industry overview technology sector

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TECHNOLOGY SECTOR

� Semiconductor� Computers� Telecommunications

v. 1.0p August 2007

INDUSTRY OVERVIEW � Intel � TI � Qualcomm � IBM � HP

� Dell � Cisco � Verizon � AT&T � Motorola

Sample of Representative Companies

Industry Sector: Technology 2 © 2007. Polycom, Inc.PARTNER USE ONLY

TABLE OF CONTENTS

REPRESENTATIVE COMPANIES.......................................................................3SEMICONDUCTOR..............................................................................................4

INDUSTRY OVERVIEW.............................................................................................................. 4

RECENT DEVELOPMENTS....................................................................................................... 7

BUSINESS CHALLENGES ........................................................................................................ 7

TRENDS AND OPPORTUNITIES .............................................................................................. 8

EXECUTIVE / LOB INSIGHTS ................................................................................................... 9

CONVERSATION STARTERS................................................................................................. 11

RESOURCES AND ACRONYMS............................................................................................. 13

COMPUTERS.....................................................................................................15INDUSTRY OVERVIEW............................................................................................................ 15

RECENT DEVELOPMENTS..................................................................................................... 17

BUSINESS CHALLENGES ...................................................................................................... 18

TRENDS AND OPPORTUNITIES ............................................................................................ 19

EXECUTIVE / LOB INSIGHTS ................................................................................................. 20



TELECOMMUNICATIONS .................................................................................25INDUSTRY OVERVIEW............................................................................................................ 25

RECENT DEVELOPMENTS..................................................................................................... 28

BUSINESS CHALLENGES ...................................................................................................... 29

TRENDS AND OPPORTUNITIES ............................................................................................ 30

EXECUTIVE / LOB INSIGHTS ................................................................................................. 31



ENTERPRISE SOLUTIONS TEAM RESOURCES ............................................37


REPRESENTATIVE COMPANIES The list below is a sample of companies that would fit into this industry sector.

� Semiconductors o Intel o AMD o Texas Instruments o Micron o Qualcomm o Hitachi Semiconductor o ARM

� Computers o IBM o HP o Sun Microsystems o Dell o Apple o NCR

� Telecommunications o Cisco o Verizon o AT&T o Motorola o Nortel o Nokia o NEC o Alcatel o Siemens

Sources: First Research LLC, 2007 Interindustry Economic Research Fund, Inc., 2007 Fintel LLC, 2007


SEMICONDUCTORINDUSTRY OVERVIEW

The US semiconductor and electronic components manufacturing industry consists of 5,000 companies with combined annual revenue of about $150 billion. Large companies include Intel, Texas Instruments, Micron, and AMD. The industry is highly concentrated; the 50 largest companies hold about 70 percent of the market.

The output of US electronic components manufacturing is forecast to grow at an annual compounded rate of 6.9 percent between 2006 and 2009.

Electronic Components Growth Peaks Then Stabilizes

COMPETITIVE LANDSCAPE

The industry depends highly on demand from the computer industry and makers of telecommunications products like cell phones, which can vary sharply from year to year. Companies can be successful producing standard parts at low cost or by producing highly specialized components. Small companies can compete effectively with large ones by producing specialized products or developing new applications. Technological expertise is extremely important. The industry is highly automated; average annual revenue per employee is about $250,000.

PRODUCTS, OPERATIONS & TECHNOLOGY

Major products include semiconductors (computer chips); printed circuit boards; and various components like electron tubes and electronic connectors. Semiconductors account for almost 60 percent of industry revenue, circuit boards for 25 percent.

The manufacture of computer chips starts with long cylinders of pure silicon (or other semi-conducting materials, such as gallium arsenide) cut into thin "wafers." In photolithography, various layers of conducting and insulating materials are deposited on a wafer and etched away after exposure to light or other beams in patterns that trace the various elements of the integrated circuits. Hundreds of chips can be produced on one wafer. The thickness of the integrated circuit lines determines how many elements can be packed into one chip. After fabrication, chips are extensively tested to weed out those with defects. The yield is the percentage of chips that pass the testing process.

Microprocessors, memory, and image sensors are the three main types of computer chips. Major memory chips are dynamic random access memory (DRAM) and flash memory, which doesn't lose information if power is turned off. Image sensors currently used in digital cameras are


charge-coupled devices (CCD) or complementary metal-oxide semiconductors (CMOS). Chipsets are groups of chips designed to work together for a particular application.

Even big chip makers specialize: Intel is the leading manufacturer of microprocessors, the brains of computers, while Texas Instruments concentrates on chips that translate analog signals, such as light, touch, and voice, into digital signals, and chips for digital signal processing. Micron is a large producer of memory chips. Most chip design companies don't manufacture their own products because of the huge cost associated with advanced facilities, and instead farm the process out to contract manufacturers (chip-making "foundries"). A chip manufacturing facility can cost over $1 billion.

Computer chips are valuable because of their technological capabilities; cost is often a secondary consideration. The production of circuit boards and other electronic components and accessories, on the other hand, focuses on cost reduction. To a large extent, circuit boards and other electronic components and accessories are commodity items, whose technical features can easily be duplicated by other manufacturers.

SALES & MARKETING

Major customers are manufacturers of computers, telecommunication devices, and control devices that end up in other products such as machines, airplanes, cars, and other consumer products. Marketing and sales focus on a manufacturer's ability to produce the specific component required at a reasonable cost. Many products are made-to-order, although some commodity-type components, such as memory chips, may be manufactured in quantity without specific orders in hand. Sales are handled by senior managers who are often engineers, especially in small companies. Commodity-type products are often sold through distributors. Trade shows and personal contracts are important sources of sales.

Many small companies depend heavily on repeat sales to large customers. Even large companies depend on big orders: Intel can receive over 15 percent of its sales from each of its largest two customers. Some supply contracts can cover several years because the producer must invest in expensive manufacturing equipment. These contracts call for the buyer to take minimum quantities per year or pay a penalty. Such contracts are often used by large buyers, sensitive to the volatility of supply and demand in the industry, who want to be assured of an adequate supply.

FINANCE & REGULATION

Companies that design computer chips and components have mainly personnel costs. Companies that manufacture computer chips and components have mainly fixed costs and high investment needs for specialized manufacturing equipment. The concentration of sales in a few large customers means that accounts receivable are often high. Cash flow can be a problem for smaller companies because payments usually aren't made until an order is delivered. The large international component to this industry means that firms often need expertise in handling imports and exports, and managing foreign currency. The strong technical nature of the industry means that research & development (R&D) spending is often high. Mergers and acquisitions are frequent, as are other investment banking opportunities as companies go through several cycles of venture capital financing.

The manufacture of some electronic components, such as computer chips, uses large quantities of toxic materials, such as acids and volatile solvents like toluene and trichloroethylene. The processing, storage, and disposal of these potential pollutants can be expensive. Companies


have been fined and prosecuted for violations of the Clean Water Act and CERCLA (the Superfund Act). The European Parliament bans lead, a welding material for electronic components, in electronics sold in Europe.

REGIONAL & INTERNATIONAL ISSUES

Exports and imports account for a large portion of industry volume. The high value of electronic components and their low weight mean that transportation costs are almost insignificant. Exports of semiconductor and other electronic components in 2005 were over $45 billion, mainly to countries with computer assembly plants: Mexico, Malaysia, Korea, Canada, the Philippines, and Taiwan. Imports totaled $68 billion, mainly from China, Malaysia, Taiwan, Japan, Mexico and Korea.

HUMAN RESOURCES

The manufacture of computer chips and other electronic components involves operating sophisticated machinery (to make chips), but can also involve a large amount of hand assembly (to make circuit boards). Some technical skills are needed, which accounts for slightly above-average earnings, about $17 hourly, a dollar more than the national wage. The industry has a very good safety record, with half the number of injuries as the national average.

The design of electronic components requires highly skilled engineers, who are often senior managers in small companies. Companies often try to retain such key employees by awarding them stock or stock options.

Many companies outsource manufacturing to production specialists like Solectron that operate US and foreign manufacturing plants.

Industry Employment Growth Bureau of Labor Statistics


Average Hourly Earnings & Annual Wage Increase Bureau of Labor Statistics

RECENT DEVELOPMENTS

Imports Increase in 2006, then Stabilize - US imports of semiconductors and other electronic components have been increasing for three years, following a three-year decline. Although imports essentially were flat in January 2007, compared to a year earlier, annual imports rose 10.3 percent in 2006. China is the leading source of electronic components, providing over 20 percent of imports, followed by Malaysia and Taiwan.

US Output Rises to Meet Demand - US manufacturers have met higher levels of demand for electronic components in recent months. Domestic production of computers, video, and audio equipment, indicators of demand for electronic components, rose 25.8 percent in February 2007, compared to a year earlier. Similarly, the nation’s output of semiconductors and other electronic components increased 32.3 percent in the same period.

Manufacturers Raise Prices, Reverse Trend - Prices of electronic components are rising, reversing a downward trend. US manufacturer prices for electronic components and accessories increased 4.7 percent in February 2007, compared to a year earlier. Average annual prices had decreased eight consecutive years before rising 1.8 percent in 2006. Sharp demand spikes, such as rising computer production, contribute to price increases.

BUSINESS CHALLENGES Demand Linked to Cyclical Computer Manufacture - Demand for electronic components depends directly on demand for computers and similar electronic devices. For example, US production of computers and video and audio equipment grew 25 to 50 percent yearly in the 1990s, but fell to single-digit growth in the last five years. Future annual growth in computer production is likely to be in the 10 to 15 percent range.

� US firms' investment in computer equipment, an indicator of demand for semiconductors, fell less than 1 percent in fourth quarter 2006, compared to a year earlier.

Foreign Competition - Much production of non-specialized electronic components (including standard memory chips) has moved abroad to lower-cost manufacturers in Asia. US imports of electronic components have recently been about $60 billion per year.


� US imports of semiconductors and other electronic components fell 0.3 percent in the first two months of 2007 over year-earlier levels, led by a large drop in imports from Malaysia.

Rapid Product Obsolescence - Most electronics manufacturers specialize in one product line that depends on a particular technology application. Specialization increases the risk of obsolete product technology due to the increasingly short life cycle of many electronic products. As more electronic functions are crammed into computer chips, freestanding resistors, transistors, and capacitors will become obsolete, just as radio tubes have.

Heavy Capital Investment Requirements - As electronic components become smaller and more complicated, the machinery necessary to produce them becomes more expensive. R&D costs to develop new products get larger as products get smaller. The heavy capital investment required to keep abreast of technology and manufacturing changes is beyond the reach of many smaller companies.

Customer Concentration - As the number of computer manufacturers has decreased in recent years, more industry sales have been concentrated in a few large original equipment manufacturers (OEMs). Many small companies are basically just subcontractors for large manufacturers and would be out of business if their biggest customer stopped using them. Even large producers like Intel have concentration risk: 19 percent of its 2005 revenue was from Dell.

Dependence on Key Personnel - Small companies may depend heavily on the technological knowledge of just a few employees. The practice of hiring away employees to gain technological expertise is widespread.

Exposure to Foreign Currency Risk - A large percentage of industry revenues depends on sales to foreign buyers. Individual companies can get a majority of their sales from overseas. Many small companies lack the expertise to manage foreign currency risk and the export credit risks.

TRENDS AND OPPORTUNITIESOutsourcing Manufacturing - Forecasts suggest that third-party silicon foundries will be fabricating 40 to 60 percent of the industry's semiconductors. The large economies of scale that can be achieved by full-time production also encourage electronic component makers to use contract manufacturers for actual production.

Moore's Law - Moore’s Law is a common semiconductor industry belief that, due to evolving technology, the number of transistors that can be placed on a computer chip doubles every 18 months. Moore's Law has held true for several decades.

Decreasing Computing Costs - The steep decrease in the cost of computing power has boosted the adoption of computer technology in the US economy, and was the primary factor for increased productivity underlying the long economic expansion of the 1990s.

Equity Investments - To gain access to emerging technological developments, many larger companies make equity investments in small companies. Intel holds almost $2 billion in such investments. Access to new technology is vital for companies to grow.

New Demand - As the world economy improves, demand for semiconductors and other electronic components is expected to grow by 20 to 30 percent per year. Although analysts expect demand for desktop computers to slow, demand for servers, mobile computers,


telecommunication devices, music players, and imaging devices, such as scanners and digital cameras, will grow.

Digital Transition Speeding Up - Sales of DVD players and digital TVs have increased steadily in the past few years. Both contain more sophisticated electronics than the VCRs and analog devices they replace. Although sales of high-definition TVs (HDTV) are still hampered by high costs, federal mandates that require TV stations to deliver digital images will eventually greatly expand the market.

Manufacturing Automation - To compete with low-cost imports, many US manufacturers continue to automate the operations of their production plants, boosting demand for the sophisticated electronics that control them.

CMOS Growth - Image sensors, semiconductor devices that convert photons to electrons, are a growing market segment. Complimentary Metal Oxide Semiconductor (CMOS) image sensors will take over a large share of the market currently served by Charge-Coupled Devices (CCD), because CMOS are cheaper and more power-efficient.

GPS Technology - Global Positioning Systems (GPS) are becoming more important for cars and cell phones. The FCC requires all wireless carriers to pinpoint cell phone locations for 911 calls, which will increase the embedded GPS market. Automakers are embedding GPS and other telematics in new cars.

Collaboration in Manufacturing - More semiconductor producers are cooperating to share design and manufacturing costs. The costs for building and sustaining independent R&D, design, fabrication, and manufacturing capabilities have been high as profits are squeezed by weakened chip demand and increased competition. Some firms are more commonly sharing horizontal resources in supply chains; others are sharing consumer information to better respond to changes in demand. Collaboration may reduce costs, but has been difficult due to concerns about proprietary technology.

EXECUTIVE / LOB INSIGHTS

(NOTE: The information provided below is intended to provide general line of business insights. For more information and solutions specific to collaboration refer to the Enterprise LOB and Workflow documentation.)

CHIEF EXECUTIVE OFFICER - CEO Developing New Technologies and ProductsCompanies, especially smaller ones that specialize, devote substantial time and investment to developing new technologies, products, and processes necessary to enhance the firm’s business position. Once a technology or product is introduced, additional research and development (R&D) investment is required to improve the product and lower its production costs. Texas Instruments’ R&D expenditures are about 15 percent of revenues.

Promoting Favorable Legislation and Regulation The market for technology-based products can be heavily influenced by legislation and regulation. Legislation has set a hard deadline to end broadcast analog TV, conditions for offering consumers broadband access and voice over IP (VOIP), and the auction of additional spectrum for wireless technologies. Given the global nature of the industry, a major legislative issue is promoting a fair and competitive environment worldwide. Industry associations and their


members are spearheading lobbying efforts in Congress to promote greater market access, reduce trade impediments, and improve intellectual property rights.

CHIEF FINANCIAL OFFICER - CFOAttracting Investment CapitalDuring start-up, continuous capital infusion is needed for R&D spending and acquisitions. Smaller companies typically go through many cycles of venture capital fundraising. After the business is established, expansion is funded through retained earnings, bank borrowing, and private capital. Financial executives spend much time and effort cultivating strong relationships with these financial sources.

Reducing Foreign Currency RiskMany companies depend highly on foreign manufacture and sales. Foreign currency management is important, particularly for smaller firms expanding their foreign operations. Companies generally invest unrepatriated funds (earnings held by a subsidiary in a foreign country) in local securities and use currency hedging as a tool to manage risk.

CHIEF INFORMATION OFFICER - CIOImplementing Factory Automation To compete with low-cost imports, many manufacturers are further automating their factories to lower production costs. Industry information technology (IT) departments are investing R&D dollars in more flexible manufacturing operations. AMD has designed more flexibility in its manufacturing process by creating an automated-precision-manufacturing model, which allows manufacturing process changes quarterly, enabling new innovations to be incorporated more quickly.

Supporting and Safeguarding Global Communication NetworksManufacturing and sales have gone global with production facilities, R&D labs, and test facilities located in many countries; telecommunication facilities are required to tie them together. Corporate global communication networks link supply chains and manufacturing processes to maintain standards and ensure consistent quality. These networks are highly secure, reliable, and robust.

HUMAN RESOURCES - HROverseeing GlobalizationMergers and acquisitions have been common in the industry as has moving many functions offshore, including software development and help desk operations. HR execs are increasingly overseeing an international workforce, modifying benefit programs and procedures to suit the customs and requirements of each country.

Supporting H1-B Immigration ReformThe H1-B visa program was created to allow recruiting foreign technology experts to fill positions that the US labor market cannot. Prior to 2000, almost 200,000 H1-B visas were issued annually; after the 2001-2002 business slowdown, the number was reduced to 66,000. The American Electronics Association and member companies are pressing for current caps to be reevaluated.

VP SALES/MARKETING - SALESEnhancing Service to Major CustomersMany companies’ sales are concentrated in a few customers. Small companies especially concentrate on providing superior service to large customers; senior executives take an active


role with major accounts and their needs. Many companies are searching for new customers overseas to reduce dependence on their largest domestic customers.

Developing and Maintaining Strong Distributor RelationshipsMany products are sold primarily to distributors. Small companies especially devote much time and effort to deepening their distributor relationships, educating them on developing technology and processes, spending time with them at industry trade shows to personalize their relationship, and keeping them informed of new developments.

CONVERSATION STARTERS

(NOTE: These questions are used to kick off conversations and demonstrate a general interest and understanding of the industry and its business challenges. For more information and solutions specific to collaboration refer to the Enterprise LOB and Workflow documentation.)

How significantly does import competition affect the company's market share? Much production of non-specialized electronic components (including standard memory chips) has moved abroad to lower-cost manufacturers in Asia.

How does the company deal with product obsolescence, and how are revenues affected?Most electronics manufacturers specialize in one product line that depends on a particular technology application.

How is the company positioning itself to take advantage of growing worldwide demand?As the world economy improves, demand for semiconductors and other electronic components is expected to grow by 20 to 30 percent per year.

What is the company's strategy for meeting growing consumer demand for new digital products and technology?Sales of DVD players and digital TVs have increased steadily in the past few years.

How much automation is used during production?To compete with low-cost imports, many US manufacturers continue to automate the operations of their production plants, boosting demand for the sophisticated electronics that control them.

What types of products does the company manufacture?Examples include printed circuit boards; semiconductors (computer chips); resistors; capacitors; connectors; displays; cable assemblies; electromechanical assemblies; and power switches.

In what end-products do the products appear?Examples are computers, industrial controls, telephones, and consumer products.

What marketing strategies does the company use to find new customers?Trade shows are an important marketing outlet for many small companies.

How much does the company typically spend each year on capital investments?Some manufacturing processes require sophisticated equipment.


Does the company has foreign sales?

Does the firm determine its success by return on equity, return on assets, or another measure?

What capital investments will the company need to make to meet future demand?Semiconductor plants often take two years to build.

Does the company have a strategy to meet changing demands?While personal computer sales drove much demand for electronic components in recent years, the growth of telecommunications, in the form of wireless and Internet communications, is expected to drive future demand.

Does the company have a technological advantage over its competitors?Small companies compete mainly on their technological abilities.

What new products is the company developing?

Does the company manufacture its own products, or does it contract out the work?Because of cost, many product designers and marketers contract out the actual production work.

How much automation is used during production?Printed circuit board assembly is often still done by hand.

Does the company have any foreign production plants?Assembling components, such as circuit boards, is often cheaper in foreign countries.

To what extent does the company collaborate with other firms to produce components?To reduce costs and improve communication, some manufacturers are establishing collaborative relationships with other companies to share resources such as research and development (R&D) and design and production facilities.

How many customers does the company have, and how long have they been customers?Customer concentration is common; many companies have only one big customer.

How large a sales force does the company have?In small companies, senior executives are the main salespeople.

Does the company sell directly to end-users or to distributors?Small companies are more likely to sell directly to users.

How much is spent annually on research and development (R&D)? Designing and manufacturing computer chips and other components rely on sophisticated equipment and are heavily capital-intensive. R&D spending is often high.

How does the company hire, train, and retain qualified staff? Finding qualified personnel is a major issue. Competition for staff is intense and firms spend significant resources for finding, training, and retaining qualified labor.


How rapidly is technology changing in the company’s business segment? Most electronics manufacturers specialize in one product line that depends on a particular application of technology.

How often does the company upgrade its products?Most companies are constantly developing new versions.

How does the company plan to grow?Mergers and acquisitions are a primary source of growth.

Does company strategy include an increase in outsourcing manufacturing?Industry experts expect the outsourcing trend for electronics manufacturing to continue.

RESOURCES AND ACRONYMS American Electronics AssociationPublic policy, research, and news. http://www.aeanet.org

Consumer Electronics AssociationNews, market overview, technology and standards, magazines, and public policy. http://www.ce.org

Electronic Industries AllianceIndustry links, business trends, government relations, and technology and standards. http://www.eia.org/

Electronic NewsIndustry news, research, and archives. http://www.edn.com/

Electronics Supply & ManufacturingManufacturing news. http://www.ebnews.com/

InformationWeek Industry news, research, and archives. http://www.informationweek.com

Semiconductor Industry AssociationIndustry statistics, forecasts. http://www.sia-online.org

TechWebNews about business technology, including computer processors and components. http://www.techweb.com/

CMOS - Complimentary Metal Oxide Semiconductor

DRAM - Dynamic random access memory


GPS - Global Positioning Systems

IT - Information technology

OEM - Original Equipment Manufacturers

PC - personal computer

RoHS - Restriction of Hazardous Substance


COMPUTERSINDUSTRY OVERVIEW

The computer manufacturing industry in the US includes about 1,500 companies with combined annual revenue of $75 billion. Major companies include IBM, Hewlett-Packard, Sun Microsystems, and Dell. The industry is highly concentrated: the top 50 companies hold more than 85 percent of the market.

The output of US computer manufacturing is forecast to grow at an annual compounded rate of 7.6 percent between 2006 and 2009.

Computer Growth Peaks Then Falls


Demand is tied to consumer and business income. The profitability of individual computer companies depends on purchasing and production efficiencies, and on technological expertise. Large companies have economies of scale in purchasing and production. Small companies can compete successfully by specializing in certain products or by developing superior technology. The industry is capital-intensive and highly automated; annual revenue per employee is about $500,000.


Major products include personal computers (PCs); printers; monitors; mainframes; servers; and disk drives. PCs, including desktop, laptops, and workstations, account for almost 50 percent of industry revenue. Input-output devices such as printers, monitors, keyboards, and mice account for 20 percent of revenue, mainframes and servers for 15 percent, and disk drives for 12 percent.

The manufacturing process for PCs consists of integrating circuit boards, disk drives, and input/output devices into a final product. Companies typically assemble PCs from components bought from other manufacturers. Key components like "motherboards" are specially made for a particular product, while disk drives and other components may be off-the-shelf parts. Despite automation gains, some assembly work is still labor-intensive. Manufacturers of specialized devices like printers, monitors, and disk drives may also buy some components from outside vendors. The manufacture of some products requires highly sophisticated machinery.

Although components and other materials can usually be bought from a variety of vendors, some components are available from just a few suppliers. For example, Intel is the major supplier of processor chips for PCs. Many components are bought from foreign vendors and many US manufacturers have foreign manufacturing operations, mainly in Asia.


Computer manufacturers rely heavily on technology to produce better products and lower costs. R&D spending at large manufacturers generally varies between 5 and 15 percent of product revenue, and can be higher for smaller companies or low for pure assemblers, like Dell. Patent licensing is common and patent disputes frequent. Technological advances can rapidly make products obsolete. The life cycle for a product is often less than 18 months, which is based on a common industry concept called Moore’s Law, which states the capacity of a computer chip must double every 18 months to keep up with evolving technology. Moore's Law has held true for several decades.

SALES & MARKETING

Major end-use customers are consumers and businesses. Manufacturers sell to consumers mainly through large retailers like Best Buy and Circuit City, or directly through websites. Large business customers are reached mainly through an in-house sales force. Partnerships with software companies; information technology (IT) consultants; and other vendors can be important in reaching smaller business customers. Manufacturers of components rely heavily on a sales force and trade shows.

Advertising is widely used in the industry, especially to reach consumers and business IT managers. Magazine advertising is common. Internet advertising has also become important.

For many years, the industry has been characterized by steadily falling prices. Advances in technology have made many devices cheaper to manufacture even as their performance improves. In the past decade, wholesale industry prices dropped 60 percent.


Cash flow may be slightly seasonal, depending on the type of product and customer. Personal computer (PC) sales to consumers are highest in fourth quarter; government sales in third quarter. For manufacturers that sell through retail chains, receivables can be high, close to 60 days sales. Companies try to keep inventories low because of the risk of obsolescence, but inventories may still be around 50 days sales. Pure assemblers like Dell can have very low inventories and receivables. Annual write-offs of obsolete inventory can be 5 percent or more.

The industry is regulated by federal and state laws relating to the environment. Pollutant discharge, disposal of hazardous substances, and the cleanup of contaminated sites can be important issues because computers can contain harmful substances such as chromium, arsenic, lead, mercury, and cadmium.


The industry is global. Many products are designed in one country, components manufactured in another, and the final product assembled in a third. A large portion of the revenue of big US manufacturers comes from international operations. Many US companies make products abroad or use foreign contract manufacturers.

US imports of computer equipment are very high, amounting to around $80 billion, almost half from China. Exports are about $30 billion, with a third going collectively to Canada, Mexico and the United Kingdom.


HUMAN RESOURCES

Production workers account for a relatively small proportion of US computer manufacturing personnel, about 30 percent of total employment. Due to rapid innovation and technological advancement, another 30 percent are engineers, technicians, and other skilled workers. Average hourly earnings of production workers are relatively high, around $23, compared to the average national wage of $16.

Industry consolidation, productivity improvements, and off-shoring have resulted in a 30 percent decline in US employment in computer manufacture in recent years. The industry maintains a very safe work environment, with less than one injury per 100 full-time workers per year.



RECENT DEVELOPMENTS Vista May Not Boost PC Sales Immediately - The release of Microsoft’s Windows Vista operating system may not boost US PC sales until the second half of 2007. The back-to-school period in late summer and early fall will create a new wave of PC sales growth, according to Gartner Inc. Many industry experts say the corporate PC upgrade cycle may last even longer as corporations do many months of testing before deploying a new operating system. The business version of Windows Vista was released in November 2006, and the home version was released in January 2007.


US PC Sales Growth Slows - US PC sales rose just 3.5 percent in 2006 compared to 2005, according to IDC. PC sales in the US grew roughly 10 percent annually from 2003 through 2005. Sales in Europe and other regions rose over 10 percent in 2006. Slowing US PC sales were not due to delayed availability of the Windows Vista operating system, but to a slowdown in the development of faster PCs, and generally poor performance by PC makers, according to IDC.

Sales of Apple Computers Up in 2006 - Sales of Apple Incorporated’s Mac computers rose 30 percent in the fourth quarter of 2006 compared to the same period the previous year, according to IDC. Industry experts say much of the sales increase is due to the switch to Intel processors throughout the line of Mac products. The company is likely to set an all-time record for Mac sales in 2006, according to IDC.

BUSINESS CHALLENGES Industry Revenue Closely Tied to Economic Growth - Sales of computer equipment depend on rising consumer income and corporate profits. For example, during the last recession, US production of computers fell about 5 percent, compared to 30 percent annual growth during the 1990s. Although consumers and businesses typically replace computers every few years, they can easily delay doing so if finances are weak.

� US gross domestic product rose 5.9 percent in fourth quarter 2006 from a year earlier, more than doubling the 2.2 percent increase in the third quarter.

Customers Expect Lower Prices - Demand for computers and peripheral equipment is related to steadily lower prices; without these continuing price declines, the market would probably shrink. In a recent five-year period, manufacturer prices dropped 35 percent overall, an average 7 percent per year; laptop prices dropped 75 percent.

� US computer and peripheral manufacturer prices fell 5.1 percent in 2006 compared to 2005.

Rapid Technological Innovation - The life cycle of computer products is relatively short; better and cheaper machines are introduced frequently, making current models obsolete. Without access to new technology and lower costs, companies quickly are overtaken by competitors. As demand for hardware products shifts or declines, companies can be left with obsolete inventory.

Dependence on Foreign Suppliers - Many components in US-made computers come from foreign sources. US imports of computer equipment, including components and finished products, rose 6 percent in 2005 to $78 billion. The US annually imports almost $30 billion of computer chips.

Dependence on Chip Manufacturers - While other computer components are available from a variety of suppliers, computer chips are made by just a handful of large manufacturers, including Intel, AMD, and Micron. Computer manufacturing companies typically make a particular product with chips from a single supplier. Switching suppliers usually requires a new product design.

Environmental Concerns - Many states have introduced electronic waste legislation. Dumping high-tech trash in landfills is no longer a viable option, as personal computers contain harmful substances such as chromium, arsenic, lead, and mercury. With PCs lasting an average three to five years, the potential waste stream is high. Industry observers estimate 315 million old PCs are


ready to be disposed of. “Take-back” programs and recycle programs have been developed by some manufacturers.

Government Controls on Computer Exports - As computers become more powerful, government concerns have grown that US-made computers could be used by other countries for military purposes. Exports of high-end computers are already subject to government controls, but recent legislative proposals would make exports of ordinary computers more difficult.

TRENDS AND OPPORTUNITIESContinuing Productivity Gains - Automation and redesign of manufacturing operations have increased industry productivity by more than 100 percent in the last five years. Industry employment fell 30 percent, while output rose 50 percent. Productivity gains have been a major factor in the steady fall of computer prices.

Off-Shore Design Facilities - Since many US manufacturers have established manufacturing operations offshore, the design of new products and technologies is occurring abroad as well. Hewlett-Packard has long had operations in Japan and recently established a presence in China. Foreign engineers receive much lower pay than their American counterparts.

More Industry-Standard Platforms - The server market has shifted from proprietary hardware and operating systems to standards-based architecture. These “open standards” allow open source operating systems and programming languages such as Linux and Java. The broad acceptance of open standards allows the hardware to more easily absorb new technical innovations.

Growth of Alliances - More manufacturers are developing alliances to offer a wider range of products and services. Dell and EMC announced a co-branding agreement to market joint products; IBM and Network Appliance Corp. announced a co-branding agreement in 2005; Lexmark allied with Dell and IBM to be their exclusive printer partner.

Multiple CPU Processors - Because processor costs are low, designers are producing machines with multiple processors to handle simultaneous tasks such as image processing. With "wider" processor power, computers can be specifically designed for power-hungry tasks like video editing or complicated computer games.

Sales of Software, Consulting Services - As computers become a commodity business with low margins, some manufacturers have expanded into related business such as sales of software or consulting services. IBM, for example, recently received just a third of total revenue from sales of computer hardware, while 50 percent came from consulting services and 15 percent from software; gross margins were 30 percent for hardware, over 85 percent for software.

Flash Memory Products - As costs of flash memory have dropped sharply while capacity has increased, smaller computer products have become possible. Flash memory is lighter and smaller than hard disk drives, and less prone to failure. Products like the iPod nano contain large amounts of flash memory.

Mobile and Wireless Communications Products - Portable computer devices, including laptops and personal digital assistants (PDAs), have become more popular. Although prices for desktop computers were lower, laptops recently outsold desktops in the US. The deployment of local and wide-area wireless communications networks like Wi-Fi and Wi-Max is expected to


encourage the shift to portable products.



CHIEF EXECUTIVE OFFICER - CEO Pursuing Litigation in Patent Disputes Because technological advances make products obsolete, protecting company intellectual property (IP) is important. Patents are very common in the industry – IBM alone received almost 3,000 patents in 2005. Companies protect their IP vigorously, taking those that infringe on their innovations to court. Many companies are involved in multiple patent disputes.

Offshoring Labor-Intense FunctionsUS labor costs are high compared to foreign countries’. While Asian workers, including engineers, have lower wages and benefits than American workers, their technical education levels are becoming comparable. Many companies are shifting production and new product design offshore. Hewlett-Packard has long had a presence in Japan and opened a facility in China in 2005 to take advantage of lower labor costs there. Dell Computer, like other computer manufacturers, has shifted customer service operations to India.

CHIEF FINANCIAL OFFICER - CFOManaging Inventory Levels to Minimize ObsolescenceInventory levels can be high -- up to 60 days’ sales. Financial managers manage inventory levels closely due to rapid product obsolescence. Companies discount product prices as inventory levels rise and new technology products near market. Inventory write-offs can approach 5 percent, necessitating close monitoring.

Managing Seasonal Cash FlowCash flow is seasonal; personal computer makers’ cash flow peaks in fourth quarter. Government sales are highest in third quarter. In first and second quarters, manufacturers generally change production to new models and purge inventories.

CHIEF INFORMATION OFFICER - CIOReducing Manufacturing Costs Customers expect computer equipment prices to fall; prices have decreased an average 7 percent for each of the past five years. Technology executives continuously search for new ways to drive costs out of products. As chips become more powerful, more functions can be placed on fewer chips, reducing component and assembly costs.

Implementing Industry Standards The computer industry has supported developing interface standards to assure interoperability across manufacturing product lines. Standards such as those for wired and wireless networking, DVDs, and USB allow devices and networks to be developed independently and connected to different manufacturers’ computers. Manufacturers recognize that customers value the standard interfaces and appreciate that the lack of standard connectivity limits marketability.


HUMAN RESOURCES - HRHiring Skilled Workforce and Engineers Technically qualified employees and engineers are crucial to the industry, since innovation is vital to success. Almost a third of workers are technicians and engineers whose talents command a large wage premium over most US workers. Companies offer wages of almost $21 per hour and strong benefit packages to attract and retain these skilled employees.

Creating Outplacement Packages for Displaced WorkersDespite automation improvements, high labor costs boost production costs, in turn causing many companies to shift production to low-cost countries in Asia. Companies offer displaced domestic workers outplacement services including job training, counseling, job-finding assistance, and financial severance packages.

VP SALES/MARKETING - SALESSupporting Value-Added ResellersAs companies become more specialized, many are forming licensing agreements where they contract for some product manufacturing through another company. Such licensing agreements enable companies to offer customers a wider selection of products and services. Dell has a licensing agreement with Lexmark where Lexmark printers are branded and sold as Dell equipment, and a contract with EMC where it sells EMC storage subsystems.

Developing Computer ServicesComputer equipment had become a commodity business with price reductions expected by customers, resulting in lower margins. To maintain a growing revenue stream, many companies have expanded into providing system services for which margins and demand are high, such as consulting and software. Many manufacturers now provide consulting services and hardware. Over half of IBM’s revenue comes from consulting.



Does the company expect a strong US and global demand for computers in the next year?Sales of computer equipment depend on rising consumer income and corporate profits.

What products does the company make?Major products are PCs, printers, monitors, servers, disk drives, and components.

Does the company manufacture for inventory or only to fill orders?Because of manufacturing efficiencies of scale, some companies produce in larger quantities than they can immediately sell.

Who are the major competing manufacturers?Concentration within product segments is high.


What are the major competing technologies?In memory, for example, hard drives compete with flash memory; in printers, ink jets compete with laser, bubble-jet, and dye-sublimation technology.

What types of marketing does the company use?Print advertising is widely used in the industry, especially by peripheral and storage device companies. Trade shows are often used to introduce new products or technologies.

Does the company sell mainly to other manufacturers, or to retailers and end-users?Most manufacturers make components for other manufacturers.

What competitive advantages does the company have?Unique technology or low prices are commonly cited.

What products does the company expect to introduce in the coming year?The life cycle of computer products is relatively short; better and cheaper machines are introduced frequently, making current models obsolete.

Where does the company see an opportunity to increase sales?While US PC sales rose just 3.5 percent in 2006 compared to 2005, sales in Europe and other regions rose over 10 percent.

Does the company make its own components or buy them? Some large computer manufacturers mainly assemble purchased components.

How much of manufacturing is done in the US versus offshore?Many manufacturers have foreign production facilities or use foreign contract manufacturers.

Does the company rely on sole suppliers for any product components?Many companies use sole suppliers but could find alternative sources if necessary.

How much of the company's revenue comes from foreign sales?Many large manufacturers have a substantial foreign business.

What share of the company's components is made abroad?Many computer components are made in East Asia.

As a percentage of revenue, how much does the company spend on research & development (R&D)?Some manufacturers have R&D spending equal to 10 percent or more of revenue.

What is the typical time to develop and manufacture a new product?Development times are often less than two years.

How does the company hire, train, and retain staff?Technically qualified employees are crucial in an industry where innovation is so important.

Does the company plan more automation of production?Industry productivity in the US increased 100 percent in the past five years, due to heavy investment in production equipment.


What types of major technology changes does the company expect in the next year?Industry growth has been driven by technological advances.

What new products does the company plan to make?

Does the company plan for more or less US manufacturing?Despite automation, high US labor costs are still an important factor for some manufacturers.

RESOURCES AND ACRONYMS American Electronics AssociationNews, governmental affairs, legislative updates. http://www.aeanet.org

Computer Business Review Issues facing the computer and technology industries. http://www.cbronline.com/

ComputerworldIndustry news and information. http://www.computerworld.com

Electronics Industries Alliance Industry and company news. http://www.eia.org

InformationWeekIndustry and company news, legislative issues, links, company financial updates. http://www.informationweek.com

Institute of Electrical and Electronics EngineersIndustry news and trends. http://www.computer.org

PC MagazineConsumer product developments. http://www.pcmag.com/

PC WorldTrends in personal computing. http://www.pcworld.com

TechWebIndustry and company news. http://www.techweb.com

The Computer Information CenterList of sources. http://www.compinfo-center.com

CPU - Central processing unit


IT – Information Technology

OEM - Original equipment manufacturer

PC - Personal computer

PDA - Personal digital assistant

R&D - Research and development

RAM - Random access memory


TELECOMMUNICATIONS INDUSTRY OVERVIEW

The US telecommunications industry comprises about 2,000 companies with combined annual revenue of $65 billion. Major US companies include Cisco, Lucent, 3Com, and Motorola. Large foreign competitors in the US market include Nortel, Nokia, NEC, Alcatel, and Siemens. The industry is highly concentrated: the 50 largest companies hold 75 percent of the market.

The output of US communication equipment manufacturing is forecast to grow at an annual compounded rate of 2.9 percent between 2006 and 2009.

Communication Equipment Production Growth Slowing


The industry depends on purchases from businesses, telephone companies, cable companies, data communications providers, and TV and radio broadcasters. Profitability for individual companies is linked to technical innovation and the ability to secure high-volume contracts from large customers. Small companies can be successful if they make highly specialized products. There are large economies of scale in manufacturing standard products, but many products are specialized and produced in small manufacturing plants. Annual revenue per employee in a large plant varies from $500,000 to $1 million.

The US telecommunications industry is entering a transition phase where the current telephone system is converted to Voice over Internet Protocol (VoIP) technology and the TV broadcast industry is migrating to High Definition TV (HDTV) technology. These changeovers will require replacing a substantial portion of the equipment in use today, presenting an opportunity for all vendors.

The industry is recovering from a major boom and bust that saw revenue fall 50 percent between 2000 and 2002, after climbing 40 percent in previous years.


The industry produces transmitters and receivers (including satellites); signal boosters; signal processors; connecting devices; power supplies; switches; and telephones. About half of industry revenue comes from equipment for wireless communications (including radio and TV) and half from equipment for line-based communications. Telephone handsets (wired and wireless) account for about a third of industry sales.


The industry makes a large variety of products that are used by the different communications networks currently installed in the US, including radio and TV broadcasting, microwave communications, remote alarm systems, wireless telephone, cable TV, cable data, and telephony communications (including the Internet), and the “wireline” telephone system. The number of products is very large because communications' signals can be sent in different forms (electrical, optical, electromagnetic); at different frequencies, in different modulations (AM or FM); different modes (digital or analog); and signals can be composed and processed in many different ways (CDMA, TDMA, GSM, ATM, circuit-switching, packet-switching, etc.) Products range from $10 telephones to $5 million room-sized Class 5 switches that are the backbone of the wireline telephone system. With leading-edge technology content, equipment is often expensive.

Because of the large number of possible products, most companies concentrate efforts in a particular segment with the objective of dominating that segment. Motorola specializes in wireless telephone, Cisco in Internet infrastructure, Lucent in wireline infrastructure.

Many telecommunications products are electronic devices assembled from standard components (such as computer chips and circuit boards) that are customized for a particular application. Production facilities are often highly-automated. Systems are designed to be highly modular, consisting of cabinets, shelves, boards, etc. Large, expensive pieces of equipment may be assembled by hand from pre-built components. Parts are bought from a large number of electronic component suppliers, many of which are located abroad.

Outsourcing has become pervasive in telecommunications manufacturing. Specialized chips may be shipped to companies fabricating circuit boards and then shipped to other vendors doing the final assembly and test. Many large manufacturers, including Lucent and Motorola, outsource some or all of the actual manufacturing to contract manufacturers like Flextronics and Solectron that operate factories in low-cost countries. Computer chips, the core of most products, are sometimes in tight supply. Individual product testing is usually required to ensure that the internal electronics of finished products work properly. Software is a significant part of finished systems and can be a significant contributor to profit margins. Manufacturers hold the code as highly proprietary.

The technology of telecommunications is rapidly changing. Companies constantly introduce advanced versions of their products and spend heavily on research and development (R&D). From being passive devices that perform a single function, many products have evolved into programmable computer-controlled devices that can adapt to different needs. For many manufacturers, R&D spending is greater than 10 percent of revenue; for some, more than 20 percent.

SALES & MARKETING

Products are sold mostly to companies that provide telecommunications services, such as telephone companies, radio and TV stations, cable systems, data communications companies, and Internet service providers. Most companies use an internal sales force with strong technical knowledge. Because of the complexity of technical issues involved, sales are typically “engineer-to-engineer.” Equipment is sold based on technical specifications and performance as well as price. Sales proposals are often in response to requests for bids from large customers. Negotiations on large multi-year sales contracts can be lengthy.

Pricing is often unrelated to production costs. With the rapid pace of technological change in the industry, manufacturers must recoup development and production costs as rapidly as possible


before a product is obsolete. As in the computer industry, for many years prices have been falling relative to performance.

Trade shows are an important marketing tool for manufacturers. Many large companies in the industry have alliances with smaller ones to stay abreast of technological developments. Co- or re-branding of smaller company equipment is common, with the large company warranting and servicing the smaller company’s equipment.


Cash flow for many companies is uneven because of the importance of large contracts and the unpredictability of demand. To prevent accumulating obsolete inventory, many products are made in quantity only once a contract has been signed, so inventories are generally low. Traditional practice is for manufacturers to receive one-third of the contract price when the order is accepted, one-third when final assembly is started, and one-third on completion. Competition to secure the business of local exchange carriers causes many manufacturers to offer generous credit terms; consequently, receivables may be high.

The amount of capital spending required depends on the type of product being made and the extent to which manufacturing is done internally. Small items made in large quantity typically require automated production equipment, whereas the manufacture of large expensive products may require very little capital equipment because final assembly might involve bolting together units manufactured by subcontractors, powering up the system, and testing it.

During the 1990s, many companies expanded by buying smaller companies. Cisco, for example, acquired 10 to 12 small companies per year. In the retrenchment of 2001-2002, many of the business lines acquired in the 90s were abandoned or spun off, leaving some large companies with substantial amounts of debt.

The telecommunications industry is highly regulated by states through public utility commissions and the federal government through the Federal Communications Commission (FCC). Equipment manufacturers aren't directly regulated, but many of their products must comply with FCC standards. Because some materials used to make some telecommunications equipment are toxic, manufacturers may have issues with regulations for workplace safety, waste disposal, or air and water pollution.

Patents are important to most telecommunications manufacturers because of the highly technical nature of most products. Patent disputes are frequent. Manufacturers may pay to license rights from patent holders or may get significant income from licensing their own patents.


Large manufacturers may have production facilities in low-cost countries like Korea, Mexico, China, and Malaysia. Computer chips and other electronic components are often supplied from the Far East. China has become the largest supplier of electronic components to the US, at $15 billion.

The telecommunications industry has become international in scope and domestic manufacturers ship up to 50 percent of their branded products overseas. Total US exports of telecommunications equipment are about $20 billion. Overseas manufacturers such as Nortel, Nokia, NEC, Alcatel, and Siemens are significant suppliers to the US market. Total


telecommunications equipment imports to the US (from US and foreign manufacturers) are about $50 billion.

HUMAN RESOURCES

Telecommunications manufacturers depend heavily on a workforce of highly educated and well-paid engineers to design products, manage the manufacturing process, and help with sales. Technicians who assemble complicated products like telephone switches also require special training and have high earnings. Overall, industry wages are 15 percent above the national average.

The number of US workers in the industry has declined sharply in recent years, both because production volume fell 25 percent during the recession and because more production moved to low-cost countries.



RECENT DEVELOPMENTS New Network Construction Boom - Telecommunication equipment manufacturers are enjoying resurgent interest in new network creation, according to industry experts. Many organizations are building new networks, which are powered by telecommunication equipment, to satisfy the


growing demand for Internet and communication technology that requires more capacity and bandwidth than ever before. The new networks rely on more powerful telecommunication equipment than some previous networks, which should indicate a continued need for innovation among telecommunication companies.

Wireless Networking on the Rise - The popularity of wireless networking, which allows consumers to connect to the Internet without cords or cables, is rising in the US. Increased usage means an increase in the amount of equipment necessary to run the networks, which is manufactured by telecommunication equipment manufacturers. According to a report released by the Pew Internet & American Life Project, there has been a 100 percent increase in home wireless networks since January 2005, to approximately 20 percent of Internet users’ homes today.

Equipment Makers Gear Up for Broadband Via Cell Phones - Cell phone service providers, which rely on telecommunication equipment to run their networks, are gearing up for an expansion of broadband services to customers. Eventually, customers will be able to speedily download Internet content, including television shows, via a cell phone, though the technology does not yet allow this type of application at speeds commensurate with what many Internet customers are used to. However, as the industry moves forward with broadband cell phone access, telecommunication equipment manufacturers should experience increased demand for broadband networking equipment.

BUSINESS CHALLENGES Revenues Tied to Cyclical Business, Consumer Demand - Although manufacturers sell mainly to telecommunication service providers, demand for services depends on the economic situation of businesses and consumers. Small changes in demand have large effects on manufacturers. For example, during the last recession, when corporate profits fell 5 percent and personal income growth was low, telecommunication equipment manufacture fell 25 percent.

� US disposable personal income, an indicator of demand for telecommunication equipment, rose 5.4 percent in 2006 compared to one year ago.

Telecom Service Providers Subject to Regulation - Demand for new telecom equipment depends partly on the types of services various providers can offer per federal regulations. The FCC and state regulators have a large impact on the structure and operations of the telecom services industry. Because of rapid advances in technology, these regulators and the courts are often required to make decisions that affect demand for new equipment.

� Several US states are considering legislation that would set forth rules concerning governmental regulation of VoIP services in their jurisdictions, including the payment of operating fees to government agencies.

Obsolescence Risk: Rapidly Evolving Technology - Because of rapid advances in technology, equipment manufacturers run a large risk of making outdated products. To keep up with advances, companies must spend large amounts on R&D, the costs of which typically equal 15 to 25 percent of revenue. Many high-tech products are routinely replaced every two to three years.

Dependence on Large Customers - Because of consolidation among telecom service providers, equipment manufacturers may depend on just a few customers for a large portion of business. Companies that supply the big telephone, cable, and TV providers, in particular, typically depend on a few relationships. In 2004, for example, Lucent received almost 30 percent of its revenue


from Verizon.

Competition from Foreign Suppliers - Because telecommunication services are becoming standardized throughout the world, equipment makers for foreign markets can also sell their products to US service providers. Many of the largest equipment competitors in the US market are foreign companies, including Nortel, Alcatel, Nokia, NEC, and Siemens. Many foreign companies try to enter the US because it's the largest telecom market in the world.

Dependence on Foreign Manufacturing Facilities - Many US equipment suppliers have some or all of their actual manufacturing plants in foreign locations, often in Asia. Companies that outsource manufacturing to third-parties typically also rely on foreign manufacture. Major semi-conductor suppliers are located in the Far East; therefore, foreign political or economic events could seriously disrupt the manufacturing supply chain.

Complex Products Prone to Errors - Telecommunication products are inherently complex and use leading-edge hardware and sophisticated software algorithms. Pre-shipment testing, no matter how comprehensive, won't detect all hardware and software bugs. Once hundreds of the units are installed in different environments, latent defects may become apparent. Elaborate systems are established to bring company expertise to bear as rapidly as possible, but severe problems can overwhelm a system and produce large financial losses.

TRENDS AND OPPORTUNITIESMulti-Media Network Consolidation - The migration to a consolidated public telephone system that supports voice, data, and video is underway. Most believe that the protocol used will be the Multi-Protocol Label Switching (MLPS) system that supports IP, ATM, and other protocols. Transition will require converting all the class 5 and 4 switches, and will eventually require optic fiber to the home, necessary upgrades for phone companies to compete with cable carriers. Wireless carriers will compete using 3G networks and could have some advantages in suburban and rural areas.

Slow Capital Spending for Phone Companies - Phone companies don't forecast major increases in capital expenditures other than for acceleration of fiber-to-home networks, and are building out their DSL access networks slowly. But competition from cable companies offering phone services and high-speed Internet access could prompt larger investments in new equipment.

Continued Deregulation - The FCC has articulated a vision of four types of providers competing for local services – local phone companies, cable companies, wireless providers, and electric companies providing access to broadband over power lines (Access BPL). Recent FCC rulings have opened additional frequency for nationwide advanced wireless services and adopted rules to encourage development of Access BPL. The regulatory climate in the next few years is expected to foster more competition, encouraging new equipment purchases.

Continued Technology Innovations - New innovative telecommunications services are being created and offered by service providers and third parties. With the advent of two-way video, even more creative services are possible. In Korea, sending and receiving video mail, movies, and a full range of mobile automation services is possible. In the US, Sprint launched a video-mail service and other providers have announced similar services.

VoIP Equipment - While the traditional telephone system dedicates a single open line to each phone call, the packet-switching technology used by the Internet can send small pieces of many


calls along one line, reassembling them at the end. This greater efficiency is pushing service providers to buy packet-switching equipment to build so-called Voice over Internet Protocol (VoIP) systems. Analysts expect that converting the phone system to VoIP will require huge investments in new equipment.

HDTV, Other Digital TV Equipment - With prodding from the federal government, which has granted TV broadcasters extra spectrum and set various deadlines, the US TV system is converting from analog to digital signals. Among the most anticipated new digital services is high-definition TV (HDTV). To produce and transmit high-definition images, broadcasters must buy new cameras and signal-processing equipment.

Wireless Video Services - Technology forecasters expect a majority of cell phones will have built-in digital television receivers. Phones will also have enough memory and processing power to handle a whole new set of services, making it possible to create a TiVo-like video recorder that fits in a pocket.

Rural Wireless Broadband Access Services - Rural users have been largely unserved in the broadband rollout in the US, primarily because a large segment is more than 18,000 feet from the local exchange facility. Because of the low density of users, carriers have been reluctant to upgrade facilities to accommodate them. Satellite services have been considered, but are expensive and have propagation delays involved. Wireless services appear to be an economical way of addressing rural users.

Wireless Internet Access Systems (Wi-Fi) - Local wireless Internet access, Wi-Fi, systems allow large numbers of users to connect to the Internet without hard-wired connections. The service depends on a local network of antennas, which is much cheaper than wire connections. Numerous municipalities plan to build these systems as a public service, despite objections from local phone companies that believe that such tax-supported competition is unfair.

Data Transmission Over Power Lines - The ubiquity of electrical connections suggests the possibility of sending information to homes or businesses through power lines. The FCC has issued guidelines to minimize interference between the electrical grid and other spectrum users, and feasibility tests are being conducted. The success of this technology would lead to massive investment in new types of communication equipment.



CHIEF EXECUTIVE OFFICER - CEO Developing Superior TechnologyThe telecommunication service industry is transitioning from switched voice services to routed multi-media (voice, video, and data). Cable providers are placing their services to directly compete with the phone companies for all those services. Cable providers and phone companies, the dominant buyers of telecommunications equipment, are upgrading or replacing entire networks to provide multi-media services. The technologies selected will become the standards for the next generation systems and the selected vendors will dominate the industry.

Developing Relations with Major CustomersAs buyers, the major phone companies and cable providers dominate the telecommunication


marketplace. Vendors with the best combinations of core technologies, price, and service are often awarded large multi-year, high-volume contracts. Because these multi-year contracts are strategic to both companies, agreements are often negotiated at the senior executive level. Consolidation among telecommunication providers has resulted in a few large customers accounting for the majority of revenue of an equipment manufacturer. Attaining stringent performance and availability parameters requires both vendors to operate in concert at all levels with the supplier consistently going beyond the letter of the contract.

CHIEF FINANCIAL OFFICER - CFOComplying with Revenue Recognition StandardsSince divestiture in the early 1980s, the telecommunication industry has been burdened with overly aggressive accounting techniques. Global Crossing booked $3.2 billion from capacity swaps with other carriers; Nortel and Lucent took credit for deliveries one to two quarters in advance of actual equipment delivery and installation. The economic downturn of 2001-2002 caused many small carriers to go out of business, exposing accounting techniques. The SEC has imposed fines and instituted criminal procedures to discourage future misrepresentations.

Outsourcing Manufacturing OperationsContract manufacturers dominate the technical equipment production business. These manufacturers specialize in establishing production lines and continuously reengineering the processes to make them more efficient. While many of their plants are located in developing countries to take advantage of low wages, extensive automation allows the plants to be located anywhere. Using these manufacturers minimizes capital outlays, increases manufacturing flexibility, and takes advantage of the superior scale economies in the buying of the large contractors. Most major telecommunication equipment suppliers have outsourced their manufacturing, selling their plants and transferring some employees. Lucent, Juniper, Nortel, and Cisco all use contract manufacturers.

CHIEF INFORMATION OFFICER - CIOConstructing Regression Testing EnvironmentMajor manufacturers set up testing labs that can emulate a 100,000-line switching network. These labs are used to interface new items of equipment with several generations of older equipment – class 5 switches, DSL panels, etc., and determine the new equipment’s performance in a simulated production environment under various load conditions. This testing is necessary for all new equipment before any new equipment is placed in a live environment.

Participating in Standards DevelopmentTelecommunications is a standards-driven industry with standards developed in industry forums; national standards organizations (ANSI, IEEE); and international organizations (CCITT, ITU). The international standards process can take years, but with technology moving as rapidly as it is, domestic processes are being used more, resulting in incompatibilities between countries – as in the CDMA, GSM, and UMTS standards in wireless. Participating in the standards process gives a company the opportunity to support standards favorable to its products.

HUMAN RESOURCES - HRHiring Specialized WorkersTelecommunication manufacturers often need design engineers with specific technology skills and experience, who may be in short supply. In the industry downturn of 2001-2002, employment in telecommunication manufacturing decreased by more than 40 percent with areas of high concentrations of manufacturers – Richardson, Texas;, San Jose, California; and Homdel, New Jersey – hit especially hard. Most manufacturers had to severely downsize and many are in


danger of bankruptcy. Recruiting in this environment is challenging due to the uncertainties being experienced by the former industry leaders.

Providing Technology TrainingBecause of the rapid evolution of technology in the industry, manufacturers must continuously train design, production, and maintenance personnel. Some companies maintain close ties with university research departments to stay abreast of innovations in basic technology. Manufacturers provide extensive training for customers and value-added resellers.

VP SALES/MARKETING - SALESDeveloping Channels to MarketManufacturers sell most products directly to major customers. To reach smaller customers, manufacturers usually use value-added resellers. Where the company has little or no market penetration, they often form strategic selling alliances with competitors. Juniper Networks has strategic reseller relationships with Lucent, Ericsson, and Siemens. Because of the frequent overlap in customers, developing and managing channels is a major challenge.

Developing Export MarketsBecause technology can easily be used in other countries, many US telecommunication equipment companies have large international sales. US exports of telecom equipment are close to $20 billion per year, of which a large share goes to Canada, The Netherlands, Mexico, and Japan. International sales can be especially difficult because the buyers are often government-owned companies.



Will the company profit from the switch to a national Voice over Internet Protocol (VoIP) phone system?While the traditional telephone system dedicates a single open line to each phone call, the packet-switching technology used by the Internet can send small pieces of many calls along one line, reassembling them at the end.

How is the company impacted by the proliferation of new networks?An increasing need for greater capacity and the desire of some organizations to own their own networks are two primary reasons for an increase in new networks.

How will the company be affected by an increase in interest in wireless networking?Increasing consumer comfort with wireless networking could result in even deeper market penetration of the equipment necessary to power wireless networks.

What types of products does the company make?The industry produces transmitters and receivers (including satellites); signal boosters; signal processors; connecting devices; power supplies; switches; and telephones.


What industry segment does the company serve?Telephone, data networks, cable, wireless communications, and radio and TV are the major industry segments.

Who are the major competitors?The industry is highly competitive in most segments.

What distinguishes the company’s product(s)? Product could be distinguished on features, price, or both. If features are identical, pricing is critical.

Who are the major customers for the company's products? What percentage of net sales do they represent?A single customer taking more than 10 percent of the vendor’s output represents a potential risk.

Does the company sell mainly to service providers or directly to businesses and consumers?Direct sales require different marketing and sales strategies.

How does the company plan to keep up with advances in technology?Because of rapid advances in technology, equipment manufacturers run a large risk of making outdated products.

Is the company developing products for the digital TV market?With prodding from the federal government, which has granted TV broadcasters extra spectrum and set various deadlines, the US TV system is converting from analog to digital signals.

Will the company produce equipment for the wireless markets?Technology forecasters expect a majority of cell phones will have built-in digital television receivers.

How many and what type of facilities does the company have?Most smaller companies have a single manufacturing site.

Who does the company buy components or raw materials from?Many semi-conductor manufacturers are in the Far East.

Does the company use contract manufacturers?Many large companies, including Nortel, Lucent and Alcatel, outsource their manufacturing.

How large a sales force does the company have?This depends on the size of individual contracts.

Does the company depend on a sales alliance with a larger partner?Small manufacturers may sell their product through a larger partner.

Are the company’s products manufactured domestically or imported?Many companies have off-shore design and manufacturing. Others engineer and fabricate domestically; some use combinations of domestic and off-shore.


What percentage of company sales is overseas? In what countries are the products sold? The larger manufacturers (Lucent, Cisco) sell about 50 percent of their product overseas.

How much does the company spend on research & development (R&D)?For some manufacturers, R&D exceeds 20 percent of revenue.

How does the company hire and train technical personnel?Engineering is a critical function for most equipment manufacturers.

Is the company developing new products?With technology moving quickly, products can become obsolete rapidly and require replacement.

RESOURCES AND ACRONYMS Broadcast NetGood industry and manufacturer links. http://www.broadcast.net/index.html

BusinessWeek Online - TechnologyIndustry news. http://www.businessweek.com/technology/index.html

Cellular-NewsNews. http://www.cellular-news.com/

CTIA - The Wireless AssociationIndustry news and issues. http://www.ctia.org

Federal Communications Commission FCCRegulatory actions and policy. http://www.fcc.gov/

National Association of BroadcastersIndustry issues. http://www.nab.org

National Cable & Telecommunications AssociationGood industry overview, industry issues. http://www.ncta.com

Telecommunications Industry AssociationIndustry statistics, policy issues. http://www.tiaonline.org

Telephony OnlineIndustry news. http://telephonyonline.com/


United States Telecom AssociationIndustry issues. http://www.usta.org

3G - Third generation

AMPS - Advanced mobile phone system

ATM - Asynchronous transfer mode

CDMA - Code-division multiple access

CLEC - Competitive local exchange carrier

DSL - Digital subscriber line

FCC - Federal Communications Commission

FTTP - Fiber-to-Premises

GSM - Global system for mobile communications

HDTV - High definition TV

ILEC - Incumbent local exchange carrier

ISDN - Integrated services digital network

NEBS - Network equipment building standards

PCS - Personal communications system

PSTN - Public switched telephone network

PUC - Public utility commission

RBOC - Regional Bell operating company

TDMA - Time-division multiple access

VoIP - Voice over Internet Protocol


ENTERPRISE SOLUTIONS TEAM RESOURCESFor more information on Polycom Enterprise Solutions, please contact the Enterprise Solutions Marketing team or visit the Polycom website:

GENERAL [email protected]

ENTERPRISE SOLUTIONS WEB PAGE - coming soon

www.polycom.com/enterprise

ENTERPRISE SOLUTIONS MARKETING TEAMBob Preston Vice President, Enterprise Solutions Marketing [email protected] Remote Office: 1-858-792-5797 San Jose Office: 1-408-474-2293 Mobile: 1-858-342-6656

Brian Gilman Director, Enterprise IT/Infrastructure Solutions [email protected] Remote Office: 1-610-365-1934 Mobile: 1-484-547-3592

Randel Maestre Director, Enterprise Line of Business Solutions [email protected] Remote Office: 1-858-577-0097 Mobile: 1-858-603-4687

industry overview technology sector

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