Nortel, Huawei to Form New Company

Nortel Networks in a press release today announced a “joint venture” with China-based manufacturer Huawei Technologies Co. Ltd, but the deal is much more than a partnership.

In meetings with analysts, Nortel said the companies have signed a memorandum of understanding to form a new company, whose name and launch date they would not reveal.

Executives did say the company will be headquartered in Ottawa, Canada, and that Nortel owns the majority stake – the percentage it would not divulge – but they also would not discuss whether the current Nortel will be folded into the new company or whether it will remain as a standalone corporation, said Jeff Heynen, directing analyst of broadband and IPTV for Infonetics Research.

The agreement makes way for Nortel to sell immediately Huawei’s products; jointly developed equipment will be available in the third quarter.

The deal is a “brilliant move” for Huawei, Heynen said, because it gives the company instant access to North America, which thus far has proven an impenetrable market. Huawei secured a lot of business in China, then branched out into Europe and South America – but North America has been difficult for Huawei to enter because of the predominance of vendors such as Alcatel, Lucent and Nortel, Heynen said.

The usual suspects of language and cultural barriers also played a part in Huawei’s inability to break through to North American companies, Heynen explained. Plus, he said, only in the past six or eight months did Huawei establish an analyst organization, which contributes to a company’s credibility and viability.

The formation of a Nortel-Huawei company means more choice for carriers, especially when it comes to per-port pricing and the overall cost of equipment, Heynen noted.

“Huawei is infamous for pricing their equipment competitively, and there’s no question they’ll bring that to the North American market,” he said.

For Nortel, the deal restores a footprint it lost when it sold its broadband access equipment division, Heynen said. The company now will be able to compete for the RBOCs’ FTTx projects as well as VDSL deployments that are coming down the pike.

“This deal, while an admission of defeat for Nortel, in the sense that it has not been able to compete effectively in the broadband access arena, also proves that the RBOCs are going to be spending quite a bit of money in upgrading their broadband facilities,” Heynen said. “Deals like this, that are specific to a product area, really prove that to be true.”

Nortel, in a press release, said the two companies will make products that help service providers deliver voice, video, data and wireless services onto a common IP platform that supports copper, fiber and fixed-wireless networks.

"We believe the cooperation with Nortel, a leader in the telecommunications industry, will enable us to create greater value for our customers," Yafang Sun, chairwoman of Huawei, said in a statement. "The joint venture will combine Huawei and Nortel's advanced technologies and products, to create leading broadband access solutions to meet customers' needs. It will bring better value to our existing and potential customers."

Nortel has been working to improve its profitability and image, particularly after surviving an accounting scandal in 2004 that led to management and company shakeups.

"Nortel is focused on seizing opportunities that will generate new revenue and expand operating margin,” said Mike Zafirovski, Nortel’s new president and CEO. “This joint venture is a bold opportunity to combine the strengths of Huawei and Nortel into a company that can aggressively target and win share in the rapidly expanding ultra broadband market. This will create a powerful new player in what is a high-growth market."

Huawei Technologies Co. Ltd www.huawei.com
Infonetics Research www.infonetics.com
Nortel Networks www.nortel.com

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