Huawei’s and ZTE’s low cost global expansion plans are putting heavy pressure on the world’s more mature telecoms companies, and Motorola and other big-time equipment makers are facing the heat. Among them, Nortel’s situation is undoubtedly the worst.

According to Mark Sue, analyst for RBC Capital Markets, Nortel is plagued by short funds, and if it cannot raise money by selling assets, its heavy debts will push it into bankruptcy before 2011.

“Considering the worsening macro environment, Nortel’s challenged industry position, and concerns related to liquidity while the capital markets are basically closed, we think bankruptcy is a distinct possibility down the road,” Sue wrote in a note to investors, cutting his target price on Nortel from US$1.5 to zero.

Nortel began taking losses in 2006. In 2007, the company lost US$103 million in the first quarter, $37 million in the second, and $844 million in the fourth quarter. The situation has only worsened since the beginning of this year. First and second quarter losses were $138 million and $113 million, and the total deficit for the year so far has reached $3.66 billion.

Benefiting from the development of the telecoms industry, Nortel’s market value rose as high as $90 billion in 2000. But in the fierce competition against telecom companies such as Cisco and Huawei, Nortel has faced increasing performance pressure. Since the beginning of the year, Nortel’s market value has plummeted 95%. 

Mark Sue said Nortel’s cash flow was such that if the company failed to gain a government rescue or dig up crucial financial support, it would run out of all its cash when its $1 billion corporate bond matures in 2011. 

Nortel’s previous main income came from three areas: wireless, fixed, and intranet. The company had strong advantage in CDMA business and fixed network.

But Chinese enterprises, such as Huawei and ZTE are rising, keeping costs and prices comparatively low, and this along with pressure from industry consolidation, is making if difficult for some former global giants to compete. In 2005 Ericsson acquired Marconi to consolidate its leadership in the market. In 2006 Alcatel merged with Lucent, and Nokia merged with the telecoms sector of Siemens.

“If a telecoms firm has no costs advantage and is not big enough, the only possibility is decline,” said an industry insider.

Ericsson adopted positive expansion strategy to compete with Huawei and ZTE, with their low costs and low sales prices, and saw a drastic decline in its profits and share price. Nortel, much smaller than Ericsson, went for a completely different strategy. Due to the small scale and low profitability of its UMTS business, it sold this division to Alcatel Lucent for $320 million, in the process giving up all its 3G business including WCDMA and HSPA, and focused completely on 4G technologies. But now 3G business including WCDMA is putting a lot of money into the pockets of the major telecoms companies such as Ericsson, Nokia Siemens, and Huawei, while there’s no timetable for the commercial use of 4G technologies for at least the next three years.

Now Nortel is focusing its business on intranet such as CDMA, WiMax, and Unified Communications, but is facing challenges in all the three areas.

Figures show the growth potential of the CDMJA market is much more limited than that of the WCDMA market. Even worse is that about 70% of orders in the CDMA market go to ZTE and Huawei, and Nortel might stand a chance only in North America. WiMax technology is still under development. But for the WiMax network built by the US telecom operator Sprint, now the largest on WiMax market, equipment orders all went to Nortel’s competitors and Nortel got nothing.

The intranet market is now Nortel’s most important income source, but its rivals there include Cisco, Juniper, and Huawei, and the firm has no obvious advantage.

Rumor has it that Nortel may be forced to sell its metropolitan area network and ethernet sector, but even this looks difficult under current circumstances. More important, grabbing cash by selling off business parts instead of finding its core competitiveness is just putting off the inevitable.

Source:chinastake