The networking industry is taking an interesting turn at the moment. There have been some significant events in the industry, which will affect the participants in the short-term as well as long-term. Some of these events are company specific in nature. However, these events might give an indication as to where the industry as a whole is heading.
There has been a lot of movement at Alcatel-Lucent (ALU), and everyone is eagerly anticipating what Michel Combes does as he starts his tenure as the new CEO of the company. We are likely to see strategies in work by the end of June. In the meantime, the competitive landscape of the European networking industry is taking an interesting shape. Let's look at how the industry is shaping up and how it will impact Alcatel-Lucent.
European Networking Equipment Industry
There are three major players in the European networking industry - Alcatel-Lucent, which has been fighting with its internal problems; Nokia Siemens, another company facing declining sales and margins, and Ericsson (NASDAQ:ERIC). Most of the industry participants have been going through a rough patch due to the miserable condition of the industry. Alcatel-Lucent has been impacted the most due to the failed merger as well as tough market conditions.
As a result of these poor market conditions, all of these companies have been trying to cut costs through different means. The preferred choice for cost cutting has been the reduction in workforce. Ericsson announced that it will cut its workforce by 1,550 positions in Sweden while Nokia Siemens announced a massive reduction (17,000 jobs or 23% of total workforce) in its total workforce in the face of declining sales. Alcatel-Lucent also announced that the company will be slashing 5,500 jobs.
With all these players are cutting jobs, there is one company that is increasing its workforce in Europe. Chinese networking equipment manufacturer Huawei Technologies has announced that the company will hire 5,500 people over the next four to five years. It is an interesting move taking into account the condition of the European networking industry. It indicates that the networking equipment manufacturers are seeing a substantial recovery in the demand for equipment over the next four to five years. Huawei has been expanding aggressively, and after the company faced tough conditions in North America, it looks like the giant is trying to capture a larger portion of the European market.
How will it impact the already weak industry, where the participants are already looking at consolidation? I believe the current players will feel the heat of increased competition. Nokia (NYSE:NOK) and Siemens are trying to sell their share in the joint venture (Nokia Siemens), which might decrease the number of competitors. However, the impact of Huawei's increased presence will certainly create problems for the current players in the market.
Where Does Alcatel-Lucent Stand?
Alcatel-Lucent is already at a disadvantage compared to its competitors - the company is still suffering from the affects of a failed merger, and it is not likely that the current market conditions will allow the company to make significant improvement. The biggest problem with the company stems from its culture and the political influence. There are concerns that a job cut might not happen as the French government would not like to see people losing jobs.
On the other hand, if we look at the business of the company, it is clear that ALU is still able to procure major orders from its partners. The portfolio of the orders has been strong for the company. Furthermore, Alcatel-Lucent's forays in the software based solutions segment of the industry will surely bring rewards for the company. However, first of all, the management needs to bring its own house in order.
In my opinion, Alcatel-Lucent is itself the biggest hurdle in the successful turnaround of the company. To return to the profitable days, the company needs to be ruthless in its cost cutting measures and new business procurement. As I have mentioned above, increased spending from Huawei indicates that the networking equipment industry will see a considerable rise in the demand, and ALU should be ready to take advantage of this increased demand. The company still has one of the best research and development teams, which gives it a distinct advantage over its competitors. Moreover, ALU will not be able to properly exploit the growth if internal problems are not solved, and the biggest problem is the elevated costs and culture of the company.
I will be eagerly waiting for June, when Combes will be announcing the plans for the company. In my opinion, Michel needs to be brave and tackle the main issues without taking pressure from anyone. From his previous reputation, I am optimistic that we might see some major decisions made in June that will go a long way in defining the future of the company.
I believe the business side of the company remains strong and research and development team is one of the most valuable assets for ALU. If the correct decisions are made and the strategies are implemented properly, then we might see a big improvement in the business and stock price of the company over the next two years. However, if Combes fails to make substantial changes, the company will linger on.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.