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November 23, 2011

Nokia Siemens cuts a necessary evil

Struggling telecommunications gear maker Nokia Siemens had its back to the wall and the huge cuts announced today were a necessary evil to give the company any chance of survival

By Allan Swann

The company’s ongoing problems producing profits and growing market share has kept parent companies Nokia and Siemens on edge, and put pressure on the company to make changes.

This impatience in turn has been reflected in the market, says Gartner analyst Bettina Tratz-Ryan.

"While these cuts weren’t unexpected, I think the scale of them was. The staff cuts in particular were larger than we expected, but the company had to do something big," she told CBR.

The company announced earlier today that it would cull 17,000 staff, 23% of its workforce, and restructure to focus on mobile wireless and services, while cutting costs by €1bn by 2013.

"Nokia Siemens is operating in an incredibly saturated market, and competes with giants such as Huawei and Ericsson who have huge economies of scale and good provider link ups."

Worries that the company’s move to focus on services and the cloud, by focusing on infrastructure builds could be a problem. Nokia Siemens’ strengths lie in its services division, which may be hamstrung by internal politics focusing on physical builds.

"NSN has a unique opportunity here to really build on something… it is the only company within its space that has 50% of its revenue coming from services. Its competitors, Huawei, Ericsson typically have between 25%-30%. If they can capitalise on this advantage, there is every chance they can get it right."

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The company’s acquisition of Motorola’s wireless networks division, which costs US$1.2bn, was designed to increase the company’s exposure to US and Asian markets. Unfortunately, the process was dragged out too long and cooled initial market excitement, she said.

Despite this, Tratz-Ryan still considers the acquisition a good one, as it adds valuable intellectual property, high quality staff and will pay off in the long run.

The ongoing woes of parent companies Nokia and Siemens in their own business also contributed to the aforementioned impatience with the company.

Despite speculation that the company is preparing an IPO, Tratz-Ryan believes the company is in too much trouble and needs a period of consolidation to prove to investors that it can be a successful investment vehicle.

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