The sturdy independence that has Plessey declaring that System X is good for another decade and relying on participation in Integrated Services Digital Network hardware standards to survive in the public switching business (CI No 615) threatens to leave the company out in the cold as the foreign telephone exchange manufacturers form alliances to ensure their survival in the wake of the tie-ups between AT&T with Philips, and CGE with ITT. The most attractive European partner is currently L M Ericsson, because the Swedish company has the technology and the international market share to take it into the next generation, but has only limited cash resources. And the most attractive markets are Spain and Italy, where government decree is likely to ensure that business goes to the companies that contribute most to the local economy. And, not surprisingly, Ericsson is pursuing those markets hard, talking in terms of selling 5% stakes in itself to Telefonica in Spain and to Telit, the name attached to the proposed merger of Italtel and Fiat’s Telettra subsidiary in Italy. With about 20% of the Italian and 25% of the Spanish telecommunications equipment markets, Ericsson is already well placed in both countries, but it wants to increase its market share in Italy, and, more importantly, find committed partners to share the development costs for the next generation of exchanges. In Spain, it is currying further favour by proposing to alleviate the thorny problem of the ITT – now Alcatel – defence electronics subsidiary Marconi Espana by suggesting that it puts some radio manufacturing work the way of the over-manned firm.
Plessey in weak position
Plessey – and GEC – are in a comparatively weak position to negotiate because under the current free market environment in the UK, they are not in a strong position to deliver market share here: while British Telecom is currently committed to giving the lion’s share of its business to System X for the next five years or so, come the next generation, there will be all to play for, and all the survivors will compete for Telecom business on at least theoretically equal terms. Ericsson doesn’t need a UK partner because it has one already in the shape of Thorn-EMI, its partner in Thorn-Ericsson – and Thorn-Ericsson has the secondary or System Y contract for exchanges for Telecom. When the climate in the UK changed to the point where Ericsson no longer needed a UK partner to have any chance of winning Telecom business, it tried to buy Thorn EMI’s share of the venture and got a very dusty answer. But the Thorn-Ericsson collaboration looks likely to have a fairly limited life because Thorn is unlikely to want to put up the substantial sums that will be necessary to help Ericsson develop its next generation exchange. The split in System X manufacturing between GEC and Plessey is illogical and since GEC seems unwilling to agree on a joint company with Plessey, Plessey’s best bet might well be to sell its System X business to GEC and use the cash to buy its way into Thorn-Ericsson. Indeed a case can be made for a much broader tie-up between Ericsson and Plessey, with the two combining computer and communications interests in the UK. The area of biggest conflict is in PABXs – but the cost of staying even in that game is soaring. But Plessey shows no sign that it is thinking that way.