Mika Vehvilainen, COO, Nokia Siemens Networks

Mika Vehvilainen is under no illusions about the challenges facing infrastructure vendors in today’s telecommunications market. “This is a very tough industry to be in,” he says. “The growth outlook is not great.”

It’s a frank admission from a man who has had key responsibilities in the management of the merger that created Nokia Siemens Networks, which began operations a year ago this month. One of two major consolidations in the infrastructure space in recent years – the other being the formation of Alcatel Lucent – the NSN merger was designed to create an organisation more effectively outfitted to compete in this market. But it’s not that simple, as Vehvilainen concedes: “Competition is very heavy at the moment.”

One of the problems with mergers and the performance enhancements they are conceived to produce, is that the act of merging itself is such an enormous consumer of management capacity. “These kinds of mergers are never easy,” Vehvilainen says, “because the scale is so huge. And with something like this, you always end up having to focus a lot on internal issues.”

Nonetheless, Vehvilainen is content that NSN is progressing well. “Considering the challenges we’ve had, I think we’ve done really well,” he says. “We’ve been benchmarking this merger and the feedback that we’re getting from the consultants is that we’re on schedule or ahead of schedule compared to other mergers of a similar scale.”

The challenges he speaks of are significant. The combined workforce numbers more than 60,000, and is spread across 100 countries. The firm’s customer base spans 150 nations and it has 63 product divisions. And while aligning these various constituents, NSN set itself the target of reaping $1.5bn in savings by the end of this year, and slashing headcount by between ten and 15 per cent.

Vehvilainen says only that NSN is “tracking” the savings and headcount reductions. But he does point out that, while headcount is coming down, “some parts of the business are growing, like managed services, which means we’re adding headcount at the same time.”

So what was Vehvilainen’s first responsibility to NSN? “The first thing I had to tackle was to make sure that we had the best possible structure in place, because to begin with, you effectively have 30,000 direct reports, which is a fairly interesting situation,” he says. “So a lot of thought before the merger went into making sure we’d build the right leadership team.”

With this in place, the product portfolio and technology choices became Vehvilainen’s central focus. In a market dominated by cost control, he says: “Building that to be the most competitive is a challenge. The trick there is to make it competitive without affecting the quality of the product.”

One of the major trends in the infrastructure market in recent years has been the increasing momentum being built by Chinese vendors Huawei and ZTE. The relatively low cost structure that these players enjoy has put significant pressure on Western vendors and Vehvilainen gives a telling account of NSN’s strategic priorities: “Purely being competitive from a cost point of view is a high priority for us. Secondly, we need to make sure that we are technology leaders.”

He doesn’t want the cost advantages of the Chinese players to be overstated, however. “It’s certainly true that their home-based costs are considerably lower than we have,” he says. “But if you look at the overall cost base of a company, it’s only the R&D and the central functions that are in the home country. But as these Chinese companies expand, they start to incur costs in those markets in which they operate. We’ve got roughly the same number of people in R&D as we do in services, for example. And the services business is very local.”

It is for this reason, Vehvilainen says, that it doesn’t necessarily make sense for NSN to shift all of its manufacturing to the lowest-cost environments. “If you look at manufacturing, at the whole supply chain, it makes more sense – especially when you talk about the high value products – to have the manufacturing closer to where the demand is because the technology choices are getting more and more integrated. Plus, the added value element of manufacturing is going down over time while, simultaneously, the transportation and logistics costs are increasing. So having a manufacturing location in Europe, to serve Europe, is a better business case for us than having a centre further out, even though the manufacturing costs would be somewhat lower.”

Nonetheless, the mergers that created NSN and Alcatel Lucent were probably driven in part by the cost competitiveness of the newer players. There has been much speculation as to whether more consolidation in the vendor market will be forthcoming. So what does Vehvilainen think about this prospect?

“It’s difficult to say. But the situation with the smaller players is not something to envy. You see more announcements coming about various types of co-operation. The driver is to try and somehow create enough scale to be able to invest in the next generation technologies,” he says. “The investment required to be competitive in the next generation is likely to be huge and I think it’s very difficult for the players who are sub-scale to be competitive in that.”

The integrated technology choices that Vehvilainen references will be key to NSN going forward, he says. As big turnkey contracts diminish in number, being a total communications player is essential. “More and more of the world is covered by wireless networks,” he says. “But there are a lot of places that are only operating 2G and we have a lot of 3G opportunities remaining. Then, down the road, there are WiMAX and LTE deployments. So there are big infrastructure contracts coming up.”

There is perhaps greater opportunity on the fixed side, however. “The penetration of fixed broadband is really small,” he says, “so there is huge potential for that to go up.” The need for Nokia to have a greater strength in fixed was, he says, “one of the primary bits of logic behind the merger. Fixed and mobile are converging around core management systems. And if you look at the operator community, you see more and more fixed and mobile organisations converging; looking for synergies. So having a fixed side is important for us,” he says.

As NSN gears up for LTE and WiMAX deployments, what are Vehvilainen’s feelings about the opportunities for the two technologies? “There is room for all technologies but they do have slightly different user cases. From a technological point of view, WiMAX is much further ahead than LTE. It has its own ecosystem, while LTE is further down the road. I think we need to be realistic about LTE timelines, because it will come at a different pace. It will be like 3G, which appeared in the Japanese market a long time before it became widespread.

“LTE will first appear by about 2010, I think. But it will not be mass market. One key thing that we see is that the CDMA operators are clearly coming to the end of the road in terms of their technology and they are moving in the LTE direction. They are probably more in a hurry to get there than those operators who have the 3G evolution to rely on. So it will be the Japanese players and the CDMA players first, with the 3GSM operators following on.”

If vendors are exercised by the challenges of cost management, their carrier customers have plenty to occupy their own minds. The vendors are a natural sounding board for operators wondering how they are going to evolve their business. “I think everyone has a question mark about the future business model of the operators and the impact of the internet on the mobile industry,” Vehvilainen says.

“What role will the operators have and how will they monetise their value? That’s the big strategic issue. Technically the capacity challenge for the mobile players is not in the radio side, it’s in the backhaul.”

Vehvilainen is optimistic about the mobile carriers’ opportunities, though. “I think they have several very strong things in their favour at the moment. They have a great subscriber base and very healthy cash flow and profitability. The information they have about the end user would be an envy for any business looking to understand the subscriber base.

“So how do you leverage and take value out of that? Probably, going forward, there will be more ways of doing that than there are today. Today it’s more subscription based but I think in future you’ll see more transaction based business ideas,” he says.

In the meantime, Vehvilainen has the task of ensuring that Nokia Siemens Networks positions itself as an enabler of as many of those evolving business cases as possible.