Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Innovation and
Competition in Global ICT:
Telecom equipment
Marie Carpenter,
Télécom Ecole de Management, France
Japan Conference on
Financial Institutions for Innovation and Development
Co-sponsored by the Ford Foundation and Ritsumeikan University
Ritsumeikan University, Osaka Ibaraki Campus
July 30-31, 2015
Institut Mines-Télécom
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
The telecom equipment sector
 National champions
• ‘Fostered’ during roll-outs of national networks
 Regular technological change
• Hard to ‘predict’ winners
 Cyclical nature of investments
• New generations of technology require significant
capital investment followed by periods of low spending
 Increasing ‘globalisation’ of technological uptake
• Harder to spread risk across different markets as
increasingly rolling out networks at same time (ex. 4G)
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Telecom equipment – flashback to 1998
 ‘‘The Top 50 Telecommunications Equipment
Companies in 1998’’
• Concentration, Wireless, and Internet Protocol Drive
Largest Firms
─ ‘‘The futures of the leading companies depend on their
ability to deliver new technologies at ‘Internet speed’.
Strategic acquisitions are ever more essential’’
─ ‘‘With more than 8,000 IP developers at Cisco, and at
least that many working at Nortel and Lucent
(combined), the 1,000 or so at Alcatel, GEC [Marconi],
and Siemens are insufficient to deliver on their
ambitions.
─ Ericsson, Fujitsu, and NEC face a similar task but are
further behind.’’ (p.100)
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Top 15 telecom equipment suppliers in 1998
 7 from North America
 5 from Europe
•
•
•
•
•
•
•
•
•
•
•
•
Ericsson
Alcatel
Siemens
Nokia
GEC Marconi
 2 from Asia
•
•
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NEC
Fujitsu
Lucent
Motorola
Nortel Networks
Cisco Systems
3Com
Hughes Electronics
Qualcomm
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
At first glance, European equipment manufacturers
appear to have lost ground
Percentage of revenues of top 20 firms ($m): 1995-2014
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
However, equipment manufacturing and handset
manufacturing have become distinct activities
Revenues of top 20 firms ($m): 1995-2014
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
Total of all telecom equipment suppliers including handset manufacturers
Total of telecom equipment suppliers (without Apple, Samsung, LG Uplus)
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Without handset manufacturers, the
situation appears less clearcut
Percentage of revenues of top 17 firms ($m): 1995-2014
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Asian telecom equipment suppliers (no Samsung, LG Uplus)
North American telcom equipment suppliers (no Apple iPhone)
European telecom equipment suppliers
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
20 years of convergence towards an IPdominated fixed & mobile telecom network
 Phase 1
• 1995-1999: boom times
• Financialisation of North American telecom equipment
firms as they seek to emulate Cisco
 Phase 2
• 2000-2008: bust and recovery via mobile in emerging
markets
• Disappearance of Lucent and Nortel (and Marconi)
• Growth of pratice of stock buybacks in some firms
 Phase 3
• 2009-2014: stagnation in telcom equipment and growth in
mobile driven by iPhone & emerging markets
• Motorola Mobility sold to Google in 2012
• Nokia’s terminal business sold to Microsoft in 2013
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Phase 1: 1995-1999
Cisco’s ‘New Economic Business Model’ (NEBM)
 Cisco
•
•
world’s fastest growing company , dominated enterprise networking equipment
and moved into service provider market
Broad-based stock option compensation, innovation through ‘Aquisition &
Development’
 Lucent : 100-year old ‘start-up’
•
Acquired Ascend for $24 billion (1999)
 Nortel: ‘90-degree turn’,
•
Acquiring Bay Networks for $9.1 billion (1998)
 Alcatel: ‘fabless’
•
Acquired Newbridge Networks for $7.1 billion (2000)
 Marconi
•
Acquired Fore & RELTEC for $6 billion (1999) in cash!
 NEC & Fujitsu (Kushida, 2011)
•
9
‘Galapagos effect’ of tough national competition and strong national standards
Institut Mines-Télécom
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
‘Old economy’ companies need to support
stock price to ‘finance’ acquisitions
Value of acquisitions $bn: 1997-2000
35000
30000
25000
Nortel
20000
Lucent
15000
Alcatel
10000
Cisco
5000
0
1997
1998
1999
2000
Source: adapted from Carpenter, M., Lazonick, W and O’Sullivan, M., ‘The stock market and innovative capability in the
New Economy: the optical networking industry’, Industrial and Corporate Change, Vol. 12, N° 5, p.1006.
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10
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
March 2000: Cisco is the world’s most valuable company:
$541 billion capitalisation
Market capitalisation index, 100 = January 1998
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11
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Phase 1: 1995-1999
Impact of the NEBM on NA firm performance
140000
120000
100000
80000
60000
40000
20000
0
1995
1996
1997
1998
1999
2000
2001
2002
European telecom equipment suppliers
North American telecom equipment suppliers
Asian telecom equipment suppliers
 Unlike what was
predicted and
despite their lack
of IP
competencies, EU
and Asian
equipment
suppliers are
better positioned
to survive the bust
than Lucent and
Nortel
Source: compiled by author from various databases with estimates for certain years for Fujitsu, NEC ZTE and Huawei.
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Phase 1: 1995-1999
The impact of the NEBM on firm performance
When the bubble burst…
 Lucent and Nortel had destroyed themselves by trying to adopt the
stock-market oriented NEBM model
•
(Lazonick & March, 2011 and Lazonick & March, forthcoming)
 European companies, Alcatel and Ericsson, resisted the adoption of
the stock-market (financialized) dimensions of NEBM, and were much
better positioned to navigate the collapse of the market in 2001 and
2002, but had to lay off tens of thousands.
 Alcatel was able, in 2006, to take over Lucent
 Ericsson, focusing on wireless infrastructure, emerged as the leading
global competitor
 Siemens merged its telecom equipment division with Nokia’s in 2007
(and pulled out in 2013)
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Phase 2: 2000-2007
EU equipment suppliers benefit from mobile
140000
120000
100000
80000
60000
40000
20000
0
2000
2001
2002
2003
2004
2005
2006
2007
European telco suppliers
North American teclo suppliers
Asian telco suppliers
Source: compiled by author from various databases with estimates
for certain years for Fujitsu, NEC ZTE and Huawei.
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 Nokia and Ericsson
benefit from roll-out of
mobile networks in
emerging economies
 Developed markets
suffer from overinvestment in fixed
network during the
telecom boom of the
late 1990s
 Certain firms begin to
use share repurchases
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Phase 2: 2000-2007
The telecom ‘bust’ and Cisco?
Stock
price
Ironically, Cisco’s lack of success to date in penetrating the operator market
shielded them from worst effects of fall-out from telecom ‘bust’:
- $2.2 billion inventory write-off, due to contracts signed with subcontractors
- 2001: beginning of share buy-back ‘habit’
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15
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Cisco: an obsession with stock buybacks since 2002
= $6.85 billion/year on average (2002-2014)
12000
10000
buybacks $m
250
dividends $m
buybacks/net income %
200
8000
150
6000
100
4000
50
2000
0
16
0
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Who else was pursuing buybacks during
this phase (2001-2008)?
Stock repurchases $m: 2001-2008
6 000
5 000
4 000
Nokia
Motorola
RIM (Blackberry)
3 000
2 000
1 000
0
2001
2002
2003
Source: annual reports
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2004
2005
2006
2007
2008
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
A period of successful growth on the part of mobile device
companies accompanied by massive stock repurchases
Nokia
12000
10000
8000
6000
4000
2000
0
2001 2002 2003 2004 2005 2006 2007 2008
Source: annual reports
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20-F SEC Filing 2004:
 ‘‘In 2004, we introduced
performance shares as
the main element to our
broad-based
compensation
programme..to further
emphasize the
performance element in
employees’ long-term
incentives’’ (20-F, p.100)
 ‘‘A smartphone is a new
category of mobile device’’
(p.26)
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
A period of successful growth on the part of mobile device
companies accompanied by massive stock repurchases
Motorola
6000
5000
4000
3000
2000
1000
0
-1000 2001 2002 2003 2004 2005 2006 2007 2008
-2000
-3000
-4000
-5000
Source: annual reports
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Motorola Press Release,
July 24 2006
 "Motorola remains
committed to providing
growth and value for our
stockholders. We have
completed our first-ever
share repurchase
program almost 2 years
ahead of schedule and
we are immediately
instituting a second
share repurchase
program”, Press
Release, July 24 2006
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
A period of successful growth on the part of mobile device
companies accompanied by massive stock repurchases
RIM (Blackberry)
4000
2000
0
-2000
2007 2008 2009 2010 2011 2012 2013 2014
-4000
-6000
-8000
Source: annual reports
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 Toronto stock
exchange forbade
RIM from continuing
to buy its own stock
in May 2011
(Milstead, ‘‘RIM
needs a software
boost, not a share
buyback’’, The
Globe and Mail,
May 2011)
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Repurchases of stock followed by
significant loss of revenues
80 000
70 000
60 000
50 000
40 000
30 000
20 000
10 000
0
21
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2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
Nokia
Motorola
BlackBerry
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Phase 3: 2009-2014
Growth of telecom equipment firms who have
Cisco
been building innovative capabilities
Revenues ($m): 1995-2014
180000
160000
140000
120000
Juniper
Motorola
Nokia
Marconi
Lucent
Nortel
Performance of
'financialised' firms
Peformance of 'nonfinancialised' firms
100000
80000
60000
40000
20000
0
Source: compiled by author from various databases with estimates for certain years for
Fujitsu, NEC ZTE and Huawei.
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Ericsson
Alcatel
Fujitsu
NEC
Huawei
22
ZTE
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
(Even) Cisco CEO’s mea culpa
• On Apr. 5, 2011, after “disappointing the market” for two
quarters, Cisco CEO Chambers told employees: “we
have lost the accountability that has been the hallmark
of our ability to execute consistently for our customers
and our shareholders.”
• From 2002 to 2014, Cisco expended $89 billion, 110% of net profits, on stock
buybacks in an effort to boost its stock price.
• Its buybacks over the 12 years were 1.45 times its R&D expenditures.
• In Nov 2014, Cisco’s stock price was just 75% of its post2001 peak (Nov. 6, 2007)
• & below that of its peer group
• 18,000 jobs eliminated between 2011 and 2014
• “Restructuring” to optimise headcount
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Despite $32 billion in buybacks
(2009-2014)
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24
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Cisco’s missed
opportunity
5/12/2012
“Oops! Five CEOs Who Should Have Already Been Fired (Cisco, GE, WalMart,
Sears, Microsoft)”
1.
2.
3.
4.
5.
Steve Ballmer, Microsoft
Edward Lampert, Sears Holdings
Mike Duke, Walmart
Jeffrey Immelt, General Electric
John Chambers, Cisco Systems
“Mr. Chambers appears to have been great at operating Cisco as long as he was in
a growth market. But since customers turned to cloud computing and greater use of
mobile telephony networks Cisco has been unable to innovate, launch and grow
new markets for cloud storage, services or applications. Mr. Chambers has
reorganized the company 3 times – but it has been much like rearranging the deck
chairs on the Titanic. Lots of confusion, but no improvement in results.”
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25
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Cisco’s missed opportunity:
Huawei’s opportunity
60000
50000
40000
Huawei revenues
Cisco revenues
30000
20000
10000
0
Source: compiled by author from various databases with estimates for certain years for Huawei.
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Huawei: n° 1 telecom equipment
manufacturer in 2014
Source: Infonetic’s Telecom Vendor Scorecard, August 2013
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27
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Cisco’s difficulties entering new segments:
Example of the optical networking sector
 Poor integration of acquisitions
post-bubble
 Pushing all-IP solution, not wanted
by telcos
 Reluctance to invest in plant and
equipment:
•
•
Cisco and Huawei’s
optical-related patent applications
(1993-2012)
testing of complex systems
Upstream components
 Unwilling to acquire ‘incumbent’
Nortel in 2009
 Withdrawal of R&D resources from
sector before return in 2012 with
Coreoptics acquisition
Source: USPTO.
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28
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
ON market share remains stagnant for Cisco
but grows for Huawei (& ZTE, Infinera, Ciena)
Optical Transport Equipment Market Share (1998-2010)
Source: Dell’Oro
29
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29
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Existing businesses also at threat as
internal R&D ‘in competition’ with spin-ins
 Mario Mazzola, Prem Jain,
and Luca Cafiero
•
•
•
•
Crescendo
Andiamo
Nueva
Insieme
 $2.38 bn for their companies
 Jayshee Ullal, VP of Cisco’s
Data Center Tech Group left
in 2011: “it's a nightmare
when the guy in the next
cubicle is a multimillionaire
and you aren't, because you
weren't chosen”
30
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Technology leaders in telecom equipment, 2013
Cisco appears in 3 out of 16 categories
Ericsson appears in 8
Huawei appears in 10
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31
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
2015-2025…who has the innovative capabilities
needed for the converging landscape?
Huawei’s phenomenal
(mostly organic)
growth continues
Cisco struggles with its
‘‘growth through
acquisition’’ strategy
32
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Ericsson’s 10-year transformation,
2003-2013 from hardware to software
Source: Steve Saunders ‘My Ericsson Epiphay’ Light Reading, April 2 2015
http://www.lightreading.com/data-center/cloud-strategies/my-ericsson-epiphany-/a/d-id/714836
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33
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Conclusions & further research
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
34
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34
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Conclusions & further research
450000
400000
Phase 1
Phase 2
Phase 3
350000
300000
250000
200000
150000
100000
50000
0
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
35
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35
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Conclusions & further research
450000
400000
Phase 1
Phase 2
Phase 3
350000
300000
250000
200000
150000
100000
50000
0
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
36
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36
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Conclusions & further research
450000
400000
Phase 1
Phase 2
Phase 3
350000
300000
250000
200000
150000
100000
50000
0
Asian telecom equipment suppliers
North American telecom equipment suppliers
European telecom equipment suppliers
37
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37
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Why (and how) does this financialisation
happen?
 In Dec. 1999, the Spectrum report that questions what
to do with the ‘‘unprecedented industry prosperity [that]
is fueling a pile of more than $20 billion in liquid assets
on the balance sheet of the leading equipment
suppliers?’’
• pay dividends but few of these companies do
• purchase of small companies but prefer to use stock
• buy back debt but most companies have avoided
• a cushion for bad times but ‘no sign of a downturn’ (!)
• ‘top up’ earnings but already robust
• buy back shares in a soft market but ‘little need’
• make more investments in equipment but not necessary
• invest in start ups but firm becomes a venture capitalist
‘’What is the purpose of keeping so much cash? No one is saying’’
38
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Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Conclusions & further research
 Buybacks limit
resources
available to
acquire necessary
architectural
control & account
control
 Buybacks erode
organizational
integration of
personnel into
cumulative and
collective learning
process
 Enter lower margin
businesses to
develop customer
solutions (Huawei
handsets)
 Manufacture key
components for
differentiation
 Propose solutions
that solve customers’
problems even if
heavy investment
necessary
 Build work-force skills in
move from hardware to
software
 Reward employees
equitably
 Keep sufficient level of
manufacturing of critical
technologies in-house
 Seek high-level
competencies in
product/service overlaps
 On-going study of Cisco and its move into SDN & the cloud
 In-depth comparative studies of Huawei (Feng, Lazonick & Li), Ericsson
(Glimstedt) and Alcatel-Lucent (Carpenter)
39
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39
Introduction
Phase 1
Phase 2
Phase 3
Conclusion
Conclusions & further research
 Buybacks limit
resources
available to
acquire necessary
architectural
control & account
control
 Buybacks erode
organizational
integration of
personnel into
cumulative and
collective learning
process
 Enter lower margin
businesses to
develop customer
solutions (Huawei
handsets)
 Manufacture key
components for
differentiation
 Propose solutions
that solve customers’
problems even if
heavy investment
necessary
 Build work-force skills in
move from hardware to
software
 Reward employees
equitably
 Keep sufficient level of
manufacturing of critical
technologies in-house
 Seek high-level
competencies in
product/service overlaps
 On-going study of Cisco and its move into SDN & the cloud
 In-depth comparative studies of Huawei (Feng, Lazonick & Li), Ericsson
(Glimstedt) and Alcatel-Lucent (Carpenter)
40
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40