Huawei Technologies Co. and Alcatel-Lucent SA, challenging Ericsson AB’s leadership in the wireless equipment market, are reshaping tactics around services to gain a way into networks they’ve so far been shut out of.
Carriers coping with the explosion of data traffic and slowing consumer spending have turned to equipment vendors to reduce costs and improve network quality. That has boosted demand for services contracts, at a time when anemic equipment spending has weighed on infrastructure makers’ sales.
“We use the services business as a doorway to get into the hardware business,” Leroy Blimegger, head of Shenzhen, China-based Huawei’s assurance and managed services, said in an interview. “That’s the trend in the industry.”
Services are increasingly the focus in an industry where equipment has become commoditized and competition from Asia has pushed prices lower. Managed services, a market whose components range from fixing transmission stations to making new services possible for consumers, will probably grow to $25 billion in 2017 from $14 billion last year, according to ABI Research.
Ericsson and Nokia Siemens Networks each had 27 percent of the managed services market in 2011, with sales of about $3.2 billion each, according to ABI Research. After a late start, Huawei is catching up, taking in $2.2 billion that year, and it’s looking to sign deals in Europe to take more.
Wireless carriers are more willing to give up control of their networks to reduce expenses so they can focus on building new services. This is a strategic decision that is opening a huge market for the equipment makers, said Gary Nugent, head of corporate services at Paris-based Alcatel-Lucent.
“There’s a new phenomenon in Europe and North America around managing the customer experience” and these deals are typically more lucrative, Nugent said in a phone interview. “Customer experience is becoming a big sales argument for carriers.”
In Europe, where Alcatel-Lucent predicts sales of network equipment will be stable this year, the company is revamping its strategy and looking at replicating its Latin American approach, based on getting to know future clients’ networks by supplying services first, to later win wireless contracts, its global head of sales, Robert Vrij, said in an interview at the Mobile World Congress in Barcelona this week.
Billionaire Carlos Slim’s America Movil SAB a year ago said it picked Alcatel-Lucent to deploy 4G infrastructure in Latin America. Brazil’s Oi also said last year it will buy equipment from Alcatel-Lucent, among other vendors, to build its high-speed fourth-generation network.
Services and software revenue at Alcatel grew 2.3 percent last year to 4.56 billion euros ($6 billion), making 32 percent of the total. During the year, the company decided to get out of some unprofitable services contracts. Alcatel’s total sales shrank 5.7 percent in 2012.
Nokia Siemens is also looking for more profitable service contracts to lift earnings and has a focus on mobile broadband, said Phillip Long, head of the company’s professional services business. The company has been investing for years in network operations centers and products, he said.
“We are selective in how we go to market with our managed services portfolio,” he said. “Through half a dozen of our delivery centers and local service organizations we support 750 million subscribers. So we’re a large player in that domain.”
“The hardware side of the business is declining,” said Aditya Kaul, an analyst at ABI Research in London. “Huawei is mostly dealing with basic field maintenance deals now, but it is heavily investing,” which may pose “serious competition,” Kaul said.
Huawei may overtake Alcatel-Lucent in market share this year, according to ABI Research estimates.
Shares of Alcatel-Lucent have dropped 46 percent in the 12 months through yesterday. Ericsson, based in Stockholm, gained 20 percent, while San Jose, California-based router-maker Cisco Systems Inc. added 2.4 percent. Huawei is privately held.
Today, Alcatel-Lucent added 0.3 percent at 10:02 a.m. in Paris. Ericsson also climbed 0.3 percent in Stockholm.
Huawei is making investments to compete worldwide and has opened global-operation centers in India and Romania, which can manage the networks of multiple countries from a single location. As Europe’s financial crisis caused Nokia Siemens and Alcatel-Lucent to rethink their services strategy and withdraw from less profitable deals, Huawei has been stepping in and gaining new customers.
Since its first managed services deal with Pacific Bangladesh Telecom Ltd. in 2005, Huawei’s total service business has grown about 30 percent each year on average, while its managed services business jumped 70 percent on average, except last year when the growth was 50 percent, said Blimegger.
“Ericsson may have more market share, but they started a few years before we did,” he said. “The gap every year is narrowing.”
Ericsson, the largest maker of mobile network equipment, made almost 50 percent of its revenue from Global Services and Support Solutions in 2012, up from 42 percent the previous year.
Ericsson and Nokia Siemens continue to dominate the services market, ABI’s Kaul said. Western vendors have spent years building their infrastructure to support this global push. The two companies control more than half of the managed services business, in which they had almost 60,000 workers in 2011. Huawei is still a “niche” competitor with about 6,000 workers in this business, Kaul said.
Huawei’s employee costs are lower than those of European and North American vendors, Gartner said in October. A telecommunications technician in China costs less than a third of one employed in the U.S or western Europe, it said.
While may give Huawei an advantage on some deals, Huawei’s late entry into the market may make potential customers more skeptical. Huawei lost a recent bid to manage services in India for Reliance Communications Ltd. and may have been excluded because it lacks experience in dealing with such a large network, Kaul said. Alcatel and Ericsson each won a $1 billion contract from Reliance this year.
“Huawei is certainly a threat and will be a strong competitor in services,” said Joy Yang, an analyst at Gartner in Shanghai. “Ericsson already has a huge installed base, but with Alcatel and Nokia Siemens leaving some lower-margin contracts and with so many service deal renewals happening now in Europe, Huawei has a big opportunity.”