Earlier this month, telecommunications company Alcatel-Lucent announced it was to axe 1,430 jobs in France, representing 15% of its French workforce. The lay-offs cap a steady decline since the merger of the French and American companies, highlighting a series of strategic errors and the fratricidal effects of Europe’s deregulated telecommunications market.
The news came as a thunderbolt to French trade unions who had previously anticipated, after the troubled equipment maker had announced in July a plan to cut 5,000 jobs out of 76,000 worldwide, that the cuts to its home base would be more likely 800 to 900 posts.
The 15% reduction in jobs on French soil is equivalent to the 15% fall in the company's turnover in Europe during the second quarter of 2012. All its sites in France will be affected – Lannion in Brittany, Orvault near the Atlantic coast city of Nantes, and Vélizy near Paris, historically the group’s main site.
The unions described the plan as unacceptable and catastrophic while Alcatel-Lucent management says it is inevitable.
The company, created in 2006 from the merger of France’s Alcatel Alstom and Lucent Technologies, a spin-off from U.S. telecoms giant ATT, emerged from years of losses in 2011 but slid back into the red in the second quarter of this year. It now plans to cut its cost base by at least 1.25 billion euros in the hope of regaining profitability and boosting its share price.
Like other makers of telecommunications equipment, Alcatel has brought in sweeping cost and job cutbacks over the past decade. The reasons cited are always the same – technology is changing too fast for companies to amortize hefty research and development costs.
They also face harsh competition from Chinese firms that can manufacture high-quality equipment at much lower cost, and they must also operate in a completely deregulated European market. Motorola, Nokia, RIM - the BlackBerry maker – and, to a lesser extent, Ericsson, are all suffering from the same problems.
However, this difficult environment offers no excuse for Alcatel-Lucent's strategic errors, for which its employees are yet again being asked to pay the price. Alcatel has been unable to adapt to the fast-moving telecommunications market ever since its special relationship with France Télécom, the national telephone operator which had contributed to funding its research, ended in the 1990s.
It never managed to make real inroads into the consumer market, a very different proposition from its core networks and B2B businesses. Now its cell phones have fallen out of favour, and over the past few months it has lost the custom of two major French mobile operators, SFR and Bouygues Télécom. It has also partially lost Orange, France Télécom's mobile unit, while Free, which launched its cell phone network in France earlier this year, preferred Nokia-Siemens to Alcatel.
Alcatel's reaction over the years has been to veer from one business model to another. First it pursued the ‘pure player’ model, selling off its subsidiary Alstom, builder of power stations and the French high speed TGV train. Then it turned to a philosophy of ‘Factoryless Goods Producer’, and outsourced a major part of its research to China. This proved profitable for its Chinese competitors, Huawei and ZTE, who poached its engineers.
Finally, Alcatel pursued the fantasy of becoming the world's number one telecommunications equipment company by merging with Lucent, which was still suffering from the after-effects of the bursting of the telecoms bubble when Patricia Russo became its CEO in 2002. Rumours of bankruptcy pursued Lucent well into 2003.
The mirage of the merger with Lucent
Alcatel's workforce has been paying for the failure of the merger ever since, for not one of the alliance's promised benefits have come through. Lucent's technologies for the future, particularly in mobile telephony, have failed to deliver their fruits.
The patents at Bell Laboratories, part of Lucent's ATT inheritance with close relationships in the defence sector, proved disappointing. And the lure of American outlets for technologies where Alcatel had a head-start over competitors, like high speed internet and building and managing network infrastructure, proved to be a mirage.
The company has gone from one restructuring and cost-cutting plan to another in a constant spiral of shrinkage, and the merger has ended up being an expensive deal with elusive benefits. Over 40,000 jobs have been axed since the merger, and the two firms' combined turnover has shrunk from 25.6 billion euros when they merged to 15 billion euros today. As for the share price, more than 10 euros at merger, it is now under 1 euro, a ‘penny’ share at the mercy of speculators.
In tandem with this sorry decline was a series of governance issues. The merged group's management seemed more concerned with stock options, bonuses and top-up pensions than the group's industrial future. In 2008 the merger's architects, Alcatel CEO Serge Tchuruck and Lucent's Russo, were ousted. Ben Verwaayen, formerly CEO of BT, the UK telecoms group, took over as Alcatel-Lucent's CEO while a veteran of French industry, Philippe Camus, became its chairman.
Verwaayen, however, seemed entirely focused on the share price. Camus, former CEO of European aerospace consortium EADS, appeared too taken up with his other roles to give his attention to Alcatel-Lucent – he provided financial advice during the recently aborted EADS/BAe merger and until last May was co-managing partner at EADS parent Lagardère. He is still senior managing director at investment bank Evercore Partners and serves on the boards of a handful of companies.
Alcatel employees feel they have lost out to Lucent's people over the years following the merger, and the heavy price being exacted from the French sites in the current cost reduction plan is likely to reinforce this impression.
But this choice was not merely dictated by the fashionable mantra among company directors, particularly multinationals, that France can no longer be an industrial powerhouse. It is also the result of the numbers. While Alcatel is managing to maintain its margins in the American market, in Europe its business is in the red.
Europe has become the most difficult telecoms market in the world since the European Union deregulated telecommunications during the 1990s, triggering price wars. These continue even as the continent's economic woes mean that demand has collapsed. As a result, operators are seeking increasingly large discounts from manufacturers and are deferring as far as possible their investments in the equipment and infrastructure of the future, in particular 4G networks and fibre optics.
Europe abandoned its telecoms industry
The unions say they lack the sort of backing in Europe that telecoms firms receive elsewhere. "We are not supported by the operators, the government or Brussels, while in the United States, where Lucent is from, and in China, where we have a subsidiary, operators buy our products and support us," said Christophe Civit, representative of the CFDT union at Alcatel’s Vélizy site.
But the problem is a broader one. Like other European equipment firms, Alcatel-Lucent is paying the price of Europe's decision to go for unlimited deregulation in the telecoms sector. Mergers between national champions to create a group or several groups on a European scale were outlawed in the name of free, unfettered competition. Nor was any long-term policy adopted for this highly strategic sector.
Yet at the time Europe was ahead of the game, for a while, in particular with its GSM mobile phone standard. But Brussels abandoned the field and left it open to Chinese competition. And the regulators were solely concerned with opening the market to competition, so other issues barely blipped on their radar screens.
When news of the French job cuts broke last week, François Chérèque, head of the CFDT union, denounced what he called Europe's lack of protectionism in strategic sectors. Arnaud Montebourg, France's industry minister, and Fleur Pellerin, secretary of state for the digital economy, announced an action plan for the telecommunications equipment sector and called for renewed investment in ultra high speed networks.
The Alcatel-Lucent unions, which support this plan, are also demanding that Huawei and ZTE be ousted from French telecommunications networks, following the example of the United States, which invoked national security reasons. Washington accused the Chinese firms in more or less diplomatic terms of acquiescing to requests from Beijing for information.
The unions are also asking that the government operate a preference for European equipment makers and that the telecommunications regulator take employment criteria into account when attributing licences for new frequencies.
It is certainly high time to look into such measures. Rather than spending billions on new motorways, as European governments plan to do to boost growth, the money would surely be better spent on investing in the technologies of the future. That could also have a useful spin-off in reducing regional inequalities.
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English version: Sue Landau
(Editing by Graham Tearse)