Nokia and Siemens will merge their telecommunications infrastructure units to form Nokia Siemens Networks, the third such combination formed recently and an indication of the growing competitive pressures in the telecom supplier market.
Nokia is contributing its Networks Business Group and Siemens its carrier-related operations for fixed and mobile networks. The divisions together generated combined revenue last year of €15.8 billion (NZ$32 billion).
"We will create an immediate infrastructure leader, one of the top three," says Olli-Pekka Kallasvuo, chief executive officer (CEO) of Nokia and future chairman of Nokia Siemens Networks, during a conference call with press to discuss the deal.
Nokia and Siemens say the new company will be able to compete better with the growing threat from Asian suppliers and offer more innovative converged wireline and wireless products. At least one analyst was not convinced of either, however.
"I don't see how it's possible for any European player to try to outplay the Chinese on the scale side," says Lars Godell, an analyst with Forrester Research.
Chinese suppliers like Huawei Technologies are smaller than their European counterparts today, but are gaining market share quickly, Godell says. Rather than trying to grow to meet that challenge, the European vendors would do better by competing through innovation, he says.
Creating a large company may not foster that type of innovation. "Typically, larger companies are slower moving than small companies," Godell says.
The merger will save the two companies €1.5 billion (NZ$3 billion) per year, they estimated. Much of this will come from a 10% to 15% reduction in headcount from 60,000, meaning cuts of 6,000 to 7,500 jobs in the first four years following the merger, the companies say.
Nokia and Siemens also expect the new company to meet the demands of operators who want to develop combined wireless and wireline services.
"We will have a tremendous foundation to attack this converging market," says Simon Beresford-Wylie, the future CEO of Nokia Siemens Networks, who is currently executive vice president and general manager of networks at Nokia.
While that may be true eventually, operators may have to wait one or two years for the company to sort out internal integration issues before it can begin offering interesting converged offerings, according to Godell.
Nokia and Siemens will each hold 50% of the new venture, which will be based near Helsinki. The deal is expected to close at the end of the year. It would make the new entity the third-largest telecom infrastructure manufacturer, the companies said. This will place it after Ericsson and the merged Lucent Technologies and Alcatel.
Falling prices for infrastructure have pressured the sector, leading to the merger of Lucent and Alcatel in early April, and to Ericsson's acquisition of most of Marconi late last year. Low-cost competitors such as Huawei are producing similar gear for less, and also making inroads into markets such as Eastern Europe and Africa.
Klaus Klienfeld, CEO of Siemens, says initial reaction to the news from customers has been positive. Godell was skeptical, however. Operators typically like to buy from multiple suppliers to encourage competition between vendors, which can lead to lower prices and better products. Many large mobile operators currently buy network equipment from two suppliers: Nokia and Siemens. "The telcos will not appreciate this reduction in the supplier base because it means less competition," he says.