• June 15, 2015, 2:25 P.M. ET

Nokia-Alcatel May Not Save Telecom from ‘Insanity,’ Says Berenberg By Tiernan Ray

Is the telecom equipment industry headed for a price war?

That’s one of the questions raised today by Jean Beaubois of Berenberg, and his colleague Adnaan Ahmad, who see a reversal of a prior period of “discipline” among vendors such asEricsson (ERIC), Nokia (NOK), and Cisco Systems (CSCO).

Writes Beaubois, “24 months ago we did a Telecom Equipment workout Insanity to Discipline and thought that price discipline was coming to the industry.”

But, “Today we are worried that Q1 is the first sign that we are running back fast to Insanity…”

In the original note, back in September of 2013, the authors had written that vendors would not cut prices dramatically:

The bottom line is that pricing discipline should prevail. In fact, industry margin structure has already started to ameliorate and could continue to surprise on the upside given a) the mix shift to capacity from coverage, b) the installed base – razor-blade model, and c) the potential for further industry restructuring such as a Nokia/Alcatel-Lucent wireless combination. On this latter point, we remain sceptical given Nokia’s ability to gain share solely on its superior balance sheet position after the Microsoft transaction.

But now Beaubois cites a couple reasons why vendors such as China’s privately held Huawei,and Hong Kong-listed ZTE (0763HK), may no longer be so disciplined.

One reason is a slowdown in China’s telecom spending, he writes.

The bull case, he writes, is:

Price discipline is here to stay: We have had more than 10 years of industry consolidation such as Ericsson/Marconi/Nortel/Redback/LG; Nokia/Siemens/Motorola and now we can add Alcatel/Nokia.

The bear possibility, however, is that,

Price discipline only came because Chinese telcos were spending like crazy to roll out 4G. As China is ZTE’s and Huawei’s largest markets (c50% of sales) they were busy enough and did not have to chase business outside of their domestic market over the last 2 years. But as Chinese CAPEX is expected to fall next year, our two Chinese friends will have to aggressively look for growth in the International market! 

The bull thesis on Nokia’s merger with Alcatel-Lucent (ALU), is that it will “The merger between Nokia and Alcatel will bring further price discipline.”

But the bear possibility is “Alcatel was small in wireless with only $4b in sales and mostly in the US, so its merger with Nokia does not change the competitive intensity in the International market.”