The fact is, all parties are to blame. Spoilt by years of cheap gas and an excellent road network that led to sprawling suburbia, Americans have been compelled to live up to their love affair with cars. Maybe that explains why American housewives need 6-seater minivans and giant SUV’s to take 3 kids to soccer practice and why the suburban husband turned weekend-handyman needs a Ford 150 pickup for an occasional trip to Home Depot.

And Indians and Chinese didn’t each need to produce a billion plus people that are now going to guzzle rapidly diminishing resources either. Well, unfortunately, now these people exist and these 2.5 billion people now want everything the Americans have had for years and taken for granted – homes, cars, uninterrupted power supply etc.

Does the planet really have the resources to keep feeding, clothing and entertaining 6 Billion people (9B projected by 2042)? If India and China (just to name two so-called developing countries), actually reach the standard of living they aspire to, won’t something have to give? If the recent run-up in energy and food prices are any indication, the answer is yes.

Lots of Indians have the attitude that “their time has now come” and that they deserve all the riches, comforts, extravagant lifestyles and amenities denied to them for so long, thanks to 40+ years of a ridiculous “mixed economy” that stifled innovation and free markets. But two wrongs don’t make a right. The responsibility for sustainable energy starts at home – it is futile to say that the US has wasted energy for years, so why should Indians be energy conscious now. The simple answer is that having produced 16-17% of this planet’s population, India and Indians have a major responsibility to make sure that other countries’ that have been more frugal with their copulation (or likely more sensible with contraception) don’t suffer needlessly. While the US may or may not do its part in reducing energy consumption, does India have a real Clean Energy policy? One that works and provides the right incentives? The nuclear deal helps, but is not a pancea by any means. For those that believe the nuclear deal alone is going to solve the country’s energy problems in time, can I have some of what you’re smoking?

Om Malik has more on this in his blog: http://gigaom.com/2008/07/21/brocade-foundry/

Two related points worth highlighting: (1) The Data center battle is looming not between Brocade and Cisco, but more broadly between networking vendors and middleware/storage vendors. While the MSFT – Cisco battle for the UC and security market is well known, no one is talking about the impending battle for the data-center – between Cisco and IBM (have more on that later); (2) Is this deal a sign that consoldiation in the enterprise networking space is finally happening? We’ve seen consoldiation in the carrier space over the past 2-3 years (Alcatel+Lucent, Ericsson+Marconi+Redback, Nokia+Siemens etc), so are investors finally begining to wonder why the world needs 10 different ethernet switching vendors with absolutely zero true differentiation?  Time will tell, but my guess is that this just the beginning and tech M&A bankers are already chomping at the bit.

 Whether some of these become India’s answer to a Huawei, ZTE or UTStarcomm remains to be seen, but all of them have benefited from the low-cost structure that a 100% India-based operation allows. How sustainable is this advantage and where truly does this cost-competitiveness actually come from?

I’ve mapped out the cost-structure of a typical US optical equipment vendor and compared it with an Indian based vendor.

So from a cost perspective, it costs an Indian vendor at least $60 to “make” the same box (maybe more since their volumes may be a bit smaller owing to their more recent history). 

On the revenue side though, the price-points at which an Indian operator (or any other Emerging markets operator for that matter) will even look at a vendor is usually at least 20-25% lower than the corresponding Western price point. If AT&T is willing to pay $100 for a 64×64 OC-48 optical grooming switch, you can bet that BSNL or Reliance is unlikely to pay more than $70-80. Why? Many reasons – some have to do with institutionalization of these price points (more on this later), some have to do with the need to support legacy network; some have to do with ARPU realities.

In any event, the point here is that while the COGS is the same across the West and the East (“emerging markets”), the EM vendor takes a big hit on the GM line.

 The key to profitability and sustainability is therefore clearly not on the GM front, but on the opex-lines of R&D, Sales & Marketing expenses and on G&A.

 R&D – mostly the salary of engineers and costs of lab equipment, testers etc; since an IXIA box costs the same in the US and India (maybe more in India because of customs duties etc.), the real savings comes from lower engineer salaries. I’ve assumes typical engineer salaries in India are ¼ that in the US.

S&M – salaries of sales people, travel costs; I’ve assumes 1/3 the costs in the US

G&A expenses – other overhead; senior management pay, other staff; I’ve assumed 1/5 the costs

 With a 25% “hit” on the sales price, an Indian vendor can still get comparable margins to a US vendor. Discount the price any further and you start running into trouble.

Key Takeaways: 

1. “low-cost” means low operational cost-structure – it is difficult to play the low-cost manufacturing game
2. For the more commoditized products, Indian vendors should beat western vendors every time (in theory) when selling to Indian telcos (and yes, most optical networking gear is commoditized)
3. The real opportunity lies in Indian vendors selling “commoditized” products to the West, where they can still offer a very competitive offering and still increase their margins. Over time, there’s no reason why these vendors can’t move from access/transport gear into the domain of SP routers and enterprise L3 switches.
4. Western vendors selling products into India will have a hard time until a substantial portion of their workforce is in India or countries with a low-cost structure. Otherwise, profits from India will not even be near-enough to cover the high cost of operating in a high-wage country like the US, Canada or Germany. That’s why for companies like Cisco, “Globalization” is an imperative, not a choice. Its quite simple – if you expect more revenue from India you better have more people based out of India, otherwise your overall cost-structure takes a hit.

PR incompetency aside, and assuming all this is indeed true, its interesting that an “Enterprise” executive will now be running the “core router vendor”. In fact, few people realize that Juniper now derives more than 30+% of its revenue from the enterprise. Reflective of this new focus is the fact that the vast majority of its senior executives now come from Sun, IBM and HP – traditional breeding grounds of software/enterprise company management talent – compared to 5+ years ago when the executive suite was dominated by ex-Cisco and former telco executives.

Why the shift? Put simply, while the core-router market is a good place to be in, since barriers to entry are quite high (i don’t know if there is a single startup today that’s seriously developing a core-routetr), its also a relatively slow growth market (10-12% YoY growth) and intensely cyclical. While NGN is driving the current wave of core-router spending in markets like Japan and E.Asia, its’ not clear what comes next. Edge routers have been a good business for Juniper in the past, particularly in the B-RAS and multi-service router space, but here the competition has become more intense with Redback (Ericsson) and Alcatel-Lucent coming to the fray and making this a 4-horse race rather than 2.

The enterprise focus makes a lot of sense IMHO. Unlike the Service Provider market, where Juniper is seen as a clear #2 to Cisco, the enterprise market is much more fragmented. Depending on the segment, Cisco has anywhere from 50% to 75% share of the enterprise market (across traditional LAN switching, VoIP, Storage etc.). There are 10-15 competitors that have traditionally battled each other for a couple of 100 bps of market share. Juniper’s opportunity will lie in leveraging its carrier-level performance and reliability and emerging as a strong #2 to Cisco in the enterprise. There are loads of market share to be had (in a market significantly bigger than the SP market), before they would even compete head-to-head with Cisco.  It will be interesting to see how this develops…

As for Kriens, his attitude in the past has rubbed several people the wrong way – the executive suite was a veritable revolving door in the years that I covered the company. But I have to admit he did a good job in the last 12-18 months and held the company together. My guess is he continues to stay on as Chairman, at least for a while.

An interesting story for a couple of reasons. One, its a solution that’s smack in the middle of the intersection between Cleantech & Telecom/Tech, and goes to the very heart of this blog.  Second, it illustrates the challenges telecom operators have of providing profitable services to the bottom of the pyramid  – the next 300 million+ mobile subscribers who are more likley than not going to come from remote and rural areas. While the necessity for solar use is in large part dictated by the prohibitive cost of transporting diesel to remote areas that only have a 100-200 user base, there is no reason this cannot become a more widespread solution for regular size BTS’s as well. Interestingly there are company’s working on fuel-cell powered solutions to replace backup diesel generators for base stations. I’ll have more on that soon. Watch this space.