China Deals Brighten Lucent's Day

Lucent Technologies Inc. (NYSE: LU) pulled down a big chunk of today's China windfall (see Vendors Bag Monster Chinese Deals), as it won $350 million in contracts with China Unicom Ltd. and China Telecommunications Corp. (NYSE: CHA)

The timing couldn't be better for Lucent, which was still smarting from its bitter defeat in the federal government’s GIG-BE sweepstakes (see DISA Deal Is Done). The deal also vitiates recent observations that tension has been rising between Lucent and Juniper Networks Inc., because of Juniper's strategic partnerships with other vendors and Juniper's own direct sales efforts.

Lucent executives say the Juniper partnership was crucial to deals with China Telecom and Unicom. In fact, a Lucent executive says the joint development has resulted in some proposed standards that Lucent plans to introduce to the MPLS/Frame Relay Alliance.

John Sax, CTO of Lucent’s Data Networking group and general manager of the Lucent/Juniper partnership, says carriers are calling for multiservice convergence gear, but the standards aren’t quite there yet. Sax says Lucent and Juniper had to do prestandard work on the China Unicom and Telecom projects.

"There are existing standards, but there are flaws because the MPLS Forum versions doesn’t really allow you to scale," says Sax. "Routers and ATM switches have completely different architectures. We pointed out... that routers should do routing and ATM switches should do ATM switching."

Sax says Lucent is more than a Juniper reseller. "The partnership is a joint development partnership. We’ve worked on solving the problem of how you do that... combining Layer 2 and Layer 3, which is actually very complicated.”
It's still clear, however, that without its own routers, Lucent will have to keep a tight rein on the Juniper relationship. And Juniper still sells through many of Lucent's competitors.

The talk of Lucent's tricky positioning in the IP router space flared up again last week, when Nortel Networks Corp. (NYSE/Toronto: NT) struck a deal with Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) to pursue opportunities in the carrier routing market (see Avici, Nortel Get 'Strategic'). Industry sources said one of the factors driving the deal was that Nortel was unhappy with the fact that Juniper had deals with so many of Nortel's competitors, including Lucent, LM Ericsson (Nasdaq: ERICY), and Siemens AG (NYSE: SI; Frankfurt: SIE).

"There is channel conflict," says Frank Dzubek, president and CEO of Communications Network Architects, a consultancy, of Juniper's multi-partner approach. "Juniper has used channels for distribution, and now they're becoming their own direct distributor."

Juniper officials have downplayed the channel conflict, saying they'll strike the proper partnerships where appropriate.

Meanwhile, Lucent and Juniper may be happy to split the kitty on this $350 million deal. The contracts between Lucent and the two Chinese service providers cover a range of wireless and wireline networking gear to build high-speed mobile data access, video-on-demand, and IP Centrex services. Lucent, as the primary contractor, will be the major beneficiary, though Juniper stands to get an undisclosed sum as a sub-contracor and partner.

— R. Scott Raynovich, US Editor, Light Reading

BobbyMax 12/5/2012 | 2:41:05 AM
re: China Deals Brighten Lucent's Day The profit margin on the Chinesedeal may not be all that great. After paying Juniper,Lucent will not be left with much. So the deal may not be all that great. Lucent missed the chance to have its own IP router. In fact, Lucent has not produced any new product in the last two and half years. I do not know how Mrs. Russo will justify her position to the shareholders.Lucent has the most formidable task to stayin business
technonerd 12/5/2012 | 2:41:04 AM
re: China Deals Brighten Lucent's Day I do not know how Mrs. Russo will justify her position to the shareholders
Bobby, there [i]ARE[/i] no shareholders in the traditional sense. There are mutual funds and pension funds who hold the shares, but they're judged on such short-term periods that they are speculators rather than investors and therefore rarely do anything but rubber-stamp what management says.
hyperunner 12/5/2012 | 2:41:03 AM
re: China Deals Brighten Lucent's Day It's a bit scary that Bobby has actually touched on a good point here. Revenue is ultimately useless without meaningful profits.

Over the past 2 years, margins for all manufacturers have been massivley eroded because SP suppliers were all fighting each other for the few scraps of business that arose, or were using pricing to try and take business from incumbent suppliers. I know this from first hand experience, as we spent a long time screwing down suppliers to see what discount we'd get, even on frame contracts!

Because China has been seen as a huge potential market, the temptation to offer "strategic pricing" (ie. cutting margins in the hope that this customer will buy a lot more stuff from you in the future, one day, probably, maybe).

Just because the Chinese are dumb enough to be commies doesn't mean they can't count. If they get 50% margin on the first deal, they will want AT LEAST 50% margin on follow-on deals, or they'll switch to another manufacturer.

If LU/JNPR are putting proprietary stuff into the deal, that's a pretty shrewd move as it will lock in customers in the same way that Cisco has done for the past 15 years.

The other thing to remember about China is that they don't pay their bills very quickly. If LU is lucky, they may see the money inside of the next 18 months. In contrast JNPR is sitting pretty because they'll get paid in 30 days by LU.

Ms.Russo, you're obviously good at massaging company numbers to trigger your bonus payments, but you might want to open up those dusty old Economics books on your shelf and look up "cashflow" ;-)

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