West Hill Community Services in Toronto represents one of Nortel Networks Corp.'s biggest problems as the maker of communications gear struggles to stay afloat.
When the health centre decided recently to upgrade its phone system, it considered an offer from Nortel, which had installed the original equipment three decades ago. But after a bidding and consulting process, West Hill chose a new supplier it had never worked with before.
Nortel "didn't understand our requirements," said Shailesh Karthik, who manages IT services at West Hill. Most of the other 22 provincial health care centres in Toronto are going through a similar process of upgrading Nortel gear, he added.
The anecdote adds weight to analysts' criticism that a lengthy accounting scandal and multiple rounds of restructuring over the past eight years have distracted Nortel from its customers. Broader examples include the company's reliance on a wireless standard called CDMA, which is increasingly less popular than the global standard based on GSM technology. (Nortel's CDMA sales declined 5 per cent between the second and third quarters this year).
A Nortel spokesman said the company will not comment on a specific customer, but he pointed to numerous contracts it has won recently. "Our customers are telling us loud and clear that the reason they are choosing Nortel is because they believe in our vision for the future of communications - open, flexible, responsive solutions that are cost effective and efficient," Mohammed Nakhooda said.
Failing to respond to customer needs will hurt a business at any time. For Nortel, however, the problem is compounded today by the economic crisis, a shrinking telecom industry, fierce price competition from emerging Chinese rivals and too much debt.
Businesses and governments are increasingly reluctant to buy from any equipment supplier whose viability is in question, some industry executives say.
Three months ago, there was a dramatic change in the way business is done in the communications equipment industry. Customers started assessing the stability of a supplier before signing a contract. In at least half of all deals today, the customer wants to see the supplier's financials, said Todd Abbott, president of field operations and senior vice-president of sales for Avaya Inc., a privately owned equipment company that won West Hill's business from Nortel.
The new trend "was set off by the financial reporting of some of our competitors," he said.
Avaya, of Basking Ridge, N.J., specializes in equipment and software for handling voice and data traffic inside businesses. It was acquired in 2007 by private equity firms TPG Capital LLP and Silver Lake Partners, reportedly after Nortel failed to conclude its own takeover offer.
Today, Mr. Abbott and some other Nortel rivals see an opportunity to take business from Nortel by touting their own healthy finances. The few profitable players left in the industry, including Avaya and Cisco Systems Inc., will win at the expense of Nortel and others in a weakened state, he said. "This recession is going to cause consolidation."
Other competitors, from Europe and China, are also circling Nortel, seeing an opportunity to poach staff and win contracts in Nortel's own backyard. In October, Nokia Siemens Networks and Huawei Technologies Co. Ltd. won a contract worth about $1-billion to build a next-generation wireless network for BCE Inc.'s Bell Mobility and Telus Corp. using GSM-based technology.
Nortel is widely thought to have bid on the contract, too, but one source said Bell and Telus had made their decision before Nortel brought its final pitch to the table.
The contract represents a huge win for China's Huawei, which is struggling to gain traction in North America despite rapid success in Asia and Europe. Huawei has opened an office just outside Toronto and is now seeking opportunities to collaborate with Canadian technology firms through the industry group Canadian Advanced Technology Alliance.
Analysts surveyed by Bloomberg News expect Nortel to shrink by 5 per cent this year and another 8 per cent in 2009.
Company observers warn that without the ability to attract new business, Nortel faces only two options: Seek creditor protection and reorganize or significantly reduce expenses by selling the bulk of its assets.
NORTEL NETWORKS (NT)
Close: 38¢, up 1¢
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The competition
-CISCO SYSTEMS INC., San Jose, Calif.
The most successful of the communications equipment companies, the Silicon Valley operation has led the way in moving businesses and other organizations over to Internet-protocol-based networks that carry both voice and data.
Revenue: $39.54-billion (U.S.)
Profit: $8.1-billion
Revenue per employee: $597,000
-ALCATEL-LUCENT, Paris
Formed in 2006 when France's Alcatel bought U.S.-based Lucent. Merger difficulties have plagued the new company and last quarter it replaced its top leadership.
Revenue: $24.34-billion
Loss: $4.8-billion
-ERICSSON, Stockholm, Sweden
The communications supplier has been around for more than a century but bulked up with the purchase three years ago of key assets from Marconi Corp., which added land-line equipment to Ericsson's stable of wireless products.
Revenue: $27.78-billion
Profit: $3.2-billion
Revenue per employee: $375,380
-AVAYA INC., Basking Ridge, N.J.
Privatized last year by two U.S. private equity firms, the company says it is profitable, with a very low cost of debt.
-HUAWEI TECHNOLOGIES CO. LTD., Shenzhen, China
Started in 1988 by a former Chinese army officer turned high-tech entrepreneur, the company has made rapid inroads in Asia and Europe by selling for less than established Western players.
-NOKIA SIEMENS NETWORKS
A private joint venture between Nokia and Siemens that combines Nokia's wireless expertise with Siemens' land-line know-how.
Financial data for most recent fiscal year
