Nortel Research and Development cuts could trigger long-term challenges, says analyst

Planned reductions in Nortel Networks Corp.’s research and development budget for 2005 could represent short-term relief for the carrier but also long-term pain, says one analyst.

According to media reports on Thursday, Brian McFadden, Nortel’s chief technology officer, told an audience at the RBC Dominion Securities Inc. conference in Banff, Alta. that the firm is still scheduled to reduce its R&D spending for this year.

The Brampton, Ont.-based network equipment manufacturer had previously announced that the 19.2 per cent of revenues it poured into R&D in 2003 and 2004 would be scaled back.

“In 2005 we announced we were going to lower that figure as part of our achieving ongoing cost-reduction strategy,” said Ann Fuller, a spokesperson for Nortel. “Part of that has already started, part of it is already finishing.”

A recent layoff of 3,500 employees was part of the overall cost-cutting process, Fuller added.

No new R&D investment percentages have been announced by Nortel, nor has the firm indicated what areas of its operations might be directly affected by the reductions. It has specified, however, that its main research focus areas would be mobility, multimedia, security and broadband access.

Mark Quigley, an analyst with Yankee Group Canada in Kanata, Ont., said the R&D reductions could have a negative impact on Nortel down the road.

“It’s one of those (times you do) something for a short-term gain, but eventually, over the mid- to long-term, pay the price for it,” he said. “For a company like Nortel, in this business, the key to success is to be able to continually innovate, to provide new product releases, to continually be on the leading or the bleeding edge.”

Quigley pointed out that while the areas and scope of the reductions are still not known, “anytime you impact that overall R&D function, you certainly do put yourself at a little bit of risk.”

The analyst said he believes the quality of future networking products developed by key manufacturers will not be degraded by cost-cutting maneuvers such as Nortel’s.

“Now that we’re moving down the road to IP ubiquity, a lot of the important stuff that’s going to happen will be software-driven. I think there still remains a terrific developer community outside the Nortels and Ciscos of the world that are working to (create) applications that will reside on a Nortel or a Cisco IP box. So from that perspective, I think the enterprise is still going to be able to look forward to a terrific amount of innovation on that front,” he said.

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