Industry Profiles: Communications Equipment

Overview

The telecommunications equipment industry experienced a period of healthy growth in the late 1990s. However, conditions changed in the early 2000s as the economy weakened domestically and internationally and telecommunication service providers scaled back spending on communications equipment and networks. These conditions resulted in excess inventories and significant losses for many leading equipment companies. For example, Lucent Technologies, Inc. lost more than $16 billion in 2001 and was in the process of reducing its work-force by 39,000 employees. Similar cuts were evident at Nortel Networks, Limited, which announced plans to reduce its worldwide employee base from 94,500 to 48,000 workers.

In its 2002 Telecommunications Market Review and Forecast, the Telecommunications Industry Association (TIA) indicated that in the United States, spending on communications equipment dropped 2.8 percent in 2001, totaling $167 billion. Worldwide, the International Telecommunication Union estimated the value of the equipment sector of the telecommunications industry to be $310 billion in 2001. According to the U.S. Department of Commerce and the TIA, the United States imported $39.7 billion worth of telecommunications equipment from other nations in 2000, but, it was estimated, those imports would drop to $36.1 billion in 2001. On the export side, the United States sold $27.8 billion worth of equipment in 2000 and it was estimated at $25.8 billion worth in 2001.

History of the Industry

The telephone was patented in 1876 in the United States by Alexander Graham Bell. His device consisted of electrical wires that carried sounds. Initial outdoor transmissions used telegraph lines. Some early telephone equipment companies had been manufacturing telegraph equipment and branched out, while the rest were entirely new companies created to satisfy the huge new market. The spread of telephone networks largely replaced the use of telegraph systems, and telegraph equipment has since become a relatively insignificant part of the industry. By 1877, the United States already boasted of telephones in 150,000 homes. In March of 1885, AT&T was founded and went on to become the country's leading telephone manufacturer and telephone service provider.

Prior to the industry's deregulation in the 1980s, AT&T held a monopoly in the telecommunications equipment industry. As a public telecommunications operator, AT&T controlled the U.S. market with the exclusive right to sell telephones and other pieces of telecommunications equipment. Customer communications equipment was considered part of the overall telephone network system and AT&T argued that it had to make sure consumer communications products were compatible with its system or that third-party equipment did not somehow damage the network. Until 1968, AT&T prohibited the use of non-AT&T equipment in the United States. Gradual deregulation of the industry allowed consumers to purchase their own communications equipment and made the U.S. market more competitive.

The wireless segment of the industry largely grew out of technology produced for the defense industry around the middle of the century. For example, Motorola, one of the giants in the industry, began in the car radio business. The company sold Handie-Talkies to the Army in World War II and later installed radios in police cars. Many of the companies in this category have been defense contractors. This technology did not reach the consumer markets until the 1980s and then grew rapidly through the late 1990s. After introducing cellular phones in the early 1980s, AT&T predicted that by 2000, about 900,000 mobile phones would be in use in the United States. By 1993, that prediction had already been exceeded a dozen times.

The telecommunications industry experienced a period of healthy growth in the late 1990s. During that decade, demand increased for products like facsimile machines, modems, pagers, and cellular phones. In addition, U.S. manufacturers saw their exports rise during this period as countries such as Canada and Japan increased their imports from the United States.

Significant Events Affecting the Industry

The most recent developments in research and technology that reshaped the industry have been in data transmission technology rather than voice transmission technology. Much of this can be attributed to the explosion in Internet use, which began in the mid-1990s. Higher speeds and greater bandwidth are being demanded for transmitting computer data and are necessary for the transmission of video images for purposes such as video conferencing. Because of this, industry players began to build networks consisting of fiber optic cable, which allows data to be transmitted at fast speeds over great distances. To take advantage of similar high-speed connectivity on the short end, individual companies and users fueled demand for digital subscriber lines (DSL), high-speed satellite connections, Gigabit Ethernet connections, 10 Gigabit Ethernet connections, and cable modems, which surpass the limitations of traditional dialup modems.

The terrorist attacks against the United States on September 11, 2001 also had an impact on the industry. In addition to concerns about data security, large numbers of companies and individuals scaled back long distance travel. Accordingly, in November 2001, the TIA indicated that industry segments involving videoconferencing, disaster recovery, network security, backup and network systems, and data storage, would see increased demand.

On the international front, by reducing and eliminating tariffs and duties, trade accords such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT) sought to make foreign markets more accessible to the major telecommunications equipment manufacturers. As demand for basic telecommunications equipment slackens domestically, U.S. manufacturers can increase their revenues by shipping their products to emerging economies of Asia and South America. Furthermore, the World Trade Organization's Telecommunications Agreement of 1997 holds the potential for further expansion because it opens up the industry's major markets around the world to international competition. Although the agreement directly affects telecommunications service providers, manufacturers foresee indirect benefits from it in that increased competition will motivate telephone companies to purchase equipment for the new telephone networks and to upgrade their equipment more often to stay competitive.

Key Competitors

In April of 1996, AT&T spun off Lucent Technologies when it started to focus more on telecommunications services than on telecommunications equipment. Lucent went on to become a worldwide industry leader in the area of wireless, data, and optical networks. By the early 2000s, the company had operations in more than 65 countries. In addition to optoelectronics and communications semiconductors, Lucent's offerings include consulting services in the area of network design. During 2001, however, Lucent announced that it would reduce its workforce by 39,000 employees, 70 percent of which were management. That year, the company reported a $16.2 billion net loss on revenues of $21.3 billion.

Canadian-based Nortel Networks is another leader in the telecommunications equipment industry. The firm was founded in 1895 as Northern Electric and Manufacturing Company. It went on to grow from a manufacturer of emergency call boxes and telephones to a global provider of equipment for optical, enterprise, and wireless networks. Nortel reported a $27.3 billion net loss in 2001, on revenues of $17.5 billion. During 2001, the company announced it would reduce its employee base from 90,000 workers to 48,000.

The Galvin Manufacturing Company, started in 1928, marketed its first commercially successful car radio under the brand name of Motorola, which is a mix of "motor" and "victrola." The company officially changed its name to Motorola, Inc. in 1947, the same year the first Motorola television set was introduced. The Motorola set became so popular that within months of its introduction, the company was the fourth-largest seller in the nation. The company expanded its operations in the 1960s, establishing facilities in Mexico and Japan.

The cellular remote telephone system was developed by AT&T's Bell Laboratories in the early 1970s. Motorola aided in the design and testing of the phones and supplied much of the transmission-switching equipment. In 1989, the company introduced the world's smallest portable telephone. By 1997, it had become the world's second largest producer of analog cellular phones and the third largest producer of digital cellular phones. In 2001, Motorola reported a net loss of $3.9 billion on revenues of $30 billion. Like other industry leaders, the company significantly scaled back its manufacturing and employee base. Motorola announced that it would eliminate about 33 percent of its employees. It also closed a number of manufacturing facilities and five of its businesses.

Industry Projections

Because of overcapacity, growth was expected to remain slow for communications equipment companies in 2002. Demand for networks was expected to remain low in the wake of the explosive growth that occurred in the late 1990s and early 2000s. However, this was expected to change by 2003 or shortly thereafter. According to the TIA, the U.S. market for communications equipment and software was expected to decrease from $166.7 billion in 2001 to $160.1 billion in 2002. After that, conditions were expected to gradually improve. The TIA estimated that U.S. spending on equipment would increase approximately 7.5 percent in 2003, about 9.0 percent in 2004, and almost 11.0 percent in 2005, when levels would reach approximately $208 billion. Worldwide, the International Telecommunication Union forecast the equipment sector of the telecommunications industry would reach levels of $335 billion by 2002.

The U.S. market for traditional voice communication equipment, including telephones and answering machines, became saturated by the mid-1990s. Following the explosive popularity of the Internet and activities such as electronic mail (e-mail), electronic commerce, and telecommuting, strong growth prospects emerged in areas of data communications, including network upgrades. Standard & Poor's reported growth for several key areas within the industry. Consultancy RHK, Inc. estimated that the optical networking segment would grow at an annual compound rate of 15 percent through 2004. In the broadband segment, Telechoice projected strong growth as the number of DSL lines increased from 2.3 million in 2000 to 17.4 million by 2004.

Although the U.S. wireless communications market experienced growth in the late 1990s, this leveled off in 2001 when spending on wireless handsets decreased from 2000 levels. According to Dataquest, Inc., in the wireless segment of the industry, sales of mobile phones increased at a compound annual rate of 60 percent from 1996 through 2000. However, unit sales decreased for the very first time in 2001 by a factor of 3.2 percent. The TIA forecast a compound annual growth rate of 12.8 percent in the wireless market as a whole from 2001 to 2005, when levels were expected to reach $172 billion. Although U.S. consumers slowly chose wireless communications services in the 1980s and early 1990s, they became much more enthusiastic by the middle of the decade. The number of wireless phone subscribers ballooned from 28.1 million in 1995 to 118.3 million in 2001, according to the Cellular Telecommunications & Internet Association. Industry analysts expected healthy growth in this sector through 2005, especially when third generation (3G) wireless phones, which allow data to be transmitted at faster speeds, hit the market. On a worldwide basis, the number of mobile telephone subscribers had grown to approximately 1 billion by 2001, according to the International Telecommunications Union (ITU). The ITU forecast subscriber levels would reach 2 billion by 2005.

Global Presence

By 2002, the global marketplace was opening up for communications equipment providers. The industry's leading firms all had international operations. According to the ITU, based on a 2000 world population of approximately 6 billion, there were 16.2 main lines for every 100 households and 12.14 mobile phones for every 100 people. Most countries had privately-owned telephone companies as opposed to state-owned firms. Competition also was increasing. For example, in markets where traditional "wire line" service was provided by monopolies, private mobile phone providers offered alternative services. In some countries, including Finland, many inhabitants only used wireless phone services. In terms of exports, the top communications equipment markets for U.S. firms in 2001 were Canada, Mexico, Japan, and the United Kingdom. On the import side, the United States purchased the most from Mexico in 2001, followed by Canada, Korea, and China. Data from the U.S. Department of Commerce and the ITA indicated that total 2001 exports amounted to an estimated $25.8 billion, and imports an estimated $36.1 billion.

Employment in the Industry

According to the U.S. Bureau of Labor Statistics (BLS), the industry employed 276,200 workers in 2000, who earned an average hourly wage of $22.16. By 2010, the BLS projected a modest growth of five percent, bringing the industry total to 290,000 workers. Manufacturers continually look for ways to reduce costs and improve productivity through development and implementation of labor-saving technologies plus mergers and acquisitions, all of which allow them to reduce their workforce. Consequently, the number of employees in the industry fell slowly but steadily between 1989 and 1996. In 2001, weak economic conditions and reduced demand from telecommunication service providers resulted in large financial losses and dramatic workforce reductions within the industry.

Sources for Further Study

2002 telecommunications market review and forecast. washington, dc: telecommunications industry association, 2002. available at http://www.tiaonline.org.

annual survey of manufacturers. washington, dc: u.s. bureau of the census, gpo, 1996.

benjamin, matthew. "dialing for dollars." u.s. news & world report, 14 january 2002.

"communications equipment." standard & poor's industry surveys. new york: the mcgraw-hill companies, december 2001.

communications outlook 1997. paris, france: organization for economic cooperation and development, 1997.

"country data by region." international telecommunications union, geneva, 2002. available at http://www.itu.int.

hill, g. christian. "the spoils of war: the battle for the wireless market promises to be a bonanza for consumers." the wall street journal, 11 september 1997.

"market survey 3: telephones." retail business: market surveys, august 1995.

occupational employment statistics. bureau of labor statistics, u.s. department of labor, 23 march 2002. available at http://www.bls.gov/oes/2000/oesi3_366.htm.

semi-annual wireless industry survey. washington: cellular telecommunications & internet association, 2001. available at http://www.wow-com.com.

telecommunications equipment: changing markets and trade structures. paris, france: organization for economic cooperation and development, 1997.

"the long morning after." business week, 14 january 2002.

u.s. industry and trade outlook 2000. washington, dc: u.s. department of commerce and mcgraw-hill, 2000.

world telecommunication development report 2002. geneva: international telecommunications union, 2002. available at http://www.itu.int.

world telecommunications: equipment and services. cleveland, oh: the freedonia group inc., 1993.

"worldwide mobile phone sales post decline in 2001, study finds." ctia daily news, 11 march 2002. available at http://www.wow-com.com.