Change at the top. The names of the top eight vendors in the industry
have changed considerably in the past decade. Source: Wipro from
annual reports 
                           
                           

                                  
Top equipment vendors’ employees, revenue and R&D spend have all
gone down dramatically in the past decade. Source: Wipro from annual
reports 
                            
                            
The top telecoms equipment vendors are spending about one fifth less on research and development than they did a decade ago — and this is in a period of unprecedented change in the industry.
A study by Wipro, the Indian IT consulting company, shows just how much the industry has changed since 2000. Companies have merged or disappeared entirely. Some companies that were small in 2000 became prominent by 2010.
“This is a clear indication of the dynamism we see in the industry and also how important it is to innovate both for existence and growth,” says Wipro vice president Jeff Heenan-Jalil. “The mix of revenues has also changed considerably and a significant chunk of equipment vendor revenues now consists of services revenues, while a few years ago it used to be just platform and product based.”
Wipro carried out its study of equipment vendors in order to see, says Heenan-Jalil, “to understand how the industry has changed in terms of market shares and which players make it to the top”.
It’s “a hypercompetitive environment”, he notes. “Vendors are constrained with falling revenues and shrinking margins. They are finding it extremely difficult to fund innovation and stretch their R&D budgets.”
That “raises the question: what do they have to do to survive?”, says Heenan-Jalil, who is global head of Wipro’s business with telecoms equipment makers.
“There has been a dramatic change in the equipment vendor industry in the last 10 years, especially if we look at the top eight telecom equipment vendors,” he says. “Surprisingly, the mix has completely changed. A number of players do not either exist or have merged to form other entities, while two Chinese players have moved to the top.” 
                            
                            
Lucent, Nortel, Motorola 
                            
The Wipro study focused on the top players in the market. In 2000, the biggest was Lucent, with sales of $41.4 billion, followed by Ericsson at $31.3 billion. Nokia was next, with $28.6 billion, with Alcatel and Nortel close behind at $28 billion each. Motorola and Siemens followed with $24.4 billion and $22.8 billion each, and Cisco came in at number eight, with sales of $18.9 billion.
Sales of these top eight vendors totalled $224 billion, notes Heenan-Jalil. Huawei was off the scale with estimated sales of $100 million.
In 2010, according to the Wipro survey the top eight — mainly a different set of companies — had sales totalling $161 billion. And of that, almost $40 billion represents services revenue, leaving sales of equipment and products in 2000 totalled $121 billion — implying a fall to almost half.
The leading eight companies in 2000 employed 731,000 people. The different leading eight in 2010 employed 526,000 — a fall of one third, “a dramatic shift”, says Heenan-Jalil.
“One thing that we’re not able to ascertain is the smaller companies’ contribution to innovation,” he concedes. But the big companies have traditionally driven innovation in the industry — and while the fraction of revenues they spend on R&D is more or less the same, 11% in 2000 and 12% in 2010, the fact that the revenues have fallen means they’re spending less on innovation. 
                            
                            
Ability to innovate 
                            
“The equipment vendors have lost the ability to innovate,” says Heenan-Jalil. “What do they have to do to survive? The key challenge is revenue decline in the equipment vendor sector. This is resulting in a decline in R&D spending.”
He accepts that “a lot of innovation has been stifled by the recession”, but notes another significant change: “In the past, larger organisations were funded by various governments.”
At the same time, the stresses on vendors and operators have increased. “A key consideration is that the industry must constantly innovate quickly to get to market faster,” he says. “Time to market is the key.” Yet in the decade covered by Wipro’s survey, operators’ average margin has declined from 9% to 6%. “So where is the money coming from to invest in the R&D cycle?” he asks.
The product lifecycle is onerous. It is “a very long process and a there is a long investment cycle”, and that means there is a timelag from investment to revenue. Yet — in the end — the product may not generate the revenue expected when the business case was calculated.
Then vendors have to ask how quickly their competitors will catch up, he notes. They can “catch up and replicate and enhance technology at a lower cost”, he warns. There is an “east-versus-west dilemma — where the challenge is many Western companies are driven by quarterly results whereas Eastern companies have longer perspectives”.
The real question, says Heenan-Jalil, is how can, or how should, Western companies compete and how can the Eastern companies continue to reach into different markets with more products and services at a rapid pace? 
                            
                            
Vendor openness 
                            
He sees an opportunity for Wipro in this, but he is hoping for more openness from the equipment vendors, to which Wipro supplies contract research.
“Telecom equipment players across the world are seeking partners for innovation to derive more value for each R&D dollar spent and remain competitive,” he notes. But those vendors “are more reserved about sharing their future product roadmaps and plans. There needs to be more of an open door policy.”
If equipment vendors are saying they need help to innovate quicker, their own suppliers should be part of that ecosystem as an extension of their R&D operations. “The industry is not leveraging its suppliers to the greatest extent. The industry is at a point of crisis and the culture across the industry should be more open.”
Consumers and enterprises continue to expect more from their networks, so the stress won’t go away, he adds. “Equipment vendors ... should focus on innovation and develop a broader perspective towards creating these digital highways. Vendors are torn between the question of existence and sustainability.”
Efficient R&D is necessary to the survival of the industry. But where is the investment going to come from and which are the partners that will help the equipment vendors be successful? GTB
                            
Further reading from Global Telecoms Business:
Patents protect innovation as the price of intellectual property ... 24 Oct 2011
Innovation required for emerging and mature markets 10 Jun 2011
Senator and Bell Labs accept GTB awards 07 Jun 2011
Innovation 'is the key to new revenue generation' 09 Jun 2010
Innovation Summit: working to drive service innovation 19 Aug 2009