Alcatel Gaining Ground the U.S. Way
As companies around the world race to dominate the communications equipment business, investors have picked Lucent Technologies, Nortel Networks and the ambitious Cisco Systems as the clear front-runners. But there’s also a promising sleeper in the mix: Alcatel of France.
The once-stodgy phone equipment company in Paris has been gaining on its North American rivals, thanks to a survival strategy that is steadily doing the unthinkable: Americanizing the prized French firm.
The bold transformation began with Alcatel Chairman Serge Tchuruk’s move to make English the company’s official business language--a switch that is no minor matter in a country notoriously protective of its language and culture.
Tchuruk also introduced U.S.-style stock options companywide, established two business headquarters in California and spent $15.5 billion buying up U.S. and Canadian companies. Last year it spent $2 billion to purchase Calabasas-based Xylan Corp.
Even so, Alcatel is mostly unknown in the United States. Its underdog status shows on the U.S. stock market, where the values of its North American rivals have soared into the hundreds of billions of dollars while the market value of Alcatel’s representative shares on the New York Stock Exchange has risen to a more modest $48 billion.
The importance of that gap is not lost on executives at Alcatel.
“The higher our market capitalization, the longer we can be independent, and we would like to be the one to swallow [other companies] and not be swallowed,” said Olivier Houssin, executive vice president of Alcatel Telecom.
The disparity in value persists even though Alcatel is the worldwide market leader for several key types of equipment and is second behind Lucent in overall size among equipment firms, with $24.5 billion in 1999 sales.
“They’re undervalued because they are old school,” said Lisa Pierce, a telecommunications analyst at Giga Information Group. “And they’re late to the Internet protocol party.”
Indeed, Alcatel still relies heavily on selling “old-school” phone equipment such as switches. And it was slow to embrace the shift toward using Internet-style technology, or Internet protocol, to transmit both data and voice communications.
Tchuruk has steadily attacked that and other weaknesses by tightening Alcatel’s focus on telecommunications and by aggressively expanding into the United States, the world’s largest market for telecommunications equipment and a hotbed for development of IP networks and equipment.
First, Tchuruk sold off about $10 billion in non-telecommunications businesses. Then he rebuilt Alcatel through the U.S. acquisitions--moves that gave the company a critical foothold in IP equipment while underscoring its commitment to the American market.
“The transition has been very fast and very intense,” said Alcatel’s Houssin. “We were a voice company and a European company . . . but now our attention is on North America because it’s the largest market and because our key competitors are there.”
Houssin and other executives say the changes at Alcatel have injected a good deal of “new-school” telecommunications--and American culture--into the 102-year-old French company.
The English-language mandate, for example, once affected just the top 10% of Alcatel’s 120,000-member work force, mostly senior managers who had long before learned English as their business grew more global. But now that many key operations are in the United States, the need to work and speak in English has extended much deeper into Alcatel. With it has come stepped-up availability of English classes.
“Product specifications, product requirements and the details of processes and so on have got to be written in English now,” said Patrick Liot, president of Alcatel’s Internet-working division, a worldwide unit now based in Calabasas. “For a number of people in Europe, it has been a major challenge to adjust.”
Alcatel also recently shifted and consolidated Web site duties for a key business unit to a designer based in Calabasas.
The site had been designed in Europe, which is not as advanced in Internet matters as the United States. As a result, Liot said, “we tended to have a site that lagged behind the U.S.”
American-style business is seeping into Alcatel in other ways, too. Liot’s unit, for example, is embroiled in a high-stakes race to launch innovative products for the emerging IP networks. That has forced him and others to push European colleagues to move faster than in the past.
“I think we have introduced a sense of urgency because of the pressure of the U.S. market . . . and the fact that the [market] leadership positions are being established now,” Liot said.
During a recent conference call among product managers from both Europe and the United States, there was a “hot discussion” when Liot and others insisted that certain products be launched at the end of 2000 and not a year later, as others had proposed. In the end, Liot’s group won the point.
“It has got to be concerning or frustrating for Europeans to see so much attention being placed on the U.S.,” said Paul Segre, general manager of Alcatel’s Access Products division in Petaluma, Calif. “Alcatel is a French company, and the French love France, but they understand that the U.S. market right now is the most dynamic market in the world, and so they are investing heavily in it.”
The investment appears to be paying off. The United States is now Alcatel’s largest single market. It’s expected to account for more than one-quarter of the firm’s total sales once all the acquisitions are added in, up from just 9% in 1995.
Notably, Alcatel’s 1998 purchase of Dallas-based DSC Communications helped the firm capture more than half the $700-million U.S. market for so-called DSLAM equipment, which is used by local phone companies to deliver digital subscriber line, or DSL, service to their customers.
DSL technology enables phone companies to provide high-speed, always-on Internet access over existing copper phone lines. DSLAMs, or digital subscriber line access multiplexers, are installed in phone company central offices to handle bundles of DSL-equipped phone lines.
Cisco is the closest competitor to Alcatel in the U.S. market for DSLAM equipment, with 16% market share, said Claude Romans, DSL technology analyst for telecom analysis firm RHK.
Local phone firms BellSouth, Bell Atlantic and SBC Communications buy their DSL equipment from Alcatel. Alcatel is a leading supplier in Texas-based SBC’s $6-billion DSL roll-out in California and 12 other states, for example.
Alcatel also leads its rivals in the $2.8-billion North American market for related equipment called digital loop carriers, transmission gear used by phone companies to help extend the reach of high-bandwidth lines.
Drawing on both the internal and newly acquired technologies, Alcatel has pinned down about 35% of the market for that equipment, but is closely followed by Nortel, which has 24% of the business, according to RHK’s Romans.
There have been other advantages to Alcatel’s adoption of American business practices, including greater freedom to lay off workers and relocate or shut down operations. While such moves might cause an uproar in France, there was no outcry when Alcatel’s post-acquisition plans in the U.S. included laying off more than 600 employees and selling manufacturing facilities in Longview, Texas; Clinton, N.C.; and Aquadilla, Puerto Rico.
Analysts say Alcatel must work to catch up to its competitors in the overall U.S. market--especially in the IP equipment arena.
Alcatel recently unveiled an advanced product that aims to fill that gap. The technology stems from work done in Calabasas and at Packet Engines in Spokane, Wash. By some estimates, the market for that type of gear will grow to $2.8 billion by 2003.
Analysts point out, however, that Alcatel has other strengths that could give the French company some advantages over Lucent, Nortel and Cisco outside the United States. Alcatel has solid sales in China and in other non-North American countries, for example, and is among the leaders in a broader range of telecommunications markets, including satellites, wireless, cabling and optics.
In optical equipment, Alcatel expects its worldwide sales to jump to $2 billion this year, up 54% on new sales to Deutsche Telekom as well as expected new contracts in the United States, where Nortel dominates the business. Last year, Alcatel snagged just $200 million of the $3.8 billion in optics gear purchased in North America, but the company has said it expects to double its U.S. optics sales in 2000.
And though the company does not sell wireless phones in the United States, sales of Alcatel mobile phones in Europe have made the company the third-largest supplier of cellular phones, behind leaders Nokia and Ericsson.
“They are really a global company,” said Roger Wery, a telecommunications analyst with PRTM, a consulting firm in Mountain View, Calif. “They are very, very strong in Asia and in Latin America, where typically North American companies have not been very successful.”
Analysts believe that Alcatel’s recent $7.1-billion bid to buy Newbridge Networks of Canada could bring the company potentially important phone industry customers as well as network products for both wireless and wire-line systems.
“With Newbridge, Alcatel gets more than a start-up with good technology, they get technology plus customer relationships,” said Tracey Vanik, who follows the switching and routing business for RHK. “Newbridge has [data and voice] equipment that has been accepted by the regional Bell companies, and I think that [Alcatel] can really build on that.”
Of course, Lucent, Nortel and Cisco have also been on buying binges designed to strengthen product offerings and market positions. And some believe that Alcatel’s relatively late acquisition spurt may have caused the firm to miss out on some of the best start-up purchases.
“Alcatel remains vulnerable from the IP perspective, because they don’t have a very strong presence there yet,” noted Vanik of RHK. “But Alcatel is still a company to watch . . . [because] the feeding frenzy is not yet over.”
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The French Connection
Alcatel is Europe’s second-largest phone equipment company, but these days the French firm’s largest customer--and much of its future--is in the United States. Spurred by both opportunity and necessity, Alcatel sold off non-telecommunications units and steadily beefed up its U.S. presence and sales to take on rivals Lucent Technologies, Nortel Networks and Cisco Systems.
Alcatel at a glance
Headquarters: Paris
Chief executive: Serge Tchuruk
Products: Telecommunications applications and equipment, including switches and networking products, fiber-optics, underwater cables, wireless phones, satellites and digital subscriber line technology.
Employees: 120,000 total, including 12,000 in the U.S.
California operations: Calabasas, Milpitas, Petaluma and San Jose, with smaller offices in Irvine, San Diego, San Francisco and San Ramon.
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Sales (in billions)
1999: $24.5 billion
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Profit (in millions)
1999: $687 million
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Where it Stands
Alcatel ranks second in sales, third in profit and last in market value.
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Sales Profit Market value* (in millions) (in millions) (in millions) Lucent $38,303 $4,766 $198,000 Alcatel 24,547 687 48,000 Nortel 22,217 -170 172,000 Cisco 12,154 2,096 520,000 ET
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* As of Friday
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A Shift in Focus
Alcatel’s sales mix
1995
Telecom: 39%
Other: 61%
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1999
Telecom: 85% Other: 15% *
Sources: Bloomberg News, Alcatel
