According to the Financial Times Deutschland, DT wants to achieve cost savings of 5bn euros ($6.3bn) by 2010. The newspaper, quoting sources familiar with the plans, said the cost-cutting measures are to be officially announced in November. It is believed that spending on distribution, IT systems, and administration will be subject to extensive cuts.
Kai-Uwe Ricke, the embattled CEO of DT, is under serious pressure at the moment after revealing last month a decline in second-quarter earnings. DT was also forced to lower its forecasts for year-end profits by 10% and it also revised downwards expected sales. Some investors are reportedly urging the board not to extend Ricke’s contract when it expires next year.
The main problem for Deutsche Telekom is its core market, Germany, which makes up the bulk of the carrier’s revenue base. Ricke admitted earlier this year that DT’s fixed-line sales were in free fall, and the carrier lost more than one million fixed-line customers in the first six months of 2006.
But it isn’t just fixed-line where DT is experiencing pain. It admitted in August that revenues generated by all three strategic business areas in Germany (fixed-line, mobile, and services) fell by a total of 4% to 16.3bn euros ($20.82bn) for the first half of the year.
DT is also facing considerable pressure from the European Commission over plans for a regulatory holiday for its new fiber-optic network.
To make matters worse, the carrier has so far failed to begin its long-delayed process of axing 32,000 jobs over the next three years, despite announcing the cost-cutting plan last year. That restructuring aimed to cut costs 3.3bn euros ($4bn) and was actually pretty modest given that the workforce at Europe’s biggest carrier was still a huge 243,695 at year-end.
The size of the workforce at DT has actually risen 2.6% since then to a fraction under 250,000 at the end of June. However, intense union pressure and street protests have seemingly delayed the cost-cutting measures.
At this stage, it is not clear whether the new cost-cutting exercise will be in addition to the already announced job losses, but it is clear that DT’s bloated workforce will be in for a period of uncertainity as the plans are finalized and developed.
In an effort to turn things around, Ricke has already implemented a number of management changes, and is in the process of slashing both fixed-line and mobile prices in Germany in order to stave off fierce competition from the likes of Vodafone Group Plc. He has also recently announced a new, seven-point program called Telekom 2010 which aims to protect earnings and market share in Germany, as well as ramp up its US operation, T-Mobile USA.
