Nokia faces a difficult task in managing the overlap between Nokia Networks’ and Alcatel-Lucent’s mobile access portfolios, says Michael Soper, telecom analyst at Technology Business Research.
A TBR report said Nokia Networks’ Q3 2015 results demonstrate the telecom network company can maintain high margins despite a shift toward developing regions.
Nokia’s results indicate the company has established a strong financial position fit to absorb Alcatel-Lucent when the acquisition closes in Q1 2016. Nokia Networks’ gross and operating margins remain peer-leading at 39.5 percent and 9.5 percent, respectively, even as the company’s revenue mix shifts away from developed markets in Europe and North America towards developing markets in the Middle East and Asia. This is largely due to a focused R&D strategy and emphasis on high-margin professional services.
TBR reaffirms its expectation of Nokia to deliver a 2015 operating margin in the double digits and low-single-digit revenue growth. Large-scale LTE buildouts in China and, to a lesser extent, India will offset slowing LTE activity in North America.
More scope in China
Acquiring Alcatel-Lucent will significantly strengthen Nokia Networks’ position in China.
TBR believes Nokia Networks and Alcatel-Lucent are already the leading foreign vendors to the three China-based operators (China Mobile, China Telecom, and China Unicom), lagging domestic leaders Huawei and ZTE, but with larger market shares than Ericsson.
Combined, the two vendors will hold significant market share that will challenge, but not exceed China-based rivals due to the Chinese government’s preference to favor domestic vendors. While Nokia’s presence within the three operator’s accounts is limited to radio access and mobile core infrastructure, Alcatel-Lucent provides them with core routing, optical, and fixed access equipment, in addition to wireless access equipment.
The Chinese Ministry of Commerce approved Nokia’s acquisition of Alcatel-Lucent in October, following Nokia’s agreement to merge Nokia China with Alcatel-Lucent Shanghai Bell. Nokia Shanghai Bell will be a joint venture with China Huaxin in which Nokia owns 50 percent plus one share. To date, Chinese regulators have not mandated the new operating company forfeit market share, despite its large size. Combined, Nokia and Alcatel-Lucent did over $5 billion in sales in China in 2014.
Integration challenges
Nokia Networks’ and Alcatel-Lucent’s primary integration challenge concerns the two company’s wireless access portfolios, which have significant product overlap. TBR expects Nokia product lines to win out in most areas due to its status as the acquirer, singular mobile focus over the past three years, and the installation of Nokia personnel as the head of the forthcoming Mobile Networks unit.
Culling primarily Alcatel-Lucent product lines will cause a degree of defection leading up to and during integration. Customers may prefer to find a new vendor rather than continue purchasing Alcatel-Lucent gear that is unlikely to see an upgrade.
TBR expects minimal defections, especially in the U.S., Alcatel-Lucent’s strongest market. Tier 1 operators AT&T and Verizon leverage Alcatel-Lucent and Ericsson for RAN and would prefer to keep two suppliers. Nokia is the most likely choice, with Samsung Networks a longshot due to its small size.
Michael Soper, telecom analyst at Technology Business Research
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