Nokia-Siemens to Shut German Plant

Nokia Siemens Networks (NSN) – a 50-50 joint venture between Nokia Corporation ( NOK - Analyst Report ) and Siemens AG ( SI - Analyst Report ) has announced that it will be closing its plant in Bruchsal, Germany, latest by the end of 2013. Shutting down the plant is a part of the company’s cost cutting initiatives to trim down its heavy losses.

NSN declared that it will negotiate with the labor council in Bruchsal to close the plant as early as possible which in turn will eliminate around 650 jobs in the plant. The company expects the employees to leave the plant in the next three to six months depending on how the negotiation proceeds.

Formed in 2007, NSN achieved its first operational profitability only in the third quarter of 2012. Though the company has a strong GSM portfolio, it lacked severely on the CDMA front, which is the most dominant network used in the lucrative North American market. Moreover, by offering lower bids for network infrastructure contracts, the Chinese vendors like ZTE and Huawei Technologies provided stiff competition to the company.

In an attempt to overcome this difficult situation and to concentrate on its mobile broadband business, the company is reducing its operating cost by retrenching employees and selling its non-core business units. NSN plans to lay off 17,000 or 23% of its work force and expects the restructuring to result in an annual cost reduction of approximately $1.35 billion by 2013.

In this year itself, the company has trimmed about 13,000 of its work force and has made five divestments, which include selling some of its internet protocol television (IPTV) assets to Accenture plc. ( ACN - Snapshot Report ) . NSN is also in the final lap of negotiations to sell its Business Support System unit to L.M. Ericsson AB ( ERIC - Analyst Report ) , Amdocs Ltd. ( DOX - Analyst Report ) and some private equity firms.

Currently, the telecom carriers are heavily investing in network upgrade to support massive demand for mobile data and video. Additionally, the Chinese companies are facing political hindrances in the US market over security concern. This provides NSN an opportunity to gain a strong foothold in the US market.

We believe selling these non core business assets will help NSN to concentrate more on building LTE networks, which is in high demand in Japan, South Korea and other emerging markets.

We retain our long-term Neutral recommendation on Nokia Corp. However, it holds a Zacks #2 Rank, implying a short-term Buy rating.