R&D spending declines for Canadian telecoms

Although a study by Toronto-based Research Infosource Inc. showed that research and development (R&D) spending by the Canadian telecommunications sector decreased in 2001 by 6.5 per cent, the sector itself is not in jeopardy, according to one industry watcher.

Lawrence Surtees, senior analyst, telecom and Internet research at Toronto-based IDC Canada Ltd., said the performance of telecommunications companies in the recent past only seems dismal because the performance is relative to the boom in the late ’90s and in 2000.

“What happened through the late ’90s was an unprecedented boom fuelled not just by the Internet but by the explosion in competitive carriers,” he said.

Juan-Manuel Ramos-Gurrion, director of broadband technology for Bell Canada in Toronto, said Bell has already deployed its networks, and is now more interested in optimizing their usage than in adding any new technology.

In fact, he thinks the downturn in R&D spending is a positive development for service providers.

“We’ve seen a lot of innovations over the past five years,” he said. “But…the innovations from the technology side were not followed up by innovations from the services side.”

Ramos-Gurrion added that he thought the decrease in R&D and in scores of new products hitting the market “will give us time to sit down and think how we can retrench a little bit into our existing infrastructure and try to innovate within the assets that we have.”

Vendors such as Zarlink Semiconductor Inc. and Ericsson Canada Inc. said they’re going to start focusing their R&D expenditures on their core areas, something Ramos-Gurrion hailed as a positive thing.

He said vendors invested too much money into startups over the past few years – startups that were producing too similar equipment with “a twist here and a twist there” and selling it to the same market. So not only is decreasing revenue one of the reasons why R&D spending declined, but Surtees said this decrease in investing in startups is another culprit.

Ramos-Gurrion said he spent a month listening to sales pitches from these startup companies, and said it was a waste of time hearing about so many similar products.

“In hindsight, that time would have probably been spent better thinking about how to use the existing network assets that we have,” he said.

Now Ramos-Gurrion wants to focus company energy into maximizing the potential of their network technology.

“Maybe this is a natural effect that had to take place so services could catch up,” he speculated. “I think we would all like to see way more innovation on the service delivery side than on the technology side.”

One of these major Canadian technology vendors, Nortel, topped the Canadian charts in R&D spending with just under $5 billion, despite a decrease by about $1 billion, or 16 per cent. JDS Uniphase was second, spending about $504 million on R&D, an increase from about $168 million in 2000.

Nortel’s R&D spending accounts for 85 per cent of the telecommunications equipment sector, which is why their decline in R&D spending affected the numbers for the entire sector. Twenty per cent of all private sector R&D in Canada is attributed to Nortel. About 40 per cent is attributed to the telecommunications industry itself.

Although Surtees said Nortel’s revenue is dropping from quarter to quarter, he still expects Nortel to outstrip any other Canadian company. The only comparable firms in size are the major Canadian banks and Bell, he added.

That’s why users of Nortel equipment aren’t worried that its decrease in R&D spending is a precursor to doom; namely, that Nortel’s innovation will decline and they will produce lower quality equipment.

Charles Fleckenftein, a spokesperson for Sprint Canada based in North York, Ont., said Sprint has full confidence in Nortel’s products.

“They’ve always been a big player in the market,” he said, adding that their products offer scalability for Sprint’s millions of customers. Nortel, he said, also has the ability to produce large volumes of equipment, and its products are interoperable with equipment from other vendors such as Cisco and Alcatel.

Sprint has used Nortel’s DMS 250 long-distance tandem switching system for years now. Not only did Fleckenftein say it works great but added that Sprint would continue to use Nortel as vendor because of the quality of their products.

The decline in R&D in the sector isn’t shutting down the larger telecommunications equipment vendors; they’re simply investing R&D money into their core areas.

Peter Burke, chief technology officer at Ottawa-based Zarlink Semiconductor Inc., said Zarlink’s R&D spending has decreased since the boom period in its 2001 and 2002 fiscal years (it is currently in its 2003 fiscal year). He said that now the company will focus on its core technologies and areas they consider to be in growth such as mobility, voice over packet (VoP) and entertainment.

“The industry is going through a correction period from a revenue point of view,” he said. Essentially, revenue is decreasing, so companies have to be more selective about the technologies they invest in, he said.

Zarlink spent US$20.7 million on R&D in the first quarter of 2003, which is 43 per cent of their gross revenue. “We got a little ahead of ourselves early in 2000 and 2001,” Burke said. “Now we’re just sort of paying it back.”

Harri Pietila, director of strategic business development at Ericsson Canada Ltd., said that Ericsson is also planning to reduce R&D spending in their non-core areas. According to the Research Infosource study, Ericsson is fifth on the R&D spending list and third in the telecommunications equipment sector. Its R&D spending increased in 2001 in Canada despite consolidation of their R&D. However, this resulted in benefits for Canada because their Montreal site is their largest R&D centre in the world for Ericsson outside of its native Sweden.

“Our development here in Canada…is not tied to Canadian business only,” Pietila said. “The types of responsibilities we have are global development responsibilities that Ericsson is using in our sales opportunities around the world.”

However, he said Ericsson’s Montreal site will not be affected.

Nortel is in a similar situation. The reason their R&D figures seem so astronomical here is because Canada accounts for only five per cent of Nortel’s revenues, yet about half of their R&D expenditures.

“I think we need to remember that their top-end numbers are for the whole corporation,” Surtees said. “Which, while based in Canada, is global.”

Nortel did not return phone calls regarding this story.