The tech world is buzzing with the predictable news that Siemens and Nokia have decided to pool their telecoms equipment businesses, driven in large part, I suspect, by increasing competition from Chinese upstarts like Huawei.

The 1990s spending boom is a distant memory and no-one gets too excited about telecoms hardware these days, least of all the incumbent carriers of Europe — the principal market for Nokia Siemens Networks, the new merged entity.

Cost-cutting and piecemeal network upgrades have become the order of the day, and while there is still business to be had, the outlook for most equipment markets is relatively subdued.

The challenges that IP telephony has wrought on suppliers of traditional wireline equipment like Siemens are well known. But even mobile networks, Nokia's strength, is not the high-growth business it once was.

antenna.jpgA clear sign of the times: suppliers that sell semiconductor components to the cellular base station market fear revenues will soon start to shrink, according to Instat.

To be sure, demand for cellular voice and data is expected to grow briskly in the next few years. But that will not translate into higher revenues for chipmakers because the makers of base stations are forcing their suppliers to provide more functionality for less money.

And that is because all the big western equipment makers — Cisco, Alcatel-Lucent and Nokia Siemens — are under tough cost pressure from telco customers, who know that list prices are negotiable.

In this environment, low-cost competitors like China's Huawei have a huge advantage, particularly with carriers in emerging markets who balk at paying “western” prices for hardware.

For example, Huawei recently won a competitive bid against Cisco to supply a backup network to Telemar, a Brazilian operator.

Industry sources say Huawei's prices are typically 30 per cent cheaper than those of Cisco.

Huawei prefers to play down its pricing strategy — at least publicly — and rather stresses that the growing number of high-profile contract wins outside China show it can compete with the likes of Cisco in areas like technology, support and customer service.

It is not just emerging markets attracted by the combination of high technology and low prices. IZB, the operator of the network that powers Germany's savings banks, also recently picked Huawei. Anton Mueller, CEO of IZB, says:

Before knowing about Huawei, I did not think that a Chinese vendor would be able to supply us with both the equipment and know-how to support a financial backbone network application in Germany. But I'm happy to admit, Huawei has proven its case.”

Canada's Nortel is now talking to Huawei about a tie-up after recently abandoning plans for a more formal joint venture.

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