What Nokia Should Really be Buying: a Chinese Rival
Nokia Corp. should be buying China’s ZTE Corp. and not Alcatel-Lucent SA, which it this week agreed to buy for $16.6 billion. If approved by regulators and shareholders such a deal would be transformative and open up new growth vistas across the industry, potentially sparking a flurry of East-West and West-East mergers and acquisitions.
The impact on the high-tech supply chain could be immense. Suppliers, contract manufacturers, distributors and other support companies would benefit directly from the cross-pollination of ideas and opportunities. It might even trigger the end of the remaining barriers to trading and manufacturing activities Western and Asian governments have imposed to address intellectual property theft and security concerns.
It’s a pipe dream, of course. The planned Nokia acquisition of Alcatel-Lucent would secure a stronger future for Nokia, at least in the interim, but it also sends a strong signal about how players in the sector are locked in a time warp where they see only European and American companies as natural merger-partners, excluding potentially better Asian candidates. It also signals the end of a long and ultimately unsuccessful transformation for Alcatel and Lucent Technologies.
Both brands will soon disappear, sucked up into the corporate graveyards to join Nortel Networks. Nokia, on the other hand, will emerge stronger – and, paradoxically, weaker. It will be able to take on Ericsson LM in Europe and in North America but will still not be a major player in the Far East and other parts of the developing world.
In the meantime, the Chinese rivals of Nokia have few reasons to worry about the Alcatel-Lucent transaction. Why? Because the transaction still does not address one of the more pressing problems facing Alcatel-Lucent and its buyer: The Chinese telecom equipment market remains difficult for western OEMs whose cost-structures make them less competitive in the developing countries of Asia, Africa and South America.
Furthermore, Huawei and ZTE can sit back and watch Nokia and Ericsson undercut each other in a nasty battle for market share in Europe and North America. Huawei and ZTE have found many of these markets closed to them anyway and won’t worry about who wins or loses in these foreign markets as long as they can continue to romp around unhindered at home. Also, while Nokia is busy trying to digest Alcatel-Lucent over the next year, opportunities to snatch pieces of their current markets might open up for Huawei and ZTE.
This doesn’t mean the merger will fail. It only calls for caution on the part of anyone – investors, suppliers, contractors and customers – who may be lulled into believing the new entity won’t face challenges as daunting as the ones that made Alcatel-Lucent jump into Nokia’s arms.
A better choice, for Nokia would have been the purchase of a major Chinese telecom equipment vendor. Sure, such a deal may be difficult in the current political environment. Western governments are wary about China’s military expansion, alleged IP theft and violations of communications security. China, too, has charged western entities with violations of its political integrity.
This mistrust will force these governments to disallow a merger or acquisition involving western and Chinese enterprises. And yet, very few such seemingly preposterous ideas make as much logical sense. A transaction involving a major Western OEM and a Chinese rival could be beneficial to everyone in the supply chain in the embattled telecommunication and networking equipment market where stiff rivalry has decimated the ranks of companies in North America and Europe even as upstarts from China force down prices worldwide, further eroding margins for everyone.
Nokia could have forced these governments to face the inevitable fact that globalization is here to stay and would require further consolidation of major industry segments across national borders. An offer to acquire ZTE would have been the perfect catalyst to such a discussion while giving the Finnish company an opportunity to cement its position as a global player in the market. And, it wouldn’t need to pay quite as much as it is shelling out for Alcatel-Lucent.
With a market capitalization of a mere $1.77 billion, ZTE would represent a snack bite for Nokia; it can easily finance the deal via a stock swap or by using existing cash. ZTE’s small market value is deceptive, though. It has great potentials as a part of a western enterprise. The company reported revenue of RMB 81.47 billion ($13.14 billion) in 2014. Net income during the same period was RMB 2.63 billion.
Would China allow such a deal? The Chinese government itself may not be able to answer this question today but presented with a deal that makes sense for all parties, they might just consider it. Here’s why. China’s government and local enterprises want direct access to foreign technology and IP but securing these has become challenging because of existing distrust over who would emerge victorious in the business world. A properly structured merger or outright acquisition could help dispel some of the distrust.