Ron Martin, Fujitsu Network Communications Inc.

RICHARDSON, Texas -- Fujitsu Network Communications Inc., the telecom equipment subsidiary of Fujitsu Ltd. (KLS: FUJI.KL), has kept a low profile in recent years, but it was still hit by the telecom recession. It cut 15 percent of its workforce – 500 jobs – as part of its $45 billion parent's worldwide effort to trim expenses some weeks ago (see Fujitsu Fires 500).

Unlike its competitors, the company has managed to avoid having to write down millions in unused inventory. And it also doesn't have the searing indigestion that comes from a string of unprofitable acquisitions.

Still, its revenues are down from last year, and doubts remain as to whether the company can take its dominate position in the Sonet equipment space and use it to gain ground in other areas.

FNC will likely see revenues of $1.7 billion to $2 billion during its current fiscal year, down from the more than $2.6 billion in revenues it booked in fiscal 2000, according to Daiwa Institute of Research, a Japanese investment analysis firm.

The company is a leader in the market for metropolitan Sonet transport equipment, but a no-show practically everywhere else. RHK Inc.'s data shows that FNC led the North American metro market in 2000 with a 42.3 percent (or $2.3 billion) slice of that $5.5 billion pie.

But FNC needs to prove that its long-haul and access systems are also worth carrier dollars, a challenge that will be tough, given its own grim assessment of the long-haul market. FNC also needs to add multiservice capabilities to its gear and beef up its marketing in order to be heard, according to a recent report by Grier Hansen of Current Analysis.

With so much going on in such a normally quiet place, we felt it was high time we had a chat with Ron Martin, FNC's chief operating officer. Martin has been with FNC since 1987, and he's the one that helped the company first introduce its Sonet multiplexers into the North American market.

Martin, who spent 15 years with AT&T Corp. (NYSE: T) before going to Fujitsu, is in an interesting spot these days. His years of working with incumbent carriers are more valuable now than they've ever been. His company, which didn't grow like its competitors last year, is now entering a relatively new market – the long-haul space – at a time when it's commonly understood that the sector is down for the count.

Read on to find out more about:

Joys of JapaneseShort-Term ChallengesLong-Term StabilityLight Reading: Is having a Japanese parent company a good thing these days?

Ron Martin: It is. We're not publicly traded in the U.S., so we don't have a lot of that pressure to provide a short-term fix for the sake of investors and analysts when things slow down.

Since we don't have stockholders locally, the press assumes that there isn't a lot of readership interest in us and we tend not to get front-page space in the media around here. Everything that happens to Nortel Networks Corp. (NYSE/Toronto: NT), Lucent Technologies Inc. (NYSE: LU), or Cisco Systems Inc. (Nasdaq: CSCO) gets front-page coverage, but that's not something we complain about most of the time.

Light Reading: Is it harder for a large private company to lure workers?

Ron Martin: Last year, when we were losing all our people because we didn't have stock option plans, [being privately held] was a liability. We were losing a lot of good people that were going to competitors. Now people are more interested in long-term security and that's helped us as well. Our attrition rate has gone to just about zero (see Fujitsu Execs Flee).

Light Reading: Are you hiring?

Ron Martin: We're under a hiring freeze right now. But we're willing to upgrade the experience level in the organization. The marketplace is overflowing with talent that we previously didn't have access to. We're looking at opportunities like that, but we're not actively hiring.

Light Reading: Does making your own components help or hurt during a slowdown?

Ron Martin: Well, if you look at what our competitors try to achieve – and they've been successful at it during periods of growth – they sign these huge component deals with outside suppliers in order to get costs down. That anticipates a continued upward momentum in the market.

What happened to Cisco and Nortel, etc., is that once they made these huge commitments, the market turned around and they were still obligated to take that raw material and build products. Because we're internally sourced, we don't get stuck with these huge contracts and we have a much tighter control over raw materials. We also don't have the inventory problems because we know how much of any given item we need to make.

Light Reading: Is it harder to run a telecom equipment company now?

Ron Martin: It's certainly different. It's emotionally harder because of some of the things you have to do. The problems are much different, particularly for the younger managers who haven't experienced this before.

It's also a chance to stop and catch your breath and reassess the business. [It's a time] to look at some of the redundancy that is almost a natural creation of the 25 and 30 percent growth we were experiencing.

The challenge [for me] now is twofold. One: Predict when the market is going to turn around. Two: Target our R&D projects to have the products and the capability and the feature sets that customers are going to need when they start buying again (see Fujitsu Trims R&D Ranks ).

Light Reading: When will the market turn around?

Ron Martin: Our fiscal year will be half over at the end of this month. Our fiscal year 2001 begins in October and runs through March. So, we're predicting that revenue will be flat through March and flat again for the fiscal half that stretches from April to September.

Light Reading: So, revenue will be flat for one year?

Ron Martin: Yeah.

Light Reading: [Blank stare]

Ron Martin: Now, having said that, the historic performance of our business suggests that we usually lag the economy and the capital spending you see from the business sector by about six months – that's true going down as well as going up.

I think 2002 will be a good year for the markets and the economy and we'll see increased spending in the neighborhood of 12 to 15 percent. If any or all of those things are true, our business will start to come back by mid next year.

Light Reading: Which equipment sector will bounce back first?

Ron Martin: I think it's going to be a long time before we see the long-haul business come back, because there is just so much [core network] capacity out there. I believe the most growth will be in metro and access and we'll see that early to mid 2002. The long-haul market comeback is probably several years away.

In fact, one of our customers said that there is a possibility that they may never again need to place fiber capacity in their networks. Their point was that several companies have built so much capacity that they can sell it back and forth to each other and may never have to put fiber in the ground again.

I'm not sure I subscribe to that theory, but that's the statement that came from one of our customers.

Light Reading: What do you tell your sales executives when a customer says that?

Ron Martin: I tell them to sell their Corning Inc. (NYSE: GLW) stock.

[Laughter]

Ron Martin: Seriously, it just supports the notion that if we have too much capacity in the long-haul, then we have too little capacity in the metro and access market. We play across all areas so it doesn't have that big an impact from a sales perspective. It does have an impact in R&D and in designing equipment that's more suited for metro and access than the long-haul.

Light Reading: Is FNC looking to acquire any of the financially strapped equipment companies around here?

Ron Martin: We actually took a hard look at doing some of those things [a year ago] and we looked at outside technology to see if there was anything we could bring in-house. More often, though, what we do is partner with other companies. We develop something with another company, we'll license it, put our label on it, and we'll split the proceeds.

We're ideally suited for partnering. We have a national sales force, in-house manufacturing, and we have the leverage to help get new products into the marketplace. A startup with good technology is usually lacking all of those things.

There are some real bargains out there today, and we're looking at a couple of [bankruptcies and other asset sales] right now. There were some companies developing competing products that were further along than we were. The issue for us is being able to integrate those things smoothly. While [the price of distressed startups] sounds attractive, integrating them and getting into production is a big challenge.

Because we've been more conservative about [acquisitions] than other companies, we haven't hit the big home runs, but we haven't struck out, either. If you look at Cisco's acquisitions and ask how many of them have actually returned revenues and profits to the company – it's not a big number.

Light Reading: Are you in a price war right now?

Ron Martin: There is intense price competition right now, and most of that stems from the fact that there's a lot of excess inventory out there. Getting 10 cents on the dollar is still better than getting nothing. The problem with that attitude – and one of the reasons we've tried to avoid it – is that in this industry, it has been proven that you never get that margin back.

Once supplies are short, you can't go back to your customers and say, "Well, it's a different ballgame now and we're going to raise prices." What people who are slashing prices must realize is that they're setting the future price points in the market.

We also use our incumbency position. While our customers would sometimes like to look at first-cost issues – the cost of the equipment – it's much more complex than that. We're strongly embedded with their methods, procedures, training classes – it's a network that works pretty seamlessly, especially in the case of our incumbent local exchange carrier [ILEC] customers.

For an ILEC to bring in another player just because they're 10 to 15 percent lower than our market price, it would become a great deal more expensive for them than that 10 or 15 percent.

Light Reading: Have you at all responded to price pressures?

Ron Martin: Of course. We're not going to let someone come in and undercut our prices to key customers to the point that we're in danger of losing a customer. On the other hand, we're big enough, diversified enough, strong enough, and back with enough assets that if price cutting is the name of the game, we can play it as well as anybody.

But I want to add one thing... We had about 175 of our 2.5-Gbit/s Sonet multiplexers in Verizon Communications Inc.'s (NYSE: VZ) central office in New York. When they came to the point [after the Sept. 11 terrorist attacks] of having power and turning up service again, they chose to turn our systems up first, because they all came back up and they were working.

[Verizon's] comment to us was that they needed some good news that day, and Fujitsu's equipment, though some of it had been underwater [from firefighting nearby], came back up and performed without replacement. I think that Verizon, though they may be tempted by lower prices some time in the future, will remember what happened.

If you ask most of our customers why they use us and why they like us, probably the single biggest response you'll get is the reliability of our products. Our stuff just never breaks.