Europe's telecoms equipment makers have never had it so bad. As carriers maintain the freeze on their capital expenditure plans, network systems vendors are left to scrap it out in an increasingly messy price war. The only way, it seems, is down.
The latest figures from US consultancy RHK reinforce that gloomy outlook: the European market for optical networking gear - dense wavelength-division multiplexing (DWDM) systems, add-drop multiplexers and digital cross-connects among other things - was worth $662 m (€673 m) in the second quarter of 2002, down 30% from the $949 m posted in the first quarter.
So much for the here and now, though. What every telecoms professional wants to know is if there's a glimmer of light at the end of the tunnel - and whether that glimmer of light is in fact another train? One man urging caution is Thorsten Heins, head of the optical networking division at Siemens' fixed-line telecommunications unit, Information and Communication Networks (ICN).
"We haven't reached the bottom yet," he told FibreSystems Europe. "Growth in the periphery [of the network] will lead to market recovery, and the metro will see huge demand. But the long-haul market will be down for another year-and-a-half."
Heins took over at ICN's optical networking group in April, after an 18-month stint as chief executive and president of Siemens' mobile solutions division. He didn't have much time to settle in to the new job, however. Siemens has been scrambling to cut costs at its unprofitable ICN unit all year and recently announced a fourth round of job cuts that will bring total ICN staff reductions to 20,500, or about 35% of the division's earlier staffing level.
Despite all the upheaval, Heins maintains that a market recovery will happen, though he concedes that it won't get properly under way until 2004. When the turnaround does come, he says the telecoms operators will be focusing on three big issues: "They need equipment to reduce capital expenditure, to reduce operational expenditure and to allow new growth."
It's with those objectives in mind that Heins and his senior ICN engineers are planning a slew of next-generation product announcements for spring 2003. By making a big splash at the headline industry shows - specifically, CeBIT in Hannover, Germany, and OFC in Atlanta, US - ICN aims to be ready to catch the "wave" when the industry rebounds from its downward trajectory.
So what should carriers expect in terms of new products and functionality? For starters, ICN's next-generation Synchronous Digital Hierarchy (SDH) gear will be given a "data engine", with the integration of Multi-Protocol Label Switching (MPLS) to improve the hardware's data-handling capabilities. Heins lists specific as well as general improvements that MPLS will bring to the product line, including remote configuration of virtual networks, adaptive systems (that is, self-rearranging networks) and new charging systems.
Many of these features are intended to cut carriers' opex budgets, particularly by reducing the number of field technicians and engineers it takes to configure, reconfigure and maintain the network. In short, remote configuration and self-rearranging should mean fewer truck-rolls.
Yet Heins is pragmatic enough to know that the big differentiator for equipment vendors will be whether they can help the carriers to keep their capex under tight control. For that reason, he is adamant that ICN's next-generation products must compete on cost as well as operational advantages. Siemens gear, it seems, should not be a gold-plated Rolls-Royce (or Mercedes-Benz).
Eastern promise
But while the near-term outlook in Europe looks bleak, Heins appears more fired up about his division's prospects in the Asia-Pacific region over the next couple of years. "Siemens already has a strong history in China," he explained.
Certainly, ICN appears to have its foot wedged in the door of the Chinese market. The project to build a national backbone network for China Unicom, one of the country's leading providers of data and telecoms services, is a case in point. The contract was signed in November of 2001 and the "core of the core link" - a 1000 km DWDM link with a potential capacity of 160 x 10 Gbit/s channels - was in place in March of this year. The complete network will run to 15,000 km.
Following on from that, just last month China Mobile Communication Corporation (CMCC), the largest mobile telecoms operator in China, awarded ICN a $14 m contract to install DWDM (TransXpress Infinity MTS 2.0 systems) and SDH gear in its fixed-line backbone. Last year, ICN installed DWDM systems with a total length of 10,000 km across CMCC's national optical network.
And there's more. In July, the South Korean carrier KT International announced that it would use Siemens Surpass signalling technology to form the gateway for international data and telecoms traffic entering and leaving its national network. Contracts with PT.Telekomunikasi of Indonesia (€12 m for remote telecommunication switching units) and the Provincial Electrical Authority of Thailand ($17.5 m for a 2100 km optical cable installation project) in August add further credence to Heins' optimism.
Sales of networking boxes aside, Heins is smart enough to know there are other creative ways to survive the telecoms downturn. One notable development is the formation of a strategic alliance between ICN and the Massachusetts, US-based equipment maker Sycamore Networks. The partners will work together to market Sycamore's SN 16000 optical switches and integrate them with Siemens' TransXpress Infinity MTS long-haul transmission, SDH products and network management systems.
The tie-up will allow both firms to reach more customers - particularly Sycamore, which now has Siemens' worldwide sales force on its side. In return, Siemens gains an optical switching system for its product range with minimal structural upheaval and minimal outlay.
So all in all, Heins appears cautiously optimistic: "We will be ready for the recovery," he concluded. Time will tell whether that assertion proves correct.
Further information
Who's Up? Who's Down?
RHK's latest research shows that sales of optical networking systems in Europe dropped 30% in the second quarter of 2002 - to $662 m - compared with the $949 m posted in the first quarter. The sectors hardest hit were digital cross-connect systems (down 52%), add-drop multiplexers (down 31%) and long-haul DWDM (also down 31%).
The headline figures look like this:
• The top five equipment vendors were Alcatel (27.4%), Lucent (18.5%), Marconi (16.8%), Nortel (11.5%), Siemens (10.6%). These vendors saw their combined market share drop from 90% in the first quarter to 85% in the second quarter, with products from Adva, Ciena and Lightscape Networks representing the biggest threat.
• Alcatel's market share grew from 25 to 27.4% thanks to acceptance of its next-generation SDH and DWDM products at both incumbent and alternative carriers.
• Siemens was up from 9 to 10.6%, owing to several backbone deployments in Europe.
• Marconi fell from 23%, due in part to nervousness on the part of customers about the firm's long-term viability.
• Nortel's share dropped from 14 to 11.5%, although it is still well positioned in DWDM.
For more information, see www.rhk.com.