Waiting for a rebound

The global economy might be to blame for keeping telecom stocks on the downswing and telecom companies on the defensive. But large infrastructure companies such as Ericsson and Motorola have implemented cost-cutting initiatives to bolster their share prices as well as gain a more solid next generation strategy now that the hype over 3G has subsided.

Ericsson last week introduced cost-cutting measures—a recruitment freeze, reduction of consultants and 2600 job cuts—to reduce operating expenses by about $2 billion per year beginning in 2002. In addition to adjusting its manufacturing capacity, Ericsson sold its remaining stake in Juniper Networks.

“We have to be careful,” an Ericsson spokeswoman said. “The downturn of the economy is happening faster… and we are focused on efficiency.”

After estimating a 15% increase in year-to-year sales for the first quarter, Ericsson now expects sales to decrease. While the wounded economy is a problem, hype about 3G and WAP also is to blame, said Naqi Jaffery, senior vice president of research at The Strategis Group.

“The expectations that were set by companies have not been met, and the market has realized that things are not moving as rapidly as expected,” he said. “Companies made plans that they did not need.”

While Ericsson maintains that its cost-cutting measures do not affect its U.S. business, the company will be challenged to achieve significant growth here, said Ray Jodoin, group manager and principal analyst for wireless technology at Cahners In-Stat Group. Because of the U.S. spectrum shortage, vendors have to look beyond the U.S. for sales of next generation handsets, he said.

“We are not blessed with spectrum for 3G, and it looks like no one gives a hoot, least of all the FCC,” Jodoin said, predicting the emergence of “an entirely new group of [handset] players,” including Samsung and Panasonic. “Without spectrum, we cannot do much beyond what we have been doing.”

A Motorola spokesman dismissed the impact of spectrum issues on his company, noting that the company will focus on the 2G and 2.5G markets for the next few years. Such decisions are critical to the handset manufacturer, which has announced plans to reduce its work force by 22,000 people during the last four months.

“We are very cost conscious, especially this year in light of the global economy,” the Motorola spokesman  said. “We are all in the same boat, doing what we can to boost our stock prices and give investors a reason to have faith in our products and services.” In contrast with its chief competitors, Nokia continues to do well. Nokia Chairman and CEO Jorma Ollila recently issued a statement that the company expects to show “solid growth” and “better-than-expected” margins for the first quarter.