By Fraser Chalmers, head of European equities at Standard Life Investments Some of Europe's tech...
By Fraser Chalmers, head of European equities at Standard Life Investments
Some of Europe's technology companies finally seem to be delivering on their much-vaunted promises of cost cutting. Others, meanwhile, continue to make lots of noise but with very little action.
At the top end of the streamlining scale is Nokia, the world's largest mobile phone handset manufacturer. The company has consistently shown its ability to maintain a substantial cost advantage in an increasingly competitive industry.
Even in an environment in which growth in mobile handset sales has slowed, the company has managed to grow its profits by improving its margins over the past 18 months.
The bulk of the improvement has come from its continued efforts to lower its manufacturing costs, by reducing component costs and maximising its economies of scale. As a result, margins have actually increased while many of its competitors have seen their profitability slip dramatically.
One competitor that has underperformed Nokia's cost-cutting measures is Siemens, which is engaged in a variety of electrical manufacturing businesses including mobile and fixed-line telecommunications equipment.
Siemens has been trying to improve profitability for the past three years. For most of its divisions, progress has been good and margins have improved considerably, even when difficult end-market conditions have held back sales growth.
However, the pace of cost cutting has not kept up with the dramatic deterioration in the telecoms marketplace. As a result, the company made a loss in telecommunications in both 2001 and 2002.
Its strategy seems to be to hold out for a recovery in the market to lift its profits back into positive territory.
It is difficult for investors to have confidence Siemens will be able to grow its telecommunications profits, given the uncertainty of future demand. In the meantime, the mobile equipment market has continued to slow down faster than the company expected, partly because of the impact of Sars on the Chinese market.
Europe's biggest telecom operators are finally overcoming the millstone they created for themselves in their spending spree on 3G licences three years ago. This is largely thanks to a new crop of managers focused on reducing debt.
For the first time in two years, Deutsche Telekom posted a profit in the first quarter of this year and its new chief has high hopes 2003 will be the year of the turnaround.
Meanwhile, the executive of France Telecom hopes the company can restore its dividend this year, which has been suspended since 2001. Following the company's equity issue in May, its net debt dropped from â‚¬68bn to around â‚¬50bn.
Making in-roads into these debt mountains is crucial to restore investor confidence in the sector. A big uncertainty remains though: 3G investment. The jury is out as to whether companies and consumers will subscribe to the long-awaited roll-out of 3G and, in the meantime, work has already begun on its successor, 4G.
Some companies effectively cut costs.
Companies committed to reducing debt.
Profits and dividends returning.
Cost cutting losing to market deterioration.
Uncertainty in future demand.
Mobile market slowed faster than expected.
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