Nortel looks to Asia to boost growth

With accounting irregularities behind it, Nortel feels in ideal position to take advantage of market.

It hasn't been an easy few years for Nortel. While a series of financial troubles and resulting management changes initially hampered the communications solutions provider's efforts to recover from the hi-tech bust, the company feels it is now ready to get on with business. The first stop is Asia. "We find the market changing everyday with its expansion in India, China and Korea and it's essential that we take note of this and are active in competing there," said Bill Owens, Vice Chairman and CEO of Nortel at a London press event. "We've had a chance to look at the strategy of the world and are very much investing in technologies of the future, focusing on areas that we think matter most to this industry and to Nortel." The Canadian company feels that it is in an ideal position to take advantage of industry trends, in particular the growth of the Asian market, and has placed a strong emphasis on creating a significant position there, as part of its strategy to offset rising competition in North America and Europe. Owens said Nortel has made significant inroads to increasing its market share in Asia and that it has the portfolio of products to provide for this both in the service provider and enterprise aspects of its business. However it's the advancement of Wifi and Wimax that Nortel has focused on as its growth stimulator for the continent. "We have an advanced Wifi product and have a strong presence of our meshed wireless networks there," Owens said. "We've also continued to invest in Wimax through the last few difficult years and believe that Korea will be the first to deploy it [Wimax], before Europe and North America." Scott Coleman, an analyst at Morgan Stanley who does not own any Nortel stocks, said that the Asian market will see significant growth in wireless which is the main reason that it is so important for Nortel's success. While encouraged by the company's position in Wifi and Wimax, Coleman expressed his concern about the low cost margins that characterize Asian telecommunications companies. "The critical question on our minds is the pricing environment in developing markets such as India and China and whether follow-on business will be conducted on historical margins, or on more up-to-date pricing trends," he said. Owens noted that the rapid growth and low cost margins of Indian and Chinese companies had forced Nortel to be more aggressive in those markets and implement cost cuts to compete effectively. These include a consolidation of R&D facilities and a reduction in its work force, which currently totals approximately 35,000. On the upside, Nortel has won a series of significant contracts that have encouraged optimism in its ability to compete there. On Thursday, the company announced that China Mobile, the world's largest GSM operator, had selected Nortel to expand its digital wireless network in six regions under a series of contracts with a collective estimated value of $150 million. The China Telecom deal, a contract with Indian company ESNL, and a joint venture Nortel formed with LG Electronics to provide telecommunications equipment and networking solutions to the Korean market, are just some milestones that point to the initial success the company has had in Asia. "Being a player in the early stages of the market's growth is critical for its long term positioning there," Coleman added. "We feel that Nortel has good opportunity to win further contracts in Asia." EVEN AS Nortel keenly views the development of Wifi and Wimax in the Asian market, it takes a different attitude when it comes to Europe, despite the continents need for access to secure broadband networks to ensure its economic growth. "In comparison with Asia, Europe's economic performance has been dismal," said Steve Pusey, President EMEA and Asia at Nortel. "Europe needs to have complete and widespread access to secure broadband communications within five years in order to compete in the global market." To this end, he added that the steady increase in broadband deployment seen in Europe over the last five years needs to be accelerated and there must be a focus on extending that access to less developed infrastructures in Europe. Pusey cited a recent survey by analyst group Telecompaper which showed Europe to have a 30% market share in broadband subscribers, second only to Asia, having surpassed the Americas in its subscriber base. This all bodes well for Nortel. YET, DESPITE these promising signs, the company's past continues to cloud its successes and its ability to fully pursue its potential. Some suspect that old ghosts may still come back to haunt the company. "While we acknowledge that its accounting issues are behind them, we are concerned that the liability impact of the irregularities may arise in the form of future lawsuits filed by shareholders against the fraud of the previous management," Coleman said. In January, Nortel filed its revised financial statements for the 2001, 2002 and 2003 fiscal years after senior staff had manipulated accounting practices to meet internal profit targets and bring about undue bonus payments. Following a senior management reshuffle which saw the firing of 10 Nortel executives including its CEO Frank Dunn in April 2004, Owens announced in January the creation of a chief ethics and compliance officer, and said that 12 senior executives had voluntarily agreed to pay back some $8.6m. in bonuses. As its ethical woes had a profound impact on the Nortel stock, the company has been on an upward trend in recent months, and since hitting a 52-week low of $2.27 with the release of its 2004 annual results on May 2, the stock has bounced back somewhat to trade at $3.81 at the close of trade Friday on the New York Stock Exchange. The company had a 2004 net loss of $51m., compared to net profit of $434m. the previous year. Revenues were $9.83 billion in 2004, down from $10.19b. in 2003. Coleman, who carries an "overweight" rating for the stock and has a 12 month price target of $5, admits that he is more bullish about the company than other analysts. Prudential Equity Group, for example, has a neutral weight rating and a $4 price target. Nortel, however, is more focused on and enjoying the freedom that comes with its reemergence as a regular company, and the prospects of capitalizing on the various potential growth markets and technologies. In the words of the CEO, "We have stayed strong through some difficult times, through the dot com bust, telecom bust and our accounting issues. We are now beyond them, back to normal accounting and very much investing in technologies of the future." The writer was a guest of Nortel in London