Downturn hits Euro vendors hard

To some extent, European vendors have a more difficult challenge in righting their financials than their U.S. peers.

Vendor layoffs, sell-offs and closings that have become the norm in the U.S. are spreading to Europe.

While European equipment vendors are suffering in sync with U.S. counterparts, last week was particularly ugly. On top of the already planned 8000 layoffs, Marconi revealed that it will let go of an additional 2000 employees, including Chairman Roger Hurn and CEO George Simpson. And companies such as Alcatel and Ericsson gave warning that their outlooks were not favorable.

The news caused stocks to sink even lower.

“Our guidance as break-even in the first half has been overtaken by events,” said Mike Parton, Marconi's newly appointed CEO. “Our first quarter results were very disappointing.”

Hiding behind a now-popular veil among industry executives, Parton pointed to the continued uncertainty as reason to not provide further financial guidance. Alcatel CEO Serge Tchuruk warned that although the company had hoped to reveal positive results, difficult market conditions means Alcatel will not turn a profit this year.

Similarly, Ericsson shares dropped on news that the vendor expects to see flat to moderate growth of its global wireless infrastructure sales.

To some extent, European vendors have a more difficult challenge in righting their financials than their U.S. peers (see figure). “The Europeans have a socialistic mentality,” said Mark Lutkowitz, vice president for Communications Industry Researchers. “They are not exactly capitalists, and that is an impediment to them changing.”

European vendors' inherent structural problems prevent many from even knowing where to look in dealing with the downturn, Lutkowitz said. “Alcatel is a bureaucratic mess with layers and layers [of management],” he said.

For companies such as Marconi, the strategy of eliminating some of those layers may be a wise move. The company's six-month restructuring plan involves collapsing Marconi's three-division structure and headquarters into one organization, according to Parton.

In addition, the company is taking steps to realign its R&D spending in accordance with revenue. As part of that refocus, Marconi plans to concentrate on areas that have strong revenue potential and pull back from those that don't.

“We are concentrating research and development on a number of targeted areas,” Parton said.

Those areas include optical networking equipment such as SDH and DWDM, packet switches, broadband access platforms, and software and support systems. Areas such as fiber-to-the-home R&D will be scaled back.

“What needs to happen is [continued] development focused on customer needs,” said John Gonsalves, vice president of Adventis. “They need to keep product development cycles short and not get into situations where they overbuild. Focus is important, and it is a friend to everyone. They don't have to have all products in all regions.”

But while the European vendors are talking a good game, some are having difficulty applying the theory in practice, according to Lutkowitz. Alcatel, for instance, needs to curtail the rigid control of its French parent company and let the U.S. operations run themselves, he said.

“They couldn't pull off the changes because they don't want to,” Lutkowitz said.