Au Revoir Alcatel-Lucent

January 13, 2015 by Dave Michels

I expect 2015 will be a tremendous year for Alcatel-Lucent Enterprise (ALUE). 2014 was a year of adjustment and caution, but expect all cylinders to fire under new ownership.

ALUE and Alcatel-Lucent are no longer parent and division. ALUE became a part of China Huaxin last October when Huaxin paid $254 million for majority ownership (Alcatel-Lucent retained 15%). Huaxin? That’s what I said.

The ALUE division was profitable (we think) and produces unified communications and (wired and wireless) networking gear for enterprises. The sale included 2,700 employees and the unit remains headquartered in France.

It is no secret that UC is in flux, so staying competitive means lots of innovation and development. ALUE was a powerhouse of innovation, but has not kept up – at least on the UC side. The management team thinks those days are over and regularly refers to Huaxin as some sort of unlimited wallet.

Every company wants owners with deep pockets and a willingness to invest – though it is not easy to find. Chinese firms are getting very competitive. There is a common mis-perception that Chinese firms can’t innovate. That reputation is perpetuated by lots of cheap knock-offs. And yes, there are plenty of those from China. But that’s just the low hanging fruit. There’s a lot more to the story.

One problem with that lack-o-innovation myth is that China has been acquiring western companies – complete with their employees and intellectual property. ALUE, Volvo, and Lenovo are examples of Western know-how that, despite Horace Greeley, headed East. In addition to access to funding, the new Chinese ownership may also open up a huge new market – in fact the biggest market.

Xiaomi, for example, is relatively unknown in the US. It produces smartphones for the Chinese market, and is now the world’s most valuable start-up. The company recently closed $1.1-billion in new funding which gave it a valuation of $45 billion last month. The company will likely become the world’s largest manufacturer of smartphones in 2015. There will be lots of companies that you have never hard of that will be the largest in their sector, in China.

There’s an even bigger opportunity for Chinese technology companies because China intends to replace most foreign technology in its banks, military, government agencies, and state-owned enterprises by 2020. It’s not something we can really cry foul over since we effectively kicked Huawei out of similar opportunities in the US. Bloomberg reports this is bad news for companies like Microsoft, Cisco, IBM, and Intel. And, presumably very good news for Huaxin/ALUE (and Huawei). By the way, Huawei is doing fine in North America – in Canada. The company has done well with 3G and 4G equipment to Canadian cellular companies and is now doubling down on smartphones for Canadian consumers.

With the acquisition behind it, ALUE is now looking ahead with big plans to grow the business. Here’s some of my notes from a recent briefing.

• Geographic: The company intends to focus on targeted geographies, probably four in total that include China and Russia.
• Verticals: The company intends to focus on targeted (likely five) vertical industries including hospitality. ALUE has had strong success in high-end hospitality.
• Product road map puts heavy emphasis on cloud delivery, but intends to position its services as supplementary rather than replacement.
• ALUE is now supposedly outcome focused. I like the spirit and concept, but remain unsure about execution. ALUE is developing various new methods and models that align its technologies and fee structures with the desired outcomes of their customers.
• The company intends to leverage its Open-Touch products as a path to hybrid solutions. Open-Touch received numerous user experience updates in 2013-2014. ALUE intends to continue simplifying Open-Touch for users, administrators, and dealers.
• Company has big plans for networking and plans to continue its success in core, data center, and fabric networking solutions. SDN poses an interesting opportunity for ALUE which is committed to OpenFlow and Openstack.

The company presented itself as young, vibrant, and renewed though most of the management is the same. That may not be a contradiction. Presumably a new company name will be announced in 2015.

I believe there is a lot of pent-up innovation (and demand for it) at ALUE. Though it isn’t all rosy. ALUE may have difficulty maintaining its dominance in France. Mitel is on its heels and sees the Chinese acquisition of ALUE as an opportunity. Everyone else sees both ALUE and Aastra (#1 and #2 in UC in France) acquisitions as opportunities.

On a final note, in 2012 ALUE won a major bid for the system-wide California State University network. It was a major win for ALUE and an embarrassing loss for Cisco which bid $100 million higher. I met the decision maker at an Alcatel event in 2013, and he explained his objective, needs-based process. This $22 million dollar award beat out Cisco, Juniper, HP, and Brocade; and covered 22 of the 23 campuses.

The missing campus, San Jose State, opted out of the system-wide upgrade and decided to do their own $28 million (one campus) overhaul with Cisco – without going to bid. The project has not gone well. The San Jose Mercury News has been covering it lately with implications of fraud, abuse, and incompetence. The California State University network – both the win and the loss of San Jose State are proving to be a valuable case study for ALUE.

Based largely on how ALUE management presented the state of the company, it seems they are in for a big year – I wish them well. I’m uncertain how much their progress and growth will be visible here. The US has not been a big market for ALUE in the past, and even if the US does realize a net growth it will very likely shrink in proportional importance due to China.