Telecommunications Equipment Manufacturers
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Industry Overview
The US telecommunication industry comprises about 2,000 companies with combined annual revenue of $65 billion. Major US companies include Cisco, Lucent, 3Com, and Motorola. Large foreign competitors in the US market include Nortel, Nokia, NEC, Alcatel, and Siemens. The industry is highly concentrated: the 50 largest companies hold 75 percent of the market.
Competitive Landscape
The industry depends on purchases from businesses, telephone companies, cable companies, data communications providers, and TV and radio broadcasters. Profitability for individual companies is linked to technical innovation and the ability to secure high-volume contracts from large customers. Small companies can be successful if they make highly specialized products. There are large economies of scale in manufacturing standard products, but many products are specialized and produced in small manufacturing plants. Annual revenue per employee in a large plant varies from $500,000 to $1 million.
The US telecom industry is entering a transition phase where the current telephone system is converted to VoIP technology and the TV broadcast industry is migrating to HDTV technology. These changeovers will require replacing a substantial portion of the equipment in use today, presenting an opportunity for all vendors.
The industry is recovering from a major boom and bust that saw revenue fall 50 percent between 2000 and 2002, after climbing 40 percent in previous years.
Products, Operations & Technology
The industry produces transmitters and receivers (including satellites); signal boosters; signal processors; connecting devices; power supplies; switches; and phones. About half of industry revenue comes from equipment for wireless communications (including radio and TV) and half from equipment for line-based communications. Telephone handsets (wired and wireless) account for about a third of industry sales.
The industry makes a large variety of products that are used by the different communications networks currently installed in the US, including radio and TV broadcasting, microwave communications, remote alarm systems, wireless telephone, cable TV, cable data, and telephony communications (including the Internet), and the “wireline” telephone system. The number of products is very large because communications' signals can be sent in different forms (electrical, optical, electromagnetic); at different frequencies, in different modulations (AM or FM); different modes (digital or analog); and signals can be composed and processed in many different ways (CDMA, TDMA, GSM, ATM, circuit-switching, packet-switching, etc.) Products range from $10 telephones to $5 million room-sized Class 5 switches that are the backbone of the wireline telephone system. With leading-edge technology content, equipment is often expensive.
Because of the large number of possible products, most companies concentrate efforts in a particular segment with the objective of dominating that segment. Motorola specializes in wireless telephone, Cisco in Internet infrastructure, Lucent in wireline infrastructure.
Many telecom products are electronic devices assembled from standard components (such as computer chips and circuit boards) that are customized for a particular application. Production facilities are often highly automated. Systems are designed to be highly modular, consisting of cabinets, shelves, boards, etc. Large, expensive pieces of equipment may be assembled by hand from pre-built components. Parts are bought from a large number of electronic component suppliers, many of which are located abroad.
Outsourcing has become pervasive in telecommunications manufacturing. Specialized chips may be shipped to companies fabricating circuit boards and then shipped to other vendors doing the final assembly and test. Many large manufacturers, including Lucent and Motorola, outsource some or all of the actual manufacturing to contract manufacturers like Flextronics and Solectron that operate factories in low-cost countries. Computer chips, the core of most products, are sometimes in tight supply. Individual product testing is usually required to ensure that the internal electronics of finished products work properly. Software is a significant part of finished systems and can be a significant contributor to profit margins. Manufacturers hold the code as highly proprietary.
The technology of telecommunications is rapidly changing. Companies constantly introduce advanced versions of their products and spend heavily on R&D. From being passive devices that perform a single function, many products have evolved into programmable computer-controlled devices that can adapt to different needs. For many manufacturers, R&D spending is greater than 10 percent of revenue; for some, more than 20 percent.