The Crisis as Opportunity
Consolidation on the market for telecommunications network equipment supplier
Many governments are intervening today to prop up the financial industry which has been hit so hard by the economic crisis to prevent the situation from becoming even worse. But the laws of the free market still apply to equipment supplier in the telecommunications industry, which is dominated by the Darwinian principle of “survival of the fittest.” So procurement manager at network operator firms should ask themselves if their suppliers really and truly are among the “fittest.”
The worldwide economic downswing, which has taken on a velocity and intensity almost never seen before, is confronting all of the companies operating freely on their markets with enormous challenges. Even though the business of network operators is relatively secure from crisis, investment projects are being cancelled, postponed, or cut back in scale. The effects on the procurement market are correspondingly harsh.
Nortel was forced to file for creditor protection under Chapter 11 almost as soon as the financial crisis began. It is impossible to predict which supplier will be the next victim of the consolidation process. So procurement manager at network operators must ask themselves which of their suppliers will survive the crisis and be able to provide the required materials and services in the short term as well as the middle term.
Will your suppliers survive?
The relatively low susceptibility to crisis enjoyed by network operators is essentially based on two pillars. For one, they have a high “production depth” of their own. Another factor is that people always communicate by telephone, but they do so even more when the funds for travel are scarce. Nonetheless, the selection of the right suppliers is essential for network operators as well. In contrast to markets which are not yet at the level of full maturity, a broad consolidation has already taken place in individual segments of the network equipment supplier market. The situation here is one of only a few providers supplying only a few customers. The mutual dependency is enormous, not only owing to economic factors, but to technical barriers as well.
The telco suppliers, however, are facing declining demand – caused by the cancellation of investments by carriers – while simultaneously trying to deal with growing price pressure. Since financing is generally secured in the form of debt, they quickly find themselves in a precarious economic position: interest expenses in combination with negative business results eat up equity – sometimes very fast, sometimes more slowly – in a process also known as the “leverage effect” and end up in bankruptcy. Reserves for needed investments in research and development required to secure the company‘s future are virtually non-existent.
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