Cisco CEO Say Europeans Waited Too Long To Develop Own Internet Gear
Dow Jones Online News, Tuesday, March 23, 1999 at 09:29
By Kimberley A. Strassel and Richard L. Hudson, Staff Reporters of The
Wall Street Journal
HANOVER, Germany -(Dow Jones)- European companies are still debating
how to conquer the market for Internet gear, 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 of Germany and Alcatel SA (ALA) of France
are buying experienced data-networking companies. Others, like Finland's
Nokia Corp. (NOKA) and Sweden's Telefon AB L.M. Ericsson (ERICY), have
set their sizable research departments to build up their own Internet
businesses.
But market leaders such as Cisco Systems Inc. (CSCO) believe European
firms are too late to have an impact. Cisco's revenue is already growing
at more than 50% annually in most European markets, and the company has
broken into the crucial telecom field, tying up big deals with Telia AB
of Sweden and Swisscom AG (SCM) of Switzerland.
As for European competitors, building in-house technology will take
far too long, said John Chambers, Cisco's chief executive officer. 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 he still believes similar linkups would be
Europe's best play.
"The customers of these companies are thinking of survival - survival
in an Internet world," Chambers said in an interview at CeBIT, an annual
technology fair in Hanover, Germany. "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 in the past, European executives have struggled with how best to
respond to technological challenges posed by the U.S. or Japan. In the
mid-1980s, when Europe 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.
Industry analysts say the Europeans waited too long to start
developing their own technology, giving ample time to Microsoft Corp.
and Intel Corp. to set the industry's technical standards, and for
International Business Machines Corp. and Compaq Computer 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," said Nick VonTunzelmann, a
professor at the Science Policy Research Unit at the University of
Sussex in Brighton, England.
Still, Europe's gear makers 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,"
said Jorma Ollila, Nokia's chairman and CEO.
He agrees with 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," 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,
Ollila said, 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 strategy is being pushed by Ericsson, which, like Nokia,
has recently snapped up a series of small specialist companies. In all,
according to Mats Dahlin, head of Ericsson's mobile-networking business,
Ericsson has spent about $500 million. "We won't do any large mergers
with a data company, but would rather build up our own competence,"
Dahlin said. Besides the $500 million in acquisitions, Ericsson is
spending about $1 billion this year in research and development on how
to move data around networks, he said.
On the other side are 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. He said
Alcatel also has "paid a fortune" to develop equipment for a technology
called ADSL, or asymmetrical digital subscriber line, that allows data
and Internet traffic to move at high speeds over standard copper wires,
and as a result holds about half of the U.S. market and a third of the
global market for that equipment. He said the recent acquisitions will
help Alcatel leapfrog old technology and become a leader in innovation.
"Being late is obviously a drawback," Tchuruk saod, "but in some
cases it is an opportunity."
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