Top Stories from the Business pages of the International Herald Tribune,
Thursday, August 10, 2000

Seeking Respect, Alcatel Aims to Conquer U.S.


By Brad Spurgeon International Herald Tribune
PARIS - Alcatel SA has crept into a leading position in some of the hottest sectors of the global telecommunications industry, but it hasn't got one thing it really wants: respect.

It is still widely viewed by peers and observers as an old-fashioned European conglomerate -- accused variously of bargain-shopping for acquisitions, of top-heavy management and of outdated technology.

While Alcatel is active in 130 countries, only 18 percent of its sales are in the United States. Now, it has set its sights on perhaps its biggest challenge yet, conquering America.

To many investors, Alcatel is a positive example of an old-world industrial giant that has moved with the new-economy times, a case study in the same mold as Nokia Oyj, Vivendi SA and Olivetti SpA.

With net income of dollars 650 million last year -- and 85 percent of its sales in telecommunications -- Alcatel has come back strongly since the bad old days of 1995, when it posted the largest one-year corporate deficit in French history, a dollars 5 billion loss on massive restructuring costs.

Last month, for instance, it said its second-quarter profit rose 43 percent to dollars 312 million -- more convincing evidence for investors who have already elevated its stock this year by nearly 80 percent. But it still has a legacy to overcome.

''They're just always a little bit of an outsider compared to, say, Nortel and Lucent,'' said Claude Romans, an analyst at RHK Inc., a California telecommunications research firm. Alcatel is still viewed ''as a stodgy, big old company.''

Inside the ultramodern, recently renovated Paris headquarters of the 120,000-employee company, the architect of Alcatel's renewal has few doubts that the company will soon be properly regarded as a new-economy titan.

''If you want to call it a dinosaur, go ahead,'' said Serge Tchuruk, the Frenchman who became Alcatel's chairman and chief executive in 1995 after turning around the oil company Total.

But, he added, Alcatel is a dinosaur that has improved its U.S. sales from dollars 500 million to dollars 5 billion in five years and a dinosaur that now has the No. 1 position in a popular form of broadband Internet access worldwide.

By many accounts, Alcatel leads competitors Cisco Systems Inc. of San Jose, California, and Orckit Communications Ltd., based in Tel Aviv, in the broadband field of ADSL, or asymmetric digital subscriber lines. The technology provides data speeds of as much as 8 megabits a second over copper telephone lines and, along with cable modem broadband access, is among the fastest ways of accessing the Internet today.

Last year, the ADSL market finally boomed, and Alcatel sold 1.5 million lines to telecommunications operators, up from fewer than 100,000 in 1998, with more than 6 million line sales projected for this year. By some measures, it has as much as a 56 percent world market share, with most of the sales coming in the United States, which adopted the technology sooner than Europe.

The worldwide market for ADSL modem devices, according to Cahners In-Stat Group, will grow from dollars 272 million in 1998 to a projected dollars 8.8 billion by 2002.

Alcatel is also world leader in long-distance undersea DWDM (dense wavelength division multiplexing) optical cable, with 37 percent of the market and dollars 1.1 billion in sales. These new-generation fiber-optic cables -- laid across the Atlantic and Pacific oceans, for example -- provide capacity of as much as 5 terabits a second.

Despite its success, Christian Reinaudo, president of Alcatel's optics group, said Alcatel's image in this sector continued to languish because industry and public opinion was shaped by better-known companies such as Nortel Networks Corp. and Lucent Technologies Inc., which sell mostly overland cables.

''Because they do not have the market share in undersea systems,'' he said of his competitors, ''they don't talk about it, and the impression left is that it does not exist.''

To change opinions in America, Mr. Reinaudo said Alcatel must become a supplier to at least one of the major telecommunications operators, such as WorldCom Inc., AT&T Corp. or Sprint Corp.

''We think that before the end of the year 2000 we will have a position with one of these,'' he said.

Alcatel's dinosaur image has deep roots. Founded in 1898 as the publicly owned Compagnie Generale d'Electricite, the company became a telecommunications specialist when it combined with the bulk of ITT Corp.'s business in 1986. In 1989, it joined up with the British company GEC to form GEC Alsthom, which gave rise to its energy and railroads businesses it made the French high-speed trains, for example.

It had by then become France's largest conglomerate, but it was suffering from the effects of deregulation it could no longer charge high prices to state-run monopolies and corporate sprawl that left it without clear direction.

When Mr. Tchuruk took over, the telecommunications sector represented about 40 percent of the group. He took a gamble and started pouring money into that sector and shedding other assets.

''Then one or two years later there was the Internet explosion,'' Mr. Tchuruk said, ''and that was really undoubtedly a bit of luck.''

To compete in the United States, Alcatel is filling some holes in its technology portfolio through acquisitions.

Its biggest purchase, completed in May, was Newbridge Networks Corp. of Ontario, a market leader in ATM-based phone equipment, which Alcatel bought for dollars 7.1 billion

The purchase was a bet on the ATM, or asynchronous transfer mode, technology when many in the industry were predicting a broad move to a competing technology, IP, or Internet protocol.

Luck, however, was again on Alcatel's side. A recent Federal Communications Commission ruling encouraged U.S. phone companies to modernize their access networks, and so far several of them have selected ATM over IP.

''We believe that every one of the regional Bells is going to do a 100 percent ATM modernization,'' said Tom Nolle, a telecommunications analyst at CIMI Corp. in Virginia. ''Alcatel is the drop-dead winner in this. This initiative alone could make Alcatel a bigger player in the U.S. telecommunications market than Cisco.''

Nonetheless, the Newbridge move came under an avalanche of criticism; Newbridge had failed to meet profit predictions for several quarters and had not introduced a new product for years, analysts said.

''Newbridge is an also-ran company with a has-been technology -- why in the world would anybody want it?'' asked Bernard Daines, the former owner of Packet Engines Inc., an Ethernet routing company in Spokane, Washington, that Alcatel bought in 1998.

David Allen, who worked at Alcatel in the early 1990s and is now vice president of marketing at Nortel, said Alcatel simply did not know how to handle acquisitions.

Mr. Daines blames what he considers to be the failure of the acquisition of his company -- the Packet Engines product, while part of Alcatel's catalog, is no longer being developed -- on Alcatel's management style.

''They have an absolutely ridiculous matrix management organization,'' he said. ''Somebody either reports to five people or nobody, and they can't get anything done. It's one of their major problems and they don't seem able or interested in fixing it.''

Pearse Flynn, former president of Newbridge and now president of the division that Newbridge has become, said that some fallout from a takeover is impossible to avoid. ''How do you stop an 800-pound gorilla from picking up a newborn baby and killing it with kindness?'' he said.

Jacques Dunogue, Alcatel's secretary general, insisted that Alcatel is using ''all the management organization tricks we can.''

To succeed in broadband access, for instance, Alcatel overcame its elephantine proportions to beat nimble start-ups by using a ''virtual company'' system.

Martin De Prycker, who headed the operation out of Antwerp, Belgium, in the mid-1990s, said the concept, still used throughout the company, was to pull a few dozen people out of the conglomerate to develop a single product. The group had priority access to whatever it needed from the larger company without the usual bureaucracy getting in the way.

Alcatel also has taken heat from its stockholders and its employees. A warning in September 1998 that its profit would not meet forecasts stunned investors and sent its stock down 38 percent in one day. Mr. Tchuruk followed that up by instituting American-style quarterly results, which gave shareholders greater financial transparency.

But some employees today feel there is not enough transparency within the company.

''Every engineer wants to see his technology work well, and to create it with finesse,'' said Jean-Baptiste Triquet, a representative of the CFDT, a labor union, at Alcatel.

''But now, we have the impression that this precision technology side is not taken into account. What counts is, 'Does it make money, or does it not make money?' Some of us think the directors couldn't really care less what we're building, and we would be making peanut tins if it brought in as much money as telephones.''

Telephones are, in fact, making money for the company. Handset sales drove revenue in its enterprise and consumer division in the second quarter, and Mr. Tchuruk said the company would exceed its full-year forecast of sales of 20 million mobile phones.

Dataquest Inc. said in May that Alcatel was No. 3 in cell-phone sales in Europe, behind Nokia and Ericsson, but it is generally a low-margin business, and it does not sell phones in America.

The company believes it will get the U.S. sales -- and respect -- it feel it is due partly through continued acquisitions and partly by getting its message out.

''We are not trying to plant the French flag on the U.S.,'' Mr. Dunogue said, but rather creating local offices in acquired companies. Alcatel Carrier Networking, which includes Newbridge, is run out of Ottawa.

Like Mr. Tchuruk's choice to focus on telecommunications just before the Internet boom, Alcatel looks like a serendipitous winner in the United States with ATM modernization, according to Mr. Nolle, the analyst.

But he added, ''Alcatel has gone as far as serendipity will take them. Now can they exploit this further?''






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