Big fish, small pond

ICT hardware companies are stomaching short term problems as they look to long term gains

All those bytes and gigs need to be routed the right way

Sitting in a room where two rotating cylinder lenses track you and project a blown-up high definition image of you to your colleague sitting in Jordan, and vice versa, may be disconcerting for any number of reasons, but for Hani Raad, general manager for the Levant region at networking giant Cisco, it is a time saving routine and just another day of business meetings conducted over Internet Protocol (IP) telephony.

According to Raad, while products as state of the art and futuristic as the IP telecommunications have somewhat of a fan base among certain business segments in Lebanon, the country is missing a sizeable market for, and investment in, the more mundane market of networking infrastructure.

Routers, modems, switches and fiber optic cables are certainly one of the less hyped lines of business, but they do make up the backbone of the internet, which is not of negligible relevance to a country that wants to call itself modern.

And while sexy topics such as the internet of things come to the forefront of piquing one’s interest in Information and Communications Technology (ICT), even with the municipality of Beirut participating in the Arab Future Cities Summit in Dubai last November, judging by current investment levels in ICT infrastructure Lebanon seems far off from having smart highways where cars and speed limits talk to each other.

“Don’t think we don’t know what you’re doing. Don’t think we don’t know where you’re walking”

It is not that there are no sophisticated technologies in Lebanon. Just by entering a mall your very own mobile devices can sell you out to the marketing campaigns of a store near you. As Raad tells Executive from one of Cisco’s teleconference rooms, “Don’t think we don’t know what you’re doing. Don’t think we don’t know where you’re walking.” Indeed, every person these days is rather easily traceable through their mobile devices. This, Raad explains, is a symptom of the internet of things in Beirut.

But while not all things in our world feel the need to be connected, the majority of the people do, and having the networking infrastructure to achieve this is crucial for our modern day and often long distance communication needs. This provides the opportunity for foreign companies the likes of Cisco, Huawei, Ericsson and Alcatel–Lucent to come and carve out a share in what is, admittedly a rather meager market, but one whose people share a strong desire to be connected.

Public sector stinginess

Whether it is spiffy new technologies or basic backbone infrastructure, the pervasiveness of these technologies depends on the willingness of client organizations to invest. And unlike our Gulf neighbors, many of whose governments have made lavish investments in ICT, the Lebanese government is not an ideal client to provide a Lebanese company’s bread and butter through deals in the networking hardware market.

Lebanon has already witnessed companies being put in a shaky situation if they can only rely on the government as a customer. With a government budget upwards of $50 million supposedly allocated to the internet backbone, two companies, local civil works company Consolidated Engineering and Trading (CET) and multinational networking equipment giant Cisco, admitted to Executive that they had not been paid in full for projects they had delivered.

CET won the bid in 2011 for the milestone project to lay down Lebanon’s fiber optic backbone infrastructure, connecting exchanges together as well as heavy users such as the army. With a $55 million budget mostly allocated to the civil works part of the project, CET dug one million meters of trenches to lay down the 4,000 kilometers of fiber optic cables, according to Dany El-Horr, CET’s vice president. The work of purchasing and pulling the cables was subcontracted out to Alcatel–Lucent as part of a strategic partnership, which, the VP explained, acquired the cables from Samsung.

But whereas this project was carried out, CET has not yet been paid all of the money owed to them. Though the project did increase in size from the one originally contracted, El-Horr claims that as much as 25 percent — about $15–20 million dollars — has not been paid.

This does not bode well for CET, whose tender was the cheapest “by far” compared to those of the dozen others that were presented to the government whose inability to pay has ended up “in a total loss” for the company. Indeed, El-Horr estimates that the price came to about $12 per meter of cable. “It was very dangerous for us to get into that project with very low prices,” he says. They were expecting to break even, to make or lose 1–2 percent. Though El-Horr admitted that their primary goal wasn’t making profits, but rather for the prestige and know-how, he laments that with these amounts “who can sustain that?”

The Lebanese government also has outstanding accounts with Cisco, according to Raad. But for the multinational, the money owed to it by the government does not seem to be an amount it can’t swallow. Cisco is one of the multiple vendors taking part in Lebanon’s internet infrastructure as far as anything related to routing, switching, international gateway, etc. Though the size of the company ensures that it can better sustain losses, Cisco’s loss would likely have been smaller in value and, as Raad expresses, “our projects are not those megaprojects.”

Not only is the Lebanese government bad at paying the outstanding accounts to its telecommunication infrastructure providers, but it is also quite dysfunctional when it comes to installing new equipment in general. Even a Cisco donation of two of their treasured IP videoconferencing screens to the government through their involvement in the Partnership for Lebanon, an initiative to modernize Lebanon’s communi-cations infrastructure, were never installed according to the GM. “They couldn’t agree where and how and the process to install them,” he says.

Educated guesswork

While the image of gleaming state of the art Cisco equipment sitting in boxes uninstalled makes for a nice anecdote, it is the symptom of a much larger problem which is the inability of the Lebanese government to make and implement policy for the sector, which has hindered it particularly in terms of managing capital expenditures. In a world where government investment can shape the telecoms market, Lebanon is at somewhat of a disadvantage.

In fact, Raad states that the Lebanese market could not even grow to become a tenth of any given Gulf economy. “We don’t have the money for that,” he says, citing the similar projects in many GCC economies, whereas in Lebanon there are no transformational projects underway, just the good old timid upgrading and expanding plans for organizations.

With public sector projects “few and far between,” Raad is somewhat optimistic, citing the donations this year — such as Saudi Arabia’s pledge — as hope that the public sector will move a little bit in the coming year. But all in all not even 10–15 percent of what Cisco does goes to public sector clients “because they don’t spend,” according to Raad. Their public sector clients include the Ministry of Finance, Ministry of Interior, and the Internal Security Forces, though he qualifies that most of these infrastructure projects come from grants from international organizations such as the European Union and the World Bank.

Though the government is not a big spender, state run fixed line network operator Ogero controls much of the infrastructure and the internet service providers (ISPs) and data service providers (DSPs) have a minority share of the market. “The service providers sector is not as dynamic and, lets say, lucrative as it should be,” says Raad, who likens the acceleration of the ISP segment to “blood flowing in the veins” of the company. 

Unsurprisingly, Cisco’s main line of business in Lebanon is the financial and enterprise sector, a natural choice given the prominence of the banking sector. Raad claims that top banks, as well as top universities, hospitals, and service providers are Cisco clients for everything related to switches, routers, wireless, security, IP telephony and video.

“When we look globally, I know where I am. When I zoom to Lebanon, I don’t know where I am”

While no single company Executive spoke with could give a precise number for the market size for networking hardware, it can be assumed with some certainty that it is a small number. “In reality, the fact [is] that we don’t have data and we don’t have things to track this data, I only can assume,” says Raad. “When we look globally, I know where I am. When I zoom to Lebanon, I don’t know where I am.”

Though it is difficult to measure the total worth of the units that are being used, one number that has been thrown around for over a decade now for the ICT market is the figure of $250–300 million. More recent numbers from Investment Development Authority of Lebanon (IDAL) pegged the IT market size at $337 million in 2012. Raad assumes that if about 45 percent belongs to personal computers and hardware, a company in the networking hardware industry is left with a market size somewhere north of $150 million and south of $200 million.

But such low figures, already barely an educated guess, could quickly become irrelevant with one deal. “We stopped a long time ago at Cisco to look at market share,” says Raad, who claims they track their performance instead based on growth, employee productivity, number of accounts and service provider environment. Cisco works with more than 300 customers a year in Lebanon, according to the GM, and he claims they have had growth or at least flat year on year performance in every year since 2000.

The next big government project would be the fiber-to-the-home, or the last mile, which would require a budget of roughly $300 million according to El-Horr — the same number given by a former official from the Telecommunications Ministry who spoke on condition of anonymity. Most of that expense, like the laying of the fiber optic backbone, would go to the civil works part of the project, about 70 percent, according to Roger Ghorayeb, who oversees several countries for Alcatel–Lucent including Lebanon, Syria, Kuwait and Bahrain.

Stiff Competition

But despite the slight market size, doing business in networking hardware in Lebanon has attracted several international companies. Just as they compete globally, the usual suspects Alcatel–Lucent, Huawei, Ericsson, HP, Cisco and smaller companies like Juniper are continuing the onslaught in Lebanon.

Raad claims that Cisco has benefitted from being the first entrant to leap into the world of routers and switches in the Lebanese market since the inauguration of their Beirut headquarters in 2000. He adds that their majority stake in the market for internet hardware infrastructure has only dropped slightly, from a quasi monopoly to a current estimate of over 80 percent — though he qualifies that this is a guess at best. He claims that since most projects in Lebanon center on upgrades and expansion, and that Cisco already has the installations, it is harder for a competitor to come in and sweep up a considerable market share.

Competitors like Huawei may have some advantages when it comes to their ability to set their prices at a slightly more appealing rate. Raad claims that while Cisco currently dominates the enterprise space, Huawei could get there “at some point,” though it is not out of character for GMs of ICT companies to downplay the current activities of their competition.

Even smaller fish like Juniper have historically posed a threat to giants like Cisco on the global scale, such as when in 1999 they released their first product and took a sizeable piece out of Cisco’s market share in network routing. Cisco’s GM of the Levant says that the present competition from Juniper is rather negligible, though the latter does sell its products through Lebanese company Crystal Networks.

As technology changes, of course, there will be new competitors in the market. But the big ICT companies of our day continue struggling not only against each other, but also to stay relevant. Many giants of the networking hardware world are focusing their operations to be more specific. Alcatel–Lucent launched its ‘shift plan’ in 2013 to refocus their main lines of business on IP networking, cloud technologies and ultra-broadband access after the company ran losses for several years. While their operations are now back in the black, the process demonstrates that these giants have enough resources to withstand years of negative cash flows.

So as far as long term strategy goes, at least in Lebanon, not all incentives may be based on immediate profits. Ghorayeb explains that Alcatel–Lucent may engage in projects with limited profitability but that may bring value in the long run, value which he describes as that which “can be a reference, better perspective on long run or profitability, several things.” Their clients in Lebanon include the Ministry of Telecommunications, Ogero, Alpha, Touch, DSPs and ISPs, as well as EDL, Solidere and the Beirut Central District’s broadband network. “When we win a project, we are convinced it is vital for [the] country and company. Even if the contract is losing from a profitability point of view, we take it if [it] can bring value in [the] medium or long term to [the] country or company,” he says.

It is hard to be hopeful for the market for networking hardware in Lebanon. As long as nothing changes in the ability of the Telecommunications Ministry to come up with a spending plan and stick to it, the market will continue to operate under the same constraints. The most severe being, according to Raad, the lack of an ICT vision with tangible plans, outcomes and execution. “Today if I want to point you to Lebanon’s national ICT plan for the next five years, I can show you the Jordanian one,” he says. “I haven’t seen one for Lebanon.”

Livia Murray

Livia covers business, finance and economic policy for Executive.

*

Top