The wireless equipment sector has kept the rest of the telecommunications sector afloat for years. Now it, too, has clearly hit a rough patch. ABG Sundal Collier, a Scandinavian investment bank, notes that growth in the global wireless infrastructure market peaked in the third quarter of 2004 and has been sliding ever since.

“All of our models indicate that growth will slow further in 2005 and 2006 to 10% and 7%, respectively, and turn negative in 2007 and 2008,” ABG analysts Magnus Innala and Anders Bratenius note in a recent report.
Among the reasons cited:

> It would be difficult for the industry to match the torrid, 25% growth rate ABG estimates was achieved in 2004, when suppliers recorded US$54.4 billion in sales. Much of the increase was the result of carriers simply adding to their second generation (2G) networks to accommodate new subscribers. There now seems plenty of capacity to handle 2G traffic.

> Dozens of carriers are installing video-enabling 3G networks, but it’s not clear how quickly the new services will catch on. If subscribers show a reluctance to pay for them, the 3G rollout will slow.

> Fresh competition from low-cost manufacturers, such as China-based Huawei Technologies Inc. and ZTE Corp., is driving down prices.

> Wireless carriers are consolidating, resulting in fewer customers who are keen to achieve savings when buying equipment.

These trends help explain why nearly all the key wireless companies have lost market value since the beginning of the year (see table on p. 30). Among the big-cap firms, pure plays, such as LM Ericsson, are obviously affected. But the news is also bad for Nortel Networks Corp. of Brampton, Ont., and Lucent Technologies Inc. of Murray Hill, N.J. — both of which now rely on wireless gear for more than half their revenue and an even greater chunk of their operating earnings.

Given the sharp erosion of wireless stocks, is now a good time to get in? It depends in large part on the wireless sector targeted.
Top handset manufacturers, such as Nokia and Chicago-based Motorola Inc., are benefiting from a healthy first-quarter rebound spurred by rising sales of 2G (voice) and 3G (colour video) handsets.
Longer-term, analysts like these firms’ ability to develop extremely complex handsets less expensively than their smaller competitors.

Analysts also are impressed with industry gorilla Qualcomm Inc. of San Diego, Calif.,
which makes the technology that underpins the two main variants of next-generation cellular gear. Qualcomm stands to benefit regardless of the relative ranking of the suppliers of wireless networks.

The developers of wireless infrastructure, on the other hand, are expected to have a tougher time of things. There are two main camps in the wireless wars. The largest, led by Ericsson of Sweden, relies on a technology known as GSM (short for “global system mobile”). The other, dominated by Lucent and Nortel, uses code division multiple access (CDMA) technology.

Thanks largely to Europe’s speed in adopting GSM as a standard in the 1990s, GSM networks proliferated far more quickly.
This is important because once a carrier selects a base technology, it tends to stick with it. Nearly 80% of the wireless infrastructure market last year involved GSM-based gear or its 3G upgrade, known as universal mobile telecommunications system (UMTS).

Nortel, a latecomer to the wireless game, could do no better last year than a fifth-place ranking in GSM-type markets.

It’s a disappointing showing for Nortel
because the best opportunity for climbing the rankings emerges when carriers finally shift to the next generation of technology.
Yet, the players who dominate 2G — Ericsson and Nokia — are the same ones at the top of the UMTS heap, albeit with a diminished share. ABG reckons the two Scandinavian giants walked away with a 40% share of the rapidly growing UMTS infrastructure market last year, vs a nearly 45% share of the 2G market. Nortel won a 9.6% share of 2G sales last year and just 6.3% of the next-generation UMTS market.

Missed opportunities

Nortel missed out late last year on a big opportunity to improve its presence in the UMTS market when it lost a contract to supply Atlanta-based Cingular Wireless — a joint venture of SBC Communications Inc.
and BellSouth Corp., and the largest U.S.
cellular provider. Cingular opted instead to go with Ericsson, Lucent and Siemens AG.
Nortel has made solid inroads at other large U.S. wireless carriers that have opted for networks based on CDMA 2000 — the 3G variant of the original CDMA technology.
Nortel and Lucent are key suppliers to Sprint and Verizon Wireless, a joint venture of New York-based Verizon Communications Inc.
and Vodafone of Britain.

@page_break@The biggest winner by far in the shift to 3G — whether it involves UMTS or CDMA 2000 standards — is California-based Qualcomm, whose technology lies at the heart of both types of networks. Although Ericsson and its allies initially resisted using CDMA patents, it turned out that CDMA is the best way to deliver voice, data and video over a single handset.

Accordingly, Ericsson and the others agreed to incorporate some of Qualcomm’s intellectual property in the UMTS standard.
The upshot today is that Qualcomm receives a fat royalty from UMTS carriers and an even fatter one from CDMA 2000 operators. It’s the main reason a majority of analysts still rate the company as a “buy.”.

Motorola is also rated highly by analysts.
Lawrence Harris, an analyst with New York-based Oppenheimer & Co., notes in a report that Motorola “has some of the most exciting wireless handsets in the industry” which are due out in the second half of 2005, including variants of its hugely popular RAZR handset and the 3G V1150 model.
Harris has a US$23 a share price target on the stock (vs the US$16.21 price on May 16, the date of his report).

Nokia also continues to figure on most buy lists, thanks to a healthy handset business.
Gregory Teets, an analyst with A.G. Edwards & Sons Inc. of St. Louis, estimates that sales of wireless handsets across the industry jumped 21% in the first quarter vs the same period a year earlier. Teets adds that larger players — such as Nokia, the industry leader — are benefiting disproportionately because smaller competitors are finding it difficult to keep up.
The new generation handsets are far more complex, requiring greater R&D and sophisticated supply chains.

Although Qualcomm has so far stayed out of the manufacturing end of the business, its hold over the core technology drives its competitors to distraction. In fact, many have already begun work on “beyond 3G” or “4G” technologies that could one day break Qualcomm’s stranglehold on the industry.
Nortel, for instance, is developing MIMO technologies that use multiple antennae to boost transmission capacity. Used with an air interface called OFDM, the new approach is being developed as a follow-on to 3G UMTS networks.

Another “beyond 3G” technology receiving wide attention is something called WiMax, which is based on the well-known WiFi (wireless fidelity) standard but offers a much longer range (40 plus kilometres) and greater speed (75 megabits per second, or plenty of speed for video). Nortel revealed last month it would co-develop WiMax gear with Korea-based LG Electronics Inc. IE