Update: Nokia and Siemens to merge telecom infrastructure units

Nokia and Siemens announced on Monday that they 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 ($19.9 billion).

"We will create an immediate infrastructure leader, one of the top three," said Olli-Pekka Kallasvuo, chief executive officer of Nokia and future chairman of Nokia Siemens Networks, during a conference call with press to discuss the deal.

Nokia and Siemens said that 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," said Lars Godell, an analyst with Forrester Research Inc.

Chinese suppliers like Huawei Technologies are smaller than their European counterparts today, but are gaining market share quickly, Godell said. Rather than trying to grow to meet that challenge, the European vendors would do better by competing through innovation, he said.

Creating a large company may not foster that type of innovation. "Typically, larger companies are slower moving than small companies," Godell said.

The merger will save the two companies €1.5 billion per year, they estimated. Much of this will come from a 10 percent to 15 percent 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 said.

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," said 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 percent 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 Telefonaktiebolaget LM 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, said 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 said.