The following article in WSJE is quite interesting.
HANNOVER, Germany -- The debate within European equipment companies over how to conquer the market for nuts
and bolts that run the Internet still simmers, but U.S. competitors think the issue may be moot.
Late to catch on to the Internet buzz, European telecommunications-equipment companies are rushing to make up lost
time. Companies such as Siemens AG and Alcatel SA are buying experienced data-networking companies. Others like
Nokia Corp. and Telefon AB L.M. Ericsson have set their sizable research departments to work building up Internet
businesses on their own.
But U.S. market leaders such as Cisco Systems Inc. believe European firms are too late to have an impact. Cisco is
already growing at more than 50% annually in most European markets, because of thriving corporate business. And it has
broken into the crucial telecommunications field, tying up big deals with Telia AB and Swisscom AG.
As for European competitors, building in-house technology will take far too long, says Cisco's chief executive officer,
John Chambers. And the time for acquisitions has passed; potential targets are too expensive and difficult to integrate, he
believes. He says the partnership Cisco had with Alcatel before that company started buying is now "mostly at an end,"
but still believes similar link-ups would be Europe's best play.
"The customers of these companies are thinking of survival - survival in an Internet world" says Mr. Chambers in an
interview at CeBIT, an annual technology fair here. "They don't have time to wait for firms to work out their strategies."
The build-or-buy debate isn't new in Europe's tech world. Several times over the past decades, European executives
have struggled with how best to respond to technological challenges posed by the U.S. or Japan. For instance, in the
mid-1980s when European industry was behind the U.S. in the emerging personal-computer market, Siemens, Ericsson,
Nokia, and France's Thomson SA all opted for an "organic" strategy, building ambitious PC-design labs. On the buy
side, by contrast, Italy's Olivetti SpA forged bold alliances - first with AT&T Corp.'s computer division, and later with
Digital Equipment Corp. Similarly, France's Cie. des Machines Bull allied with Japan's NEC Corp. to buy PC maker
Packard-Bell Corp.
In the end, however, neither strategy worked out for the Europeans. Almost all European firms ended up retreating from
the PC market. In the end, industry historians say, the Europeans waited too long to start developing their own
technology - giving ample time to U.S.-based titans such as Microsoft Corp. and Intel Corp. to set the industry's
technical standards, and for International Business Machines Corp. and Compaq Corp. to build up massive economies of
scale in manufacturing and distribution.
"Often European companies wake up and are desperate to get a share of the action, but never get that far," says Nick
VonTunzelmann, a professor at the Science Policy Research Unit at the University of Sussex in Brighton, England.
Still, Europe's equipment titans are giving it their best shot. Nokia's strategy is to build up the business on its own. "We
want to be one of the key players in this Internet revolution through organic growth," says Jorma Ollila, chairman and
chief executive of Nokia, in an interview.
He agrees with Mr. Chambers that big mergers rarely work in the high-tech world - often because the culture of the
merging organizations clash. "Corporate culture is very important to us, and not very many efforts to integrate large
companies in highly technical areas succeed," he says.
As a result, Nokia has chosen to develop its data business partly in its own labs, and partly by acquiring a string of small,
specialized companies whose technology Nokia knits together. In the past 15 months, Mr. Ollila says, Nokia has spent
about $600 million on four Internet-related acquisitions, and today "we are (still) looking at small and medium-size
companies in the Internet space."
An identical "organic growth" strategy is being pushed by Sweden's Ericsson, which, like Nokia, has recently snapped up
a series of small specialist companies to combine their technology with its own. In all, according to Mats Dahlin, head of
Ericsson's mobile-networking business, Ericsson has spent about $500 million in this way. "We won't do any large
mergers with a data company, but would rather build up our own competence," Mr. Dahlin says. Besides the $500 million
in acquisitions, Ericsson is spending about $1 billion this year in data-related research and development, he says.
On the other side of this is the buy philosophy of Alcatel and Siemens. Siemens has recently spent an estimated $1 billion
on a handful of networking companies, while Alcatel has bought four U.S. companies, including a $2 billion deal for Xylan
Corp. earlier this month and the $4.4 billion purchase of DSC Communications Inc. in the summer.
Serge Tchuruk, CEO of Alcatel, doesn't believe his company will face big problems integrating these new firms. Alcatel
has paid a lot for them, but he points out that heavy investment can pay off. Alcatel has, he says, "paid a fortune" to
develop equipment for new high-speed technology called asymmetrical digital subscriber lines, but as a result holds
about half of the U.S. market and a third of the global market for that equipment. He feels the acquisitions will enable
Alcatel to leapfrog old technology and become a leader in innovation.
"Being late is obviously a drawback, but in some cases it is an opportunity," Mr. Tchuruk says.
---
Kevin J. Delaney contributed to this article.
---
Shopping Spree
European telecommunications-equipment makers' recent acquisitions
Company Announced Price* acquired date
Siemens Redstone Communications March 1999 450
Siemens Castle Networks March 1999 300
Siemens Argon Networks March 1999 240
Alcatel Assured Access Feb. 1999 350
Alcatel Xylan Feb. 1999 2,000
Gen. Elec.Reltec Feb. 1999 1,740
(U.K.)
Nokia Diamond Lane Comm. Feb. 1999 125
Alcatel Packet Engines Oct. 1998 315
Ericsson Adv. Comp. Comm. Sept. 1998 285
Alcatel DSC Communications June 1998 4,400
*in millions of dollars |
