Alcatel Doesn't Look Like An Also Ran Anymore

Serge Tchuruk has turned a basket case into a telecom growth play. But his work is far from over

Serge Tchuruk didn't promise any miracles when he took over troubled French telecom-equipment maker Alcatel Alsthom in 1995. It was the year the company posted a $4.2 billion loss, the biggest in French corporate history. But three years later, Tchuruk's medicine seems to be working. On Mar. 19, he announced that sales rose 14% in 1997, to $30 billion, while net profit jumped 74%, to $770 million. Investors are so pleased, Alcatel's share price has outpaced the French market by 15% since the start of the year (chart). "Alcatel has turned the corner. They are beginning to do the right things," says Neil Barton, a telecom analyst at Merrill Lynch & Co. in London.

But Tchuruk--a turnaround whiz who has rejuvenated French industrial giants such as Total--has plenty of challenges ahead. He inherited a bloated company involved in everything from building railroads to satellite communications. He has unloaded a pile of assets, laid off 30,000 people, and is even now preparing to halve its 50% stake in energy-and-transport giant GEC Alsthom by floating the company on the stock exchange this year. Combined with other moves, the spin-off will almost double the share of telecom in Alcatel's revenues, to 80%.

Yet to make it in the markets where Tchuruk wants to be a leader requires vision, money, and technological edge. Tchuruk wants to put Alcatel in the center of the most dynamic new communications markets, where voice, data, and wireless services are coming together. That means getting bigger in Internet, wireless, and data markets dominated by the likes of Cisco Systems, Nokia, or Lucent Technologies. Alcatel is now the world's No.6 telecom-equipment maker, behind Lucent, L.M. Ericsson, Motorola, Northern Telecom, and Siemens. In Europe, it has slipped from No.1 in 1995 to No.3 today. Its operating margins, about 4%, run around half those of its rivals. "Alcatel is a sleeping giant," says Neil Rickard, European research director at market researcher Gartner Group Inc.

HUSTLING. Tchuruk, 60, is convinced he can complete the transformation. "Alcatel has awakened. There's a lag between the image of Alcatel and the new reality," he says. His strategy: to continue cost-cutting while placing bets on new technologies and new markets. Like other established equipment makers, Alcatel will have an advantage in shepherding its huge customer base--phone operators with billions invested in traditional voice equipment--into new markets and technologies. The key will be grabbing market share in equipment to upgrade voice networks to carry rising volumes of combined voice, data, and video.

Alcatel is behind in some of these areas. But Tchuruk is hustling to catch up. In mid-March, the company launched several new products, including a high-capacity switch developed in partnership with Cisco Systems that will allow transmission of high-speed data traffic over telecom networks. Alcatel has also come out with an Internet screen phone that won an innovation award at the annual Cebit computer trade show in Hannover, Germany. Rather than relying heavily on partnerships for technology, however, Tchuruk wants mainly to start tapping his company's own vast technology expertise. "Alcatel has a huge amount of technology muscle," says Tchuruk, "and we're not making the best use of it."

One of Alcatel's brighest prospects is transmission systems, key to transporting high-speed voice and data traffic. Tchuruk is counting on double-digit growth in sales in a business where Alcatel already ranks No.1 globally and where profits are flowing freely. In Europe, Alcatel counts fast-moving players such as WorldCom Inc. among its biggest customers. "If you deliver a product the day after tomorrow for WorldCom, you are dead," says Tchuruk.

Speeding new products to market will be the litmus test for Tchuruk's reorganization. A manager who believes in a "collegial, collective" style, Tchuruk has eradicated Alcatel's rigid corporate hierarchy and fiefdoms and sought to unleash entrepreneurial talent. That approach has already helped Alcatel develop new Internet-access products. In 1995, for example, the company's research-and-development director, Martin De Prycker, created a virtual company within Alcatel aimed at developing Internet access products. The virtual team of 250 was responsible for everything from research and development to sales and customer service. "We were able to react quickly to changing market demands," says De Prycker.

The bet is showing early promise. Alcatel is considered among the leaders in the nascent global market for ASDL equipment, which allows phone companies to offer customers faster access to the Internet--as quickly as 8 megabits per second. That lets individuals and small businesses download huge files in a minute rather than a half-hour. Alcatel is already supplying four Baby Bells--Ameritech, BellSouth, Pacific Bell, and SBC Communications--with high-speed ASDL access equipment.

Last year, the company shipped 20,000 ASDL lines, giving it some 35% of the global market. "If we had said two years ago, `We want be one of the three or four key players in Internet-access equipment,' everyone would have laughed," says Tchuruk. The global market for ADSL and related technologies is expected to grow from $100 million in 1998 to $1.3 billion by 2001, according to International Data Corp.

In mobile-communications gear, meanwhile, Alcatel is still looking to gain ground. The company stumbled in the 1980s, entering the market late, and it still lags behind global leaders Ericsson, Motorola, and Nokia. Even though Alcatel is too far behind to catch the frontrunners in the current generation of technology, Tchuruk is angling for a comeback as consumers and businesses begin to replace their traditional fixed-line phone services. His goal is to be among the top four players by 2000 with equipment that allows operators to offer customers one phone and one service for home and mobile calls. "We will play our card through the convergence of fixed and mobile markets," says Tchuruk.

UNDERSTATED. One key market where Tchuruk knows he needs to build up his base is the U.S. Alcatel is aiming to double its sales there, to $2.4 billion, by 2000. While it already ranks No.3 in transmission equipment in the U.S., Alcatel aims to expand in Internet access and data networks. The company recently bought out the 49% stake owned by partner Sprint Corp. in its joint venture Alcatel Data Networks.

It will take time for Tchuruk to fulfill his ambitions. Analysts say it may be at least two years before Tchuruk can come up with enough products to ensure steady growth for Alcatel in new Internet and data markets. But an understated Tchuruk has a refreshing habit of promising less than he knows he can deliver. That kind of discipline--combined with Alcatel's technology and new marketing push--may be enough to land the company back among the world's high-tech leaders.

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