Nokia Dismisses Network Upturn

Nokia Corp. (NYSE: NOK) yesterday quashed any hopes of a major upturn in the wireless infrastructure market by the end of 2004, fueling belief that vendors are going to have to look even harder for ways to cut the costs of third-generation equipment to stimulate carrier investment.

The Finnish equipment vendor’s chief executive, Jorma Ollila, told German newspaper Handelsblatt that Nokia does not expect to see “major investments” from operators in the next eighteen months.

“I think we won’t be seeing positive signals from network operators before the end of 2004,” he commented. “The general economic situation has left operators uncertain as to what the consumer is ready to spend for new mobile telephone services. As a result, they are holding back on investment.”

Unstrung research analyst Gabriel Brown says that one way equipment vendors are starting to try cut the cost of base stations is by sourcing radio components from third parties, rather than making these widgets themselves.

However, as Brown says in the latest Unstrung Insider report -- W-CDMA: Disrupting the Technology Chain -- moving to an outsourced manufacturing model is a radical shift for the major equipment vendors such as Nokia, LM Ericsson (Nasdaq: ERICY), and Nortel Networks Corp. (NYSE/Toronto: NT). Traditionally, these vendors have built base stations entirely in-house, keeping a tight rein on all aspects of the manufacturing process.

Brown argues there is now little benefit in Nokia and the other vendors trying to compete on differences in technology when producing wideband-CDMA (W-CDMA) equipment, because most of the functions are defined in the 3G universal mobile telecommunications system (UMTS) standard [ed note: UMTS networks consist of a W-CDMA air interface twinned with a GSM core network].

"There is now an unmistakable trend toward leaner and meaner operating practices and flatter industry structure," Brown writes. "In essence this means traditional vendors are prepared to outsource components and modules to a far greater extent than they have done in the past."

Evidence of this new openness to outsourcing can be seen in the drive to define open interfaces that would allow third-party components to be more easily used in base stations. Nokia and Ericsson are both supporting separate industry initiatives to define these standards (see Bigwigs Team on Basestations and OBSAI Welcomes CPRI Initiative).

Brown predicts that these efforts may result in Nokia and its rivals farming out the manufacturing of radio components to specialized players such as PowerWave Technologies Inc. (Nasdaq: PWAV) and Infineon Technologies AG (NYSE/Frankfurt: IFX).

"The prevailing economic conditions, combined with the shift to 3G technology, provides a great opportunity for the wireless equipment vendors to fundamentally rethink how they do business," says Brown.

Brown believes that this radical rethinking of base station construction will also lead to additional restructuring within vendors in the coming months.

"No aspect of the design chain is being left untouched in the current reevaluation. There are no sacred cows anymore.”

Which must be comforting news for their vendors' employees.

— Justin Springham, Senior Editor, Europe, Unstrung

The full report -- W-CDMA: Disrupting the Technology Chain -- costs $400. An annual subscription to the Insider is ordinarily $1,250, but is currently available at the special introductory price of $899. For more information, including subscription information and research examples, go to: Unstrung Insider.

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