On Vendor Profile: Nec

ON Vendor Profile: NEC

28 January 2008

Matt Walker

www.ovum.com

Table of Contents................................................................................................................1 ON Vendor Profile: NEC.....................................................................................................2 Analysis of competitive position........................................................................................2 NEC’s ON ratings .............................................................................................................6 Regional market share by product segment.....................................................................9 Product competitiveness by product segment................................................................10 Strengths and weaknesses.............................................................................................12 Opportunities and threats ...............................................................................................15 Company information......................................................................................................16 Marketing strategy..........................................................................................................21 Product portfolio and specifications overview.................................................................22

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ON Vendor Profile: NEC NEC has solid technology, R&D, corporate backing, and Tier-1 experience but has missed the next-gen boat so far; new OED and ROADM offerings key to success Table 1 Ovum RHK’s overall rating of NEC Rating

Comments

Ovum RHK’s overall outlook

Cautious

Its UN5000 OED and DW4200 metro ROADM are promising, but for now NEC remains too reliant on its home base and legacy products

Market presence

Average

Large presence in Japan and SLTE, some presence in the US, but limited operations in CALA and EMEA

Product strategy

Fair

Late to market with ROADM and lacks a bandwidth management offering; UN5000 success is crucial

Competitiveness

Average

Builds solid products backed up by excellent service for those segments in which it competes actively

9

Eleventh straight quarter in this position; third-place rank in Asia-Pacific is supporting this continuity

Market ranking (as of 3Q07)

NEC is dominant in Japan and has solid Tier-1 carrier relationships in a number of other developed markets. It also has a strong OED offering, a growing metro WDM portfolio, good RPR support, undersea capabilities, some solutions strength, and the core R&D/corporate support needed to expand and sustain itself through down markets. However, it is not active in bandwidth management, it gets well over half of its sales from legacy products, and it is similarly reliant on a single country market, Japan. Its SpectralWave U-Node (OED), SpectralWave DW4200 (ROADM), and SpectralWave 160 (LH DWDM) platforms improve its competitive position, but now it is time to deliver. NEC also needs to build its customer list, prove it can operate profitably in emerging markets, and flesh out its portfolio through partnerships or internal development.

Analysis of competitive position Key changes affecting NEC since the last update NEC’s SW 160 sales to AT&T grew substantially for the first nine months of 2007 as the carrier continues to expand its legacy LH network with new regional builds to support video backhaul and distribution. It saw Asia-Pacific revenues in 3Q07 rebound

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to $89 million from a disappointing $55 million in 2Q07, but the slow Japan market hurts its position overall. Beyond LH DWDM sales at AT&T, ROADM (DW4200) sales in Japan represent another bright spot. The U-Node 5000 OED is proving to have a long sales cycle, but it should contribute more to revenues in future quarters. NEC’s optical business remains precariously dependent on the gasping Japanese market, too few customers, and too little next-generation revenue. Its 3Q07 sales reflect this dilemma: they were down 3% versus 3Q06, while the global market grew 21% in the same time-frame. Rolling 4Q sales through 3Q07, however, actually slightly outpaced the broader market due to the North American pickup from sales to AT&T. There were no significant optical-related customer or product announcements in 3Q07, but the company did announce wins for base station optimization services for Bouygues Telecom’s HSDPA network, and deployment of an HSDPA network for Hutchison Telecom Macau. The company also announced a deal with General Communications that includes submarine cable, amplifiers, and line terminal equipment. In other news, NEC was delisted from NASDAQ in October 2007 due to its failure to file Form 20-F for the fiscal year ended March 2006 with the US SEC. NEC announced its fiscal 2Q08 results on November 14, 2007: corporate-wide, quarterly revenues (for the period ending September 30, 2007) were 1,132.8 billion yen ($9.6 billion), on which it suffered a net loss of 5.7 billion yen ($48 million). Fullyear 2007 revenues were 4,653 billion yen ($39.78 billion), on which the company had net earnings of 9.1 billion yen ($78 million).

Overall competitive position NEC has maintained a ninth-place global ranking since 1Q05, on an annualized results basis; its rolling share has ranged from 4 to 5% during this same span. This respectable showing, however, masks the fact that almost 45% of the company’s sales come from Japan, and less than 40% of its sales are for next-generation equipment, compared to over 80% on average for all vendors. The former factor leads to lumpy revenue distribution, while the latter risks the company being left behind the market. NEC has solid R&D resources, vast experience serving Tier-1 carriers, an undersea optical portfolio, and strengths in wireless infrastructure and broadband that enhance its ON competitiveness. However, it is not currently using these assets to position itself well geographically or product-wise in ON. On the plus side, NEC has a strong new 40G- and RPR-based OED product (the UNode 5000), a good understanding of the ON needs of wireless operators, a very highcapacity LH DWDM product with a significant embedded base in North America with AT&T, and undersea capabilities that could benefit from new SLTE spending.

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Strategy definition and execution NEC aims to help carriers build next-generation networks by leveraging prowess in innovation and integrating IT and network technology and fixed and mobile networks. The NGN, in its view, is aimed at realizing a “ubiquitous networking society,” so its Mobile/Personal Solutions division plays a key role. While geographically it remains heavily reliant on Japan, NEC’s strong base in this market has helped it develop globally competitive, if not leading-edge, positions in OED/LH DWDM, WCDMA mobile infrastructure/handsets, and broadband access. Within the global ON market, however, NEC’s driving strategy is not clear. Over the past few years its presence in overseas markets has dwindled and sales success has been sporadic, even though it remains a powerhouse in Japan. It tends to have large contracts with a small number of big customers that require multi-year efforts to penetrate. This can result in lumpy and unpredictable sales over time, and it also ties product development to specific customers rather than broader market requirements. The global performance of NEC’s new UN5000 and SW 160 platforms, both of which are competitive on product specs, should be watched carefully.

Financial health For four of the last five six-month periods, NEC has not been profitable under the Japanese accounting standards that it now follows (Japan GAAP). Its fortunes modestly reversed for the fiscal year ending March 2007 when it reported a $78 million net profit on $39.78 billion in sales. However, it again reported losses for the six months ended September 30, 2007: its total sales volume fell 3.6% (in yen), and cash and cash equivalents dropped, 8% to 403.8 billion yen ($3.4 billion).

Product line management NEC has developed a series of OEDs ranging in size from a wall-mountable STM-1 unit (compact C-Node) to one that scales to STM-256 (UN5000). It also has a low-cost CWDM unit, a small but scalable metro WDM box, a larger ROADM/metro WDM platform, and LH DWDM platforms scalable to 3.2Tbps. It lacks bandwidth management products, though, and has no MR DWDM offering. It has also been behind the curve in OED product development, as Fujitsu has taken the lead overseas in this segment. However, with the U-Node NEC is starting to develop its own story. A key element is RPR, which NEC believes has a good future. The U-Node’s three elements — the UN5000, the Broadband Manager (BBM), and the Wideband Manager (WBM) — all support multi-ring RPR in the overseas versions. In Japan, KDDI has already deployed Corrigent’s RPR box, and Ovum RHK believes that NEC would like to get into this market. NTT is also interested in deploying RPR and is planning to issue an RFP, likely at the start of the next fiscal year (April 2008).

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NTT East deployed DPT from Cisco a few years ago, but the new RFP will address 10GigE-based RPR. Previously NTT thought RPR did not fit its network but now it believes it does. NEC believes RPR helps to handle multiservice traffic — including mobile, ATM, leased lines, Ethernet, and LAN service — integrated across a common ring. NEC’s unique feature is inter-ring, or multi-ring, RPR support, something that ZTE also offers. Regarding network management, NEC views this as mandatory from customers. For transport systems, the operators prefer a proprietary, dedicated system, unlike SNMP use in routers.

Globalization NEC has R&D facilities in Japan, China, Europe and the United States, but ON product development is done centrally in Japan with input from regional offices, in particular from NEC America. Historically, NEC’S product development was bifurcated along Japan/overseas lines, but this has gradually changed. The prevalence of dispersion shifted fiber and specialized SDH interfaces in Japan still requires some design differences, and Japan’s top few carriers are large enough to request product tweaks. But NEC’s newest product, the UN5000, is really a global release, and NEC will likely follow this path in the future. Geographically, NEC’s business outside Japan has languished for some time, so it could use a boost.

Solutions selling Solutions selling occurs on several levels. NEC’s ON division partners with the submarine division on occasion to capture gateway/backhaul opportunities; there remains a single window (i.e. customer interface) in such projects. Collaboration with wireless infrastructure also helps win some backhaul business. For overseas markets, NEC’s Global Networks Solutions division includes wireless and wired personnel and has sales account teams in many countries. Individual sales account managers typically facilitate the cooperation by consulting with the GNS group to leverage assets/solutions for common purposes. Currently NEC has no active relationships with system integration partners in the ON segment.

Competitive threats In NEC’s core Japan market, Fujitsu is NEC’s biggest rival. Both companies have strong historic ties with all members of the NTT Group as well as KDDI and Japan Telecom (now Softbank Telecom), and many of their products are custom designed for the Japanese market (both to fit local application/scale requirements and be compatible with the Japanese SDH standard). Outside of Japan, NEC’s strongest business has

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been in LH DWDM, mainly in North America at AT&T but also with some smaller accounts in EMEA. Nortel was the strongest threat in the legacy LH segment in both of these markets, but more generally the entire MR DWDM segment has become a threat to NEC’s LH DWDM business. In that regard, in North America key rivals include Alcatel-Lucent, Ciena, Nokia Siemens Networks (NSN), Infinera, and Nortel, and in EMEA the big threats are Alcatel-Lucent, NSN, Ericsson, and Huawei. More recently, NEC appears to be making a push into the North American metro WDM market with limited success; leaders there are Nortel, Cisco, Fujitsu, and ADVA.

External factors The market direction is toward growth for metro WDM. This segment, combined with L2 switching solutions, is beginning to cannibalize some of the OED market, which has reached maturity and has been a notable NEC strength. NEC has done less well than its Japanese counterpart Fujitsu at breaking into the metro WDM market, particularly for ROADM applications. However, NEC had a strong 3Q07 with its DW4200 ROADM product, which may help it reverse its earlier struggles in the metro WDM segment.

NEC’s ON ratings Tough competition in Asia-Pac region has taken its toll Figure 1 lists Ovum RHK’s ratings of NEC in each region by market metric.

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Figure 1 NEC’s ON ratings EMEA Average

Good

CALA Average

Good

Product strategy (fit to market requirements)

Fair

Average

Average

Good

Solutions breadth (leverage ON gets from wider offerings)

Average

Fair

Average

Good

Solutions focus (targeting specific customers/applications)

Fair

Poor

Fair

Good

Portfolio breadth (number of ON segments addressed)

Good

Good

Good

Good

Portfolio competitiveness (strengths of products' features/functions)

Average

Average

Good

Good

Market share (annualized sales vs. competitors)

Poor

Fair

Average

Good

Revenue distribution (sales across segments)

Fair

Fair

Fair

Good

Market presence (local market resources)

NA

AP

Source: Ovum RHK Rating scale: Excellent, Good, Average, Fair, Good. Red type/down arrow indicates downgrade from January 2007 profile.

In the following list, we provide supporting information for the ratings assigned above: •

Market presence: NEC’s presence is immense in Japan, through operations, sales, support, and marketing. In North America, it has a presence only at AT&T and a few small CLECs and some OED products at Qwest; it was much stronger 10–15 years ago when it held a very strong position in the NA asynchronous market which it lost to rival Fujitsu when the company did not develop a SONET-based transport product. NEC is well known in pockets of Europe and even CALA. Its recent success in the WCDMA segment has supported its overseas image. Its presence remains spotty, though, relative to suppliers with more diversified geographic reach and longer customer lists.

•

Product strategy: NEC has a strong portfolio of small, medium, and large aggregation products for the Japan, ANSI, and ETSI markets; a scalable, tested LH

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platform; and C/DWDM and ROADM offerings for the metro market. Its products are well-targeted for large wireless and incumbent carriers in developed markets. Its strategy is weaker when it comes to smaller carriers, MSOs, emerging markets, and the enterprise segment. Further, its lack of a bandwidth management strategy and absence from the MR DWDM segment make its NGN vision lack clarity. These two gaps, plus the fact that Japan’s share of Asia-Pacific ON spending is declining, may diminish NEC’s strength in its core AP market. •

Solutions breadth: NEC has a moderate range of solutions, including wireless infrastructure, transport, DSL, submarine, microwave, and some L2/3 switching, offered directly and through joint ventures. However, its optical line has gaps, and it is weak in multiservice switching, carrier Ethernet, and CDMA2000.

•

Solutions focus: Compared to some of its competition, NEC struggles to clearly define its solutions focus in terms of how its platforms all fit together; also, collaboration across business units/product lines is weaker than it could be. Only in Japan does it effectively present a united front to carriers and creatively pull its assets together to win business.

•

Portfolio breadth: NEC’s undersea portfolio and ability to support SDH, SONET, and Japanese SDH standards help to offset gaps in bandwidth management and MR DWDM.

•

Portfolio competitiveness: NEC’s products are very competitive in the regions and segments where it competes, and its technical capabilities in the OED and WDM transport segments are strong. For example, NEC employed 40G technologies in its systems (WDM first and then OEDs) based on internal R&D. Specifically, NEC has adopted EDC/PMD to expand the reachable distance up to 600km over SMF; this is done using DPSK because of its signal-to-noise ratio. In addition, NEC developed its own 10G RPR chip and implemented it in its OEDs. And at Interop Tokyo 2006, NEC demonstrated its DW4200 and connected with Cisco and Juniper over GMPLS. NEC attributes its OED success to early support of GFP, high capacity with a small footprint, and universal slots. Its entire OED product line supports data transport capabilities that its customers are using to provide nextgeneration services. Its gaps, though, prevent it from being seen as a strategic supplier to more of its customers.

•

Market share: On a rolling 4Q basis, NEC ranked second in Asia-Pacific ON sales from 1Q02 through 3Q06 but has been in third (behind Huawei and Alcatel-Lucent) for the past four quarters. Its share in other regions is in the single digits.

•

Revenue distribution: NEC is strong in all segments where it competes in AP, but elsewhere its sales are heavy in the legacy segments but light in next-gen.

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Regional market share by product segment DW4200 ROADM making inroads in Asia-Pacific Figure 2 lists Ovum RHK’s ratings of NEC in each region or market segment by product segment. Figure 2 NEC’s regional market share by product segment EMEA

NA

CALA

AP

ADM

Average

Poor

Good

Good

OED

Poor

Poor

Good

Good

DCS

N/A

N/A

N/A

N/A

OCS

N/A

N/A

N/A

N/A

Metro WDM

Poor

Poor

N/A

Average

Long-haul DWDM

Good

Excellent

Average

Excellent

Multi-reach DWDM

N/A

N/A

N/A

N/A

SLTE

Good

Good

Good

Good

Source: Ovum RHK Rating scale: Excellent, Good, Average, Fair, Poor. Green type/up arrow indicates upgrade from January 2007 profile.

In the following list, we provide supporting information for the ratings assigned above: •

ADM: NEC has led Asia-Pacific in this segment for the past several quarters with continuing sales in Japan; in CALA, only ZTE and NEC are still booking significant sales. NEC collects small but steady maintenance revenues in North America; it retains a similar position in EMEA, but its share has increased there as the market overall has shifted quickly away from ADMs.

•

OED: NEC is only a niche supplier in EMEA and North America; it maintains top five ranking in CALA; it is dominant in the Japan market but has little business elsewhere in Asia-Pacific. Sales from the UN5000 product may rise as NTT proceeds with its next-gen network plans.

•

DCS: Not applicable. Although NEC claims that its U-Node 5000 can be used as a DCS, we classify this product as an OED.

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OCS: Not applicable.

•

Metro WDM: NEC has no metro WDM sales in EMEA and CALA; it logs $1–2 million per quarter in North America. It missed the first wave of ROADM build-outs in 2004–05, but its DW4200 has already yielded some significant deployments at NTT and a consequent share increase in Asia-Pacific.

•

LH DWDM: NEC’s EMEA sales of LH DWDM equipment have increased recently as that market has dipped, putting it among the top three; NEC and Nortel are the only two real players in the North American market. The company’s annualized LH DWDM revenues in North America nearly doubled from 3Q06 to 3Q07 owing to AT&T’s efforts to increase capacity to support integration efforts stemming from its mergers. NEC ranks fourth in CALA; it has led the Asia-Pacific market for ten straight quarters despite sales concentration in Japan.

•

MR DWDM: Not applicable. NEC says its DW4200 has multi-reach capability, but we classify it as a metro WDM product.

•

SLTE: NEC is one of three key suppliers of SLTE equipment, but both it and Fujitsu have significantly lower shares than Alcatel-Lucent.

9

Product competitiveness by product segment LH DWDM deployments at AT&T add to NEC’s foothold Figure 3 lists Ovum RHK’s ratings of the competitiveness of NEC’s products by segment.

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Figure 3 NEC’s product competitiveness by product segment EMEA

NA

CALA

AP

ADM

Poor

Poor

Fair

Good

OED

Excellent

Fair

Average

Good

DCS

N/A

N/A

N/A

N/A

OCS

N/A

N/A

N/A

N/A

Metro WDM

Average

Fair

Average

Average

Long-haul DWDM

Average

Good

Fair

Good

Multi-reach DWDM

N/A

N/A

N/A

N/A

SLTE

Good

N/A

N/A

N/A

Source: Ovum RHK Rating scale: Excellent, Good, Average, Fair, Poor.

In the following list, we provide reasons for the ratings we assigned to NEC in the table above: •

ADM: NEC remains atop Japan’s ADM market and is one of a few vendors booking ADM sales in CALA and Russia, but it is mostly inactive in North America and the rest of EMEA.

•

OED: NEC’s new U-Node, the UN5000, makes it very competitive in Asia-Pacific and EMEA; its lower-end C- and V-Node products fit Asia-Pacific, CALA, and Russia fairly well, but it appears to be leaving the North American OED market to Fujitsu, Alcatel-Lucent, Cisco, and Nortel.

•

DCS: Not applicable. NEC states that the UN5000 is capable of being used as a DCS, but Ovum RHK currently counts UN5000 revenues in the OED segment.

•

OCS: Not applicable. Although NEC currently offers no product in this segment, it expects to release an OCS product (which may incorporate MEMS switching) in 2008 or 2009.

•

Metro WDM: NEC was late to market with a ROADM product, which hurt it in North America, but it is now catching up with its DW4200 ROADM, which supports 80 wavelengths while many competitors support only 40. Its port density is high, and 40Gbps interfaces are available today. A single shelf supports six 10Gbps channels, which NEC believes is better than some competitors. The DW4200 also

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functions as a wavelength cross-connect (WXC) and supports GMPLS. NEC’s MW0500 and MW1000 platforms are small and support a pay-as-you-grow approach, which is helpful in developing markets and for smaller carriers. However, its products are not targeted at enterprise applications. The MW0500 has been introduced into the North American market recently, but it is a low-end product that doesn’t change NEC’s overall positioning much in this segment. •

LH DWDM: NEC has ranked first globally in this segment for the past five quarters (in annualized sales), as it continues to leverage its installed base, a well-tested SW 40/80, and a newer much higher scale product (SW 160). North American penetration is attributed to LH applications by AT&T, which uses NEC’s SW 40/80 as the backbone for its ION (intelligent optical network). AT&T has also deployed NEC’s LH DWDM gear to support the rollover of long-haul traffic from SBC that was on leased facilities from Williams Communications (now part of Level 3). NEC’s DW4000 uses the same platform as the SW 160. The SW 40/80 platform is no longer actively marketed, so revenues are limited to maintenance/line cards.

•

MR DWDM: Ovum RHK does not currently classify it as such, but NEC states that its DW4200 can technically support MR DWDM capability. We will consider this product in 1Q08 as part of a broader review of our segmentation.

•

SLTE: NEC’s new NS640/1280 systems improve its competitiveness, but its project installation capabilities are behind those of the much larger Alcatel-Lucent.

Strengths and weaknesses NEC’s corporate strengths •

Large, stable corporate backing helps NEC’s Network Systems division (which includes ON) weather carrier spending cycles and provides the resources needed to enter new product areas.

•

Location of R&D facilities in most of ON’s key regions — the United States, Western Europe, China, and Japan — gives NEC easy access to local carrier markets that can help ensure that product development tracks regional requirements.

•

Access to the internal Electron Devices unit may help Network Systems capture advances in materials and components faster than if relying on outside firms.

•

NEC has experience working closely with Tier-1 carriers on a multi-year basis, from roadmap planning to product design to trials to post-sales support.

•

NEC has broad and deep experience in the wireless sector. It has provided microwave products and technologies to customers in more than 100 countries.

•

NEC has a very large customer base for PBX, especially in Japan and North America.

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12

The company has experience in developing and manufacturing tandem switches, which is now helpful in the SIP server market.

NEC’s corporate weaknesses •

Culturally the company is conservative, so it can miss market shifts and often must play catch-up in new product segments.

•

Its Network Systems business revolves around Japan with only small pockets of strength elsewhere. Strong handset operations nonetheless also remain subject to ups and downs of NEC’s performance in Japan.

•

Excessive dependence on NTT — and in some cases AT&T — for product development specs can result in products that lack a broader market.

•

NEC has booked a net loss for four of the last five six-month financial periods. This is due mainly to losses at its terminals and devices divisions, but it is not clear how strong the near-term growth prospects are for the Network Systems piece of its IT/Network Solutions business. NEC’s projection of strong NGN business in Japan and overseas growth in microwave transmission may not be enough.

•

NEC has been late in cutting costs out of the product R&D and manufacturing process, which could hurt it even more than in the past as its competitors in telecom hardware consolidate.

Optical product strengths •

NEC has both repeatered and unrepeatered undersea products and R&D strength.

•

Its dominance in the Japan ON market gives NEC experience in deploying ON in advanced mobile and broadband applications ahead of most other parts of the world (for example, HSDPA backhaul, aggregation and transport of metro video traffic).

•

UN5000 supports multi-ring RPR applications to improve bandwidth sharing and traffic management; ZTE appears to be the only other supplier with similar functionality (in its S330, S380, S385, and S390).

•

UN5000 has good density; it supports twenty-four STM-64 ports or six STM-256 ports in a 445mm high, 19-inch-wide shelf, with a maximum switching capacity of 320Gbps. Fujitsu’s competing Flashwave 4500 offers at most 100Gbps switching capacity and four STM-64 ports in one 578mm high, 23-inch-wide shelf. The UN5000 also offers better density than Corrigent’s C100 platform, which has been widely deployed by KDDI in Japan.

•

U-Node gets its name from its support for universal slots, allowing any line card to go in any slot, increasing flexibility for operators.

•

C-Node and C-Node S (a compact version) are both wall-mountable and support a large number of E1 ports as well as 34Mbps and 10/100 Ethernet, and scale to

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STM-4, creating a strong offering for mobile operators needing to support legacy traffic and prepare for growth into packet-based 3.5G architectures and beyond. •

V-Node can be upgraded to a dual two-fiber STM-16 ring system by replacing the optical interfaces, which helps with scalability.

•

The SW 160 platform scales to 3.2Tbps in four bays (better than many competing platforms), supports ROADM applications (not all LH platforms do), and offers features (including inverse muxing and IDC) that are helpful when transmitting over G.653 fiber.

•

NEC provides a 10G Ethernet card for its LH DWDM product, which was a big reason AT&T elected to deploy more legacy instead of overbuilding with NSN’s MR DWDM.

Optical product weaknesses •

NEC lacks product offerings in the bandwidth management and MR DWDM segments.

•

The company was late to market with ROADM functionality and so has little field experience to date.

•

Nortel’s CPL platform, as one example, offers better density (720Gbps in a half rack for the CPL vs. 1.2Tbps in a full rack for the SW 160) and built-in support for a wider range of distance requirements than the SW 160.

•

It is not clear whether NEC can leverage its good position in mobile infrastructure to penetrate mobile backhaul, as these applications can require aggressive pricing.

•

NEC’s metro WDM and OED platforms lack storage and other interfaces useful for enterprise networks.

•

The company has a limited track record of selling into Tier-2/3 carriers and emerging markets, which is where much of the capex growth is nowadays.

Solution strengths •

NEC is ranked ninth globally for annualized DSL revenues. Its success in DSL can create opportunities for its ON products in DSL backhaul.

•

The company has ranked first or second in global VDSL shipments continuously since 1Q04 and has an IPTV system that has seen at least some commercial deployment (in Hong Kong).

•

With NSN, NEC is a key WCDMA infrastructure supplier to 3 (Hutchison) and has an early lead in Japan’s HSDPA deployments.

•

Undersea expertise gives NEC a differentiator versus all ON vendors except Alcatel-Lucent and Fujitsu, and this creates opportunities for terrestrial products for backhaul and gateway applications.

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ON VENDOR PROFILE: NEC

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NEC was a major early supplier of WCDMA handsets to Japan and some European markets; it is struggling now but has a chance to take lead in the “3.5G and beyond” category.

•

Its Pasolink microwave product has a large customer base, especially for shortdistance applications; many Pasolink customers also deploy C-Node STM-1/4 optical gear.

14

Solution weaknesses •

Adoption of NEC’s packet transport products/solutions outside of Japan has been minimal; its joint venture with Hitachi, Alaxala, has similarly struggled.

•

The company lacks competitive offerings in the CDMA2000 and TD-SCDMA mobile segments, softswitch/carrier VoIP, multiservice access, and carrier Ethernet/L2 switching.

•

NEC has not announced any significant Network Systems wins for awhile, outside of WCDMA/HSDPA infrastructure.

•

Notwithstanding its recently expanded Juniper partnership, it lacks a strongly competitive IMS story at a time when this is very much a focus for the market.

•

NEC’s reliance on internal development means that solutions “gaps” tend to take a long time to fill in.

Opportunities and threats Opportunities •

Increased activity in the undersea space creates both direct (SLTE) and indirect (WDM transport and possibly gateway) opportunities.

•

The U-Node platform, combined with the DW4200 ROADM, positions NEC well to capture optical spending related to IPTV build-outs.

•

Expanding into bandwidth management, directly or through a persuasive partnership, would improve NEC’s ability to serve customers on an end-to-end basis.

•

Large parts of the world remain untapped, as do some of the smaller carriers in existing NEC markets, yet NEC has a strong brand so it can build into these areas — especially with a new, compelling, and flexible product such as the U-Node.

•

The company can leverage its relative stability and conservatism to win new business in accounts concerned about the current consolidation wave among other suppliers of network infrastructure equipment.

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Threats •

NEC gets well over half its revenues from legacy product segments where sales are declining rapidly.

•

Vendor consolidation (Alcatel/Lucent, Ericsson/Marconi, Nokia/Siemens) increases the pressure on NEC to broaden its portfolio and also keep costs low.

•

NEC’s core home market is getting more competitive and open to foreign suppliers, which complicates life for NEC as well as Fujitsu.

Company information Business focus NEC is a large, global supplier of IT/network solutions, mobile/personal solutions, and electron devices based in Japan with operations worldwide. The NEC Group includes both NEC Corporation and a total of 339 consolidated subsidiaries.

Company size Sales for NEC corporate-wide were $18.15 billion for the half-year ending September 30, 2007 (fiscal 1H08). In yen, its sales declined 3.6% from the year-earlier period. Sales within its IT/Network Systems division, which includes ON, were basically flat for the six-month period, amounting to 1,274 billion yen versus 1,264 billion yen the year before. About 80% of NEC’s corporate revenues come from the domestic Japan market. Optical revenues for NEC for the rolling 4Q period through September 2007 amounted to $662 million, giving it a ninth-place ranking and just under 5% market share. As of September 30, 2007, NEC employed 156,613 people either directly, through one of its 339 consolidated subsidiaries, or through 68 affiliate companies accounted for by the equity method in its financial reports.

Target customers Corporate-wide, sales to customers in Japan account for approximately 80% of NEC’s sales. Main target customers for the Network Systems division of NEC’s IT/Network Solutions business are: •

Mobile service providers

•

Wireline service providers

•

Government, including education and local communities

•

Large enterprises

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Lines of business IT/Network Solutions •

IT Services/System Integration

•

IT Platforms

•

Network Systems

•

Social Infrastructure

Mobile/Personal Solutions •

Mobile Terminals

•

Personal Solutions

Electron Devices •

Semiconductors

•

Electronic Components

Optical product lines NEC’s optical product lines include: Optical transport systems based on WDM •

Reconfigurable OADM system for core/edge (DW4200)

•

Core DWDM transport system for long haul to ultra long haul (DW4000, SW 40/80, and SW 160)

•

Metro CWDM (MW0500) and DWDM (MW1000) systems

•

Repeatered and repeaterless submarine systems

Optical transport systems based on SDH/SONET and transport MPLS •

Core, metro, and edge SDH multiservice platforms: SpectralWave U-Node 5000, SpectralWave U-Node BBM, SpectralWave U-Node WBM, SpectralWave V-Node, SpectralWave C-Node, and SpectralWave C-Node S1

Organization NEC reorganized its operations in mid-2006 to better focus on NGN telecom opportunities. This reorganization grouped together all of its IT and telecom infrastructure assets into IT/Network Solutions, and combined its CPE, handset, and

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terminal operations into Mobile/Personal Solutions. Electron Devices remained as an unchanged, stand-alone business unit. Descriptions of each major unit are as follows: •

IT/Network Solutions: Uses hardware and software products to create solutions for carriers, enterprises and government agencies, and individuals. In financial reporting, results for this segment are broken down into four subsegments: IT Services/System Integration, IT Platforms, Network Systems, and Social Infrastructure (e.g. aerospace products and air-traffic control systems).

•

Mobile/Personal Solutions: In financial reporting, results for this segment are broken down into two subsegments: Mobile Terminals (mainly traditional handsets) and Personal Solutions (mainly PCs).

•

Electron Devices: In financial reporting, results for this segment are broken down into two subsegments: Semiconductors and Components (including components for ON systems). NEC Electronics develops, manufactures, and markets a wide variety of chiefly semiconductors including semiconductors and some transceivers for wireless base stations and SONET and data gear.

There is a significant amount of intra-NEC business conducted, mainly sales from NEC Electronics to the other groups. These transactions appear as “eliminations” in financial reports and amount to well over 10% of net sales. Smaller business units are generally organized around specific customer types or large product subsegments: •

Domestic sales

•

Government, community, financial, and carrier solutions

•

Enterprise solutions

•

Social infrastructure solutions

•

Carrier network

•

IT platform

•

Systems integration and software development

•

Mobile terminals

•

Personal solutions

Regions NEC is a global conglomerate with directly owned operations in more than 44 countries in all regions of the world, including: •

North America: United States and Canada

•

Latin America: Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela

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Europe: Belgium, France, Germany, Hungary, Italy, Netherlands, Norway, Poland, Portugal, Russia, Spain, Sweden, Turkey, United Kingdom, and Uzbekistan

•

Africa: Egypt, Kenya, and South Africa

•

Asia/Middle East: China, Hong Kong, India, Indonesia, Iran, Japan, Korea, Malaysia, Pakistan, Philippines, Saudi Arabia, Singapore, Taiwan, Thailand, Turkey, and Vietnam

•

Oceania: Australia and New Zealand

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A total of roughly 1,750 R&D personnel are located in Japan, China, Germany, the United Kingdom, and the United States.

Partners Key partners for NEC include: •

Mobisphere: NEC and Siemens launched in 1999 a joint venture aimed at joint planning, development, manufacture, and marketing of UMTS/WCDMA products.

•

Alaxala: In 2004 Hitachi and NEC created this jointly owned and managed standalone company focused on data networking products and solutions.

•

NEC and HCL Technologies of India have in place a 51:49 JV related to offshore software engineering solutions in embedded software, hardware design, network security, grid computing, and mobile technology.

•

Juniper: NEC jointly develops IMS/FMC solutions with Juniper, and NEC also functions as a reseller for Juniper in Japan. The pair is also working on control interfaces between their separate boxes. Juniper says that this work will be based on open interfaces. The aim of the partnership is to allow carriers to add more services without having to drastically rework their network each time.

•

Adcore-Tech: In July 2006, NEC, NEC Electronics, Matsushita, Panasonic Mobile, and Texas Instruments created this JV for conducting global R&D and licensing for a communications platform to be used for 3G/3.5G handsets and beyond. The main focus is developing software for core network applications (not for handsets).

•

Esteemo: NEC Corporation and Panasonic, two of the Adcore-Tech partners, launched a JV in October 2006 to carry out the development of application software for mobile terminals.

•

Tekelec: NEC is reselling Tekelec’s next-gen switching solutions, including softswitch and gateway products, in a number of countries including Russia and Brazil. Under the agreement, NEC incorporates its own customizations to the Tekelec media gateway controller and network management software into NEC’s core network solutions. Tekelec provides training and professional services. The two jointly adapt existing solutions for target markets as needed.

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Acquisitions NEC acquired US-based unified communications provider Sphere Communications for $42 million in August 2007. The company has been merged into NEC’s Enterprise Solutions business unit.

Recent events Select announcements from the past 18 months include: •

The NASDAQ announced that it had delisted NEC’s ADRs due to the company’s failure to file Form 20-F for the fiscal year ended March 2006 with the US SEC (October 2007).

•

General Communications selected NEC to supply a submarine cable, amplifiers, and line terminal equipment for its fixed-line and mobile communication as well as cable TV services. The submarine cable will extend a total of 600km (October 2007).

•

NEC announced the opening of its new C&C (Computers and Communications) Innovation Research Laboratories in Nara, Japan. The new laboratories will focus on research and development of information communication systems. It will also collaborate with research institutes and universities worldwide (July 2007).

•

A nationwide academic network project called SINET3 run by the National Institute of Informatics (NII) of Japan deployed NEC’s UN5000 and its Layer 2/3 switch IP8800/S and started to operate the network. The network was planned and developed by NII and deployed via NTT Communications (June 2007).

•

At NXTcomm 2007 in Chicago, NEC exhibited two new product lines. It announced the CX series service aggregation switches (for mobile backhaul and other applications) and premiered its MW0500 CWDM metro access line, including the 2 RU MW0522 CWDM product and the 1 RU MW0521 that offers bidirectional transmission. NEC also confirmed that it had booked its first North American ROADM customer (June 2007).

•

NEC and Alcatel-Lucent each won part of the construction/supply contract for the Asia America Gateway network, a 20,000km project linking the US with Southeast Asia, with landings in Guam and Hawaii and the US west coast (April 2007).

•

The company announced its participation in NTT’s NGN field trial, started in December 2006, aimed at testing ubiquitous desk, retailer data center, broadcast video transmission, triple-play, and HDTV delivery to PC services (April 2007).

•

Telenor selected NEC as one of its two main suppliers of microwave systems for all of its 14 majority-owned affiliates, including Pannon (Hungary), Digi (Malaysia), Kyivstar (Ukraine), Grameenphone (Bangladesh), and Telenor Pakistan. NEC will supply 60–65% of Telenor’s expected demand of 21,000 microwave terminals, including point-to-point systems (Pasolink), long-haul, large-capacity backbone,

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SDH microwave from its 3000/5000 Series, and related services such as installation and commissioning (January 2007).

Financial highlights Corporate revenues •

Fiscal first-half 2008 (ended September 30, 2007) corporate revenues were 2,140.6 billion yen ($18.15 billion), down 3.6% from the year-earlier period.

•

Fiscal first-half 2008 net loss was 4.7 billion yen ($39.86 million), down from a loss of 9.9 billion yen ($83.95 million) the year before.

Optical revenues •

ON revenues for the four quarters through September 2007 were $662 million (78.78 billion yen), up 22% from the year prior.

Assets and debt •

NEC had 403.8 billion yen ($3.4 billion) in cash and cash equivalents on hand as of September 30, 2007, down 8% from September 30, 2006.

Development resources NEC has: •

Nine domestic and six overseas R&D facilities (one in China, two in Germany, one in the United Kingdom, two in the United States)

•

Approximately 1,500 R&D employees in Japan and 250 overseas

•

An R&D budget of $1.45 billion, equal to 8% of sales in fiscal 1H08

•

A major ON R&D project underway: an 80-channel ROADM operating at 40Gbps, which has recorded a maximum of 600km of error-free transmission using LSI for reshaping signal distortion. NEC has succeeded in testing 1,600km with 40 channels; 80 channels can support 600km as of today.

Marketing strategy Messaging NEC is focusing on supporting customers’ NGN development. NEC’s ON division aims at realizing end-to-end solutions with both optical and packet technologies. More specifically, it believes integrating WDM and packet is key. Rolling out new products including both the UN5000 (a packet-friendly OED) and DW4200 (a ROADM with high-

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capacity Ethernet transport) is the first step toward an NGN solution. At the same time, NEC’s new multiservice L2 switch, the CX2600/200, is important for supporting tripleplay, VPN, 2G/3G wireless, etc. This series supports intelligent QoS and also delivers legacy traffic including ATM aggregation and DS0 granular TDM multiplexing on a single platform.

Channel strategy Currently NEC uses only direct channels in both domestic and overseas markets. There are some joint ventures in overseas markets, for example Malaysia. In the future, NEC plans to pay more attention to overseas channel strategies. For now, NEC will focus on leveraging existing partnerships. Specifically in North America, NEC plans to exploit the existing customer base in the LH market and to attain some “organic growth.” In other areas, the company aims to exploit its success in mobile base stations.

Product portfolio and specifications overview Details about NEC’s ON products The following section details high-level features and functions of NEC’s products as segmented by Ovum RHK, with NEC’s classifications in parentheses. NEC has not made any new significant ON product announcements, in Japan or elsewhere, in 2007.

ADM (SDH/SONET aggregation) •

Currently NEC ships two ADMs: ITS-2400S and ITS-9600. Major customers include power companies and KDDI.

OED (multiservice platforms) NEC’s BBM and WBM were developed before RPR technology was standardized by IEEE 802.17 and support pre-standard RPR; however, the UN5000 supports fully standardized RPR (802.17). •

Universal Node 5000 (U-Node) is a multiservice SDH/RPR box with a built-in Layer 2 switch that integrates with NEC’s DW4200 ROADM. It offers 320Gbps TDM cross-connect capacity, 160Gbps packet switching capacity, SDH interfaces from STM-1 through STM-64 and even 40Gbps (STM-256, maximum six ports), and a range of lower-speed TDM (down to E1) and Ethernet interfaces to 10GigE. Also supports GMPLS. What the company aims at for the future is that SPs deploy UN5000 and DW4200 and employ GMPLS to manage both networks on a single platform. SPs would be able to manage wavelengths with STS paths in an integrated fashion. A single box can support up to six separate 10Gbps RPR rings

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in a multi-ring topology, furthering RPR’s bandwidth-sharing benefits. VC-4 crossconnect capacity is 2,048 x 2,048, VC-12 is 8,064 x 8,064. Plans to support multiring sometime in 2008. •

U-Node BroadBand Manager (BBM) is a multiservice platform for metro core applications supporting point-to-point and point-to-multipoint Ethernet service using embedded RPR and L2 switching. Service interfaces range from E1 up to STM-64, and protection modes include 2/4-fiber MS-SPRing (STM-64/16) and SNCP (STM-64/16/4/1). An integrated optical amplifier is provided to support longhaul transmission, which the WBM also has. Eight universal slots are standard but up to three additional 8-slot shelves can be linked externally.

•

U-Node WideBand Manager (WBM) is a “compact” multiservice platform supporting STM-64/16/4/1 applications and accommodating 2/34/45/140Mbps, Ethernet, and STM-16/64 on one shelf. Both the WBM and BBM support the same service interfaces as well as RPR. As with the BBM, the STM-n ports in the universal interface slots can be flexibly assigned to 1+1 MSP, 2/4-fiber MS-SPRing, and SNCP. An integrated optical amplifier is provided to support long-haul transmission, which the BBM also has. One shelf can support 12 universal slots, but no extensions are possible. While this product is billed as compact, one standard shelf is a bit taller than for the BBM; the width and depth are identical. The BBM and WBM are similar products, but the WBM can handle more granular traffic; its cross-connect unit supports 2Mbps connections, compared to 50Mbps for the BBM.

•

V-Node is an STM-1/4/16 platform for metro access applications supporting 2/34/45Mbps, 10/100/1000Mbps Ethernet, and STM-1/4/16 service interfaces. It has the same functioning and basic design as both the BBM and WBM. Comes with a 152 x 152 VC-4 and a 2,016 x 2,016 VC-12 matrix. Supports E-Line and E-LAN service with VLAN method. One shelf supports a maximum of six STM-16 ports, is 493mm high by 280mm deep, and fits in a 29-inch-wide shelf.

•

V-Node S is a similarly designed compact version of the V-Node. This version supports at most two STM-16 ports per shelf, each one of which is only 198mm high (same width and height). It has twice the VC-12 switch capacity but much lower VC-4 capacity. Mobile backhaul is one application for the compact version.

•

C-Node is a metro access box roughly 2U in size supporting 2/34/45Mbps, 10/100 Ethernet, and STM-1/4 service interfaces. Protection modes include 1+1 MSP and SNCP. It can be mounted in either 19-inch or ETSI-compliant racks, or wallmounted. One box supports a maximum of four STM-4 ports, or 128 E1s. It also comes in a compact version called the C-Node S, which is a 1U-sized “pizza-box” type edge box that cannot support STM-4. C-Node customers are mainly outside of Japan.

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DCS (digital cross-connect system) •

NEC does not offer any products in this segment. Although the UN5000 can be used as a DCS, Ovum RHK classifies it as an OED product.

OCS (optical core switch) •

NEC does not offer any products in this segment. The company plans to offer an OCS product in 2008 or 2009. It will likely use MEMS.

Metro WDM (metro WDM) •

SpectralWave MW1000 is a 32-wavelength metro WDM system starting at a minimum of 8 wavelengths per shelf (and upgradable in steps of 8). Tributaries can be 2.5G/10G or 1/10GigE. Adaptable to ETSI or 19-inch rack.

•

SpectralWave MW0500 is a CWDM system supporting up to 16 wavelengths in a form factor sized either 1 or 2U. Tributaries can be 2.5G/10G or 1/10GigE. Maximum transmission span of 100km. In North America, NEC has branded the 1U unit the MW0521, and the 2U unit as the MW0522.

•

SpectralWave DW4200 is a ROADM/80-channel DWDM platform supporting a bit-rate-free (3R) transponder for optical interfaces, a multi-rate SDH/SONET transponder, and 1/10GigE transponders. Wavelength transponders are tunable across the C and L bands. Optical layer protection is done on a lambda basis with 50ms switching time. ETSI and 19-inch racks are available. One shelf can add/drop 6 x 10Gbps; one rack can add/drop 40 channels. As a ROADM, the 4200 was scheduled to support up to 8 degrees by 4Q07; no update is available. In addition to functioning as a ROADM, NEC states that the 4200 can serve as a MR DWDM product simply by changing line cards. In its 40-channel configuration the DW4200 can reach up to 1,600km, and NEC plans to expand this distance in the future. The product supports linear as well as ring protection.

•

SpectralWave DW4240 is a metro core/edge ROADM that interoperates with NEC’s LH DWDM in the backbone, or to an ADM/OED metro box, or to a L2 switch in metro access. It supports 40 wavelengths in either the C or L band (must choose only one). Line speeds include OC-48/STM-16, OC-192/STM-64, and OC768/STM-256, as well as GigE, 10GigE, and SONET ADM on a blade. Users can add/drop up to 100% of total lambdas at any given node, remotely if preferred. Works as a terminal, amplifier, two-degree ROADM, and multi-degree ROADM/lambda cross-connect and can be upgraded from one mode to another in service. Supports GMPLS and ASON. Can build up to 1,000km without regeneration. The DW4240 was marketed mainly in North America; the last two digits indicated the number of wavelengths that the product supported. Later, NEC expanded it to include a series of different products. Now the DW4240 is just one member of the DW4200 series.

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LH DWDM (long-haul DWDM) •

SpectralWave DW4000 is an LH DWDM platform that comes in three versions (4008, 4016, and 4040) supporting 8, 16, and 40 wavelengths, respectively, in each of the C and L bands. It is designed for the Japanese market, so it incorporates methods to support transmission over G.653 dispersion-shifted fiber and the J-SDH standard. It is similar to the SW 40/80 designed for overseas markets and deployed several years ago in the AT&T network. Maximum capacity of one rack is 800Gbps. Maximum transmission span with FEC/A-FEC is 1,000km.

•

SpectralWave 40/80 is an LH or ULH DWDM using optical Raman amplification to extend maximum transmission distance. Minimum footprint is 400Gbps on an ETSI rack, maximum capacity is 800 10Gbps wavelengths. Can add/drop all channels at a fixed OADM. Full-band tunable transponders provided.

•

SpectralWave 160 is an LH DWDM system able to transport up to 160 10Gbps channels in each of the C and L bands, for maximum capacity of 3.2Tbps. It supports 2.5, 10, and 40Gbps channels. Up to 60 wavelengths are supported in a single bay, 80 in two bays; four bays are needed for maximum capacity. Inverse muxing of 10 and 40Gbps channels can be done to support transmission over high-PMD fiber (e.g. DSF). Key features include: integrated dispersion compensation, tunable transponders, and a remotely provisionable OADM that allows add/drop of up to 50% or 100% of the total wavelength capacity.

MR DWDM (multi-reach DWDM) NEC does not offer any products in this segment. The company says its DW4200 has multi-reach capability but we currently classify it as a metro WDM product.

SLTE (submarine systems) •

Repeatered systems include the NS640 (640Gbps per fiber pair, maximum 8 pairs per cable yielding 5.12Tbps/cable, up to 12,000km transmission distance) and the NS1280 (1.28Tbps per fiber pair, maximum 8 pairs per cable yielding 10.24Tbps/cable, up to 9,000km transmission distance. Components for the 640Gbps NS640 system and the 1.28Tbps NS1280 system include: T640/T1280 LTE (trans-Pacific transmission capability); R640/R1280 repeater, Q640/Q1280 block equalizer, and B640/B1280 branching unit (all able to go 8km underwater); NPW power feeding equipment (over 10kV, for the cable station); M640/M1280 RFTE (remote fault detection and location estimation); and WebNSV EMS (element management system based on web technology).

•

NEC offers an unrepeatered system, the SLT320, supporting 320Gbps/fiber pair, 12 pairs maximum, up to 400km spans without electronics. For island-island, island-mainland, and festoon applications. Components include the SLR320 LTE and an in-line remote pre-amplifier (IRPA).

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Management of optical networks INC-100MS The INC-100MS is a network management system to manage all members of NEC’s SpectralWave series and is compliant with the ITU’s Telecommunications Management Network (TMN) concept, supporting TMN’s two lower layers, namely the Element Management Layer (EML) and the Network Management Layer (NML). Features include the following: •

Scalable from smaller networks to larger networks.

•

Provides the end-to-end path design/establishment and consistency between the two ends of a section and/or a path on the network level.

•

Provides fault, configuration, security, performance, and system management based on telco definitions

•

Redundant server configuration enables uninterrupted system administration.

•

Hierarchical sub-map makes it possible to operate a different network in a different regional area and retrieve equipment facilities.

•

TMF standard compliant North Bound upper NMS interface.

NEC claims that the INC-100MS configuration management feature enables new network elements to be added with a simple operation, and that its fault management feature identifies the trouble source and enables rapid repair. Table 2 shows how NEC’s products map to Ovum RHK’s segmentation of ON products.

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Table 2 NEC’s optical networking products Product names

Product segment ADM

ITS-9600, ITS-2400S

OED

UN5000, U-Node, V-Node, C-Node, MA1021 (Japan only)

DCS

N/A. Although NEC claims that its U-Node 5000 can be used as a DCS, we classify this product as an OED.

OCS

N/A

Metro WDM

DW4200 (ROADM), MW1000 (metro DWDM), MW0500 (CWDM), MW0521/0522 (North America only), MW0800 (Japan only)

LH DWDM

DW4000, SW 160, SW 40/80

MR DWDM

N/A. NEC says its DW4200 has multi-reach capability but we currently classify it as a metro WDM product.

SLTE

NS640/NS1280 (repeatered); SLT320 (repeaterless)

Source: Ovum RHK N/A = not applicable.

Ovum does not endorse companies or their products. Ovum operates under an Independence Charter. For full details please see www.ovum.com/about/charter.asp. For full details of Ovum’s citation policy, see www.ovum.com/media/citation.asp. Whilst every care is taken to ensure the accuracy of the information contained in this material, the facts, estimates and opinions stated are based on information and sources which, while we believe them to be reliable, are not guaranteed. In particular, it should not be relied upon as the sole source of reference in relation to the subject matter. No liability can be accepted by Ovum Europe Limited, its directors or employees for any loss occasioned to any person or entity acting or failing to act as a result of anything contained in or omitted from the content of this material, or our conclusions as stated. The findings are Ovum’s current opinions; they are subject to change without notice. Ovum has no obligation to update or amend the research or to let anyone know if our opinions change materially.

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