps to maintain long-term competitiveness and improve profitability in a challenging telecommunications market," Suri said.

The network equipment market has grown difficult in recent years, particularly in Europe, where many operators have been delaying investments due to the economic crisis. Vendors like Nokia Siemens, Sweden's Ericsson and the Franco-American joint venture Alcatel-Lucent have faced fierce competition from low-cost Chinese manufacturers Huawei and ZTE.

The industry analyst group Gartner now ranks Huawei as the second biggest vendor, at 15.6 percent market share, after Ericsson at 34.1 percent. Nokia Siemens and Alcatel-Lucent are tied for third place at 13.2 percent.

Narrow the gap

While analysts are concerned about Nokia Siemens' ability to narrow the gap, most of them are optimistic.

"There's no denying that Chinese vendors are making the market extremely competitive," said Gabriel Brown, an analyst with the UK-based telecoms industry research group Heavy Reading. "That said, Nokia Siemens is a major vendor in Europe - its heartland - and European operators need a strong Nokia Siemens to maintain a competitive base of suppliers. They're aware of the implications of having fewer suppliers."

Brown noted the importance of having a significant base of large-size manufacturers with sufficient funds to invest in research and development. "Operators rely on the R&D investments of vendors to drive new services," he told Deutsche Welle.

Mark Newman, chief research officer of Informa Telecoms & Media, agrees. "It is not in the interests of operators to see Nokia Siemens disappear as one of the world's largest suppliers," he told Deutsche Welle. But Newman warned that if operators are struggling with flat or declining revenues, "vendors will feel the pain, too."

And Nokia Siemens has. The company has been reporting quarterly losses for most of the past two years.

In the third quarter, however, it reported an operating profit of 6 million euros on sales of 3.4 billion euros, up 16 percent. It was the vendor's fifth consecutive quarter of sales growth.

With its new strategy, Nokia Siemens hopes not only to sell more but also earn more.

Author: John Blau
Editor: Spencer Kimball