There are reasons to be concerned about the future of Nokia Siemens Networks (NSN).  Since the merger of the Nokia and Siemens telecoms infrastructure businesses in 2007, the Joint Venture never had a single profitable year:  operational losses were

-€1.3bn, -€0.3bn, -€1.6bn, -€0.7bn, -€0.3bn

in the years 2007, 2008, 2009, 2010 and 2011 respectively. The cumulative operational loss over 5 years is -€4.2bn. The average annual loss amounts to -€0.847bn over the period.

So something radical had to happen. It did. In November 2011, NSN announced that it would refocus its business on mobile broadband.  As part of the re-organisation and strategic shift, the company announced that it would get rid of 17,000 employees worldwide.  A few thousands more will be transferred to other firms with the carving out and selling of a number of product lines. In total, about 1 employee out of 3 should go.

At least two business lines are expected to be sold to third parties: the fixed network business and the BSS / Application business.  We have reasons to believe that since 2007, the fixed line portfolio, traditionally a strength that came from the Siemens side, has been an underinvested area and lost ground at NSN; today, the big names in that space are called Alcatel-Lucent, Cisco and Huawei to name a few.  In the BSS / Application space, it has certainly become very hard for NSN to compete against pure-play companies with an IT background, like Comverse, IBM and other firms.

Today, these two business lines don’t make more than 15% of the NSN turnover.  If 1 in 3 employees leave the company, costs should be reduced by about 30%.  Overall, this should give NSN a 15% points improvement in its operating profit.  As profit margin has ranged between -2% to -13% over the last 5 years, NSN might be able to turn into the black and reach a 5-10% profit margin at last.

But can the NSN management succeed this time?  Clearly there are 4 major risks:

  • Execution risk: the turn-around program, to be successful, needs to take place fast, and ideally be completed by the end of 2012. In countries with very protective labour laws, including Germany and France, things could drag on much longer.  Not only will the redundancy programs cost NSN a lot of money, but internal raw and employee de-motivation won’t be good for business either if they last.  So the company needs to get back to ‘business as usual’ really fast.
  • Customer risk: it is clear that many existing NSN customers will feel uncertain about the future of the company. On paper, NSN has two strong parents: Siemens and Nokia.  But Siemens has clearly shown that the telecoms business is not part of its core strategy any longer; and Nokia has many issues to fix in its handset business. There is no doubt that Ericsson and Huawei will still be around the corner in 5 years from now; the former because it is the #1 player; the latter because telecoms is seen as a strategic industry by the Chinese government. But some customers will ask: “What about NSN”?  And they have already asked.
  • Competition risk: Ericsson, Huawei and Alcatel-Lucent, the only three remaining global telecoms players portfolio-wise, will be very happy to take market shares from NSN in the meantime, as they have done in the year 2007 in particular, the year when NSN was set-up and the business units of Siemens and Nokia merged.
  • Skills and employee risk: finally, the last key risk is that many of the great NSN employees will leave for a brighter horizon, including joining the competition: Ericsson, Cisco etc.  Many of the best employees at NSN have already gone in the years 2007-2008, during the merger. As well as before, and after. This is not surprising really: the European telecoms industry has been in crisis since the crash in 2001.  So many bright people have gone for other jobs by now.

Can NSN succeed?  It certainly can.  NSN has three key strengths.

  • NSN has a fantastic portfolio of mobile infrastructure products.
  • It also has a strong service portfolio, including managed services; not so strong as Ericsson, but much stronger than Huawei.
  • Also with the acquisition of Motorola network business back in 2010-2011, NSN finally has a footprint in the USA, which makes 25% of the world market.  As people say in the industry: we make more money with AT&T as a single customer than with all other European telecoms operators combined!

The new NSN strategy will build up on these strengths. It must succeeds.

The Nokia and Siemens telecoms infrastructure businesses have seen many re-organisation since 2001.  This one will be the one before the last. If the transformation is not successful, then there will be very few options left for NSN.  One option would be a merger with Alcaltel-Lucent, to create a new world champion with a strong fixed line business on the Alcatel side, and a strong mobile business on the NSN side.  The other option would be a merger with a Chinese company, most likely ZTE.

We trust that the NSN management has the skills to make the turn-around a success. The alternative would mean tens of thousands of more lay-offs worldwide, and in Europe in particular.  Which is the last thing that Europe needs right now.

Read our follow-up article on the future of NSN: can NSN survive without its Managed Services business?.