Hitachi Telecom markets two main product lines: customer premise equipment (PBXs) and optical systems. The optical systems product portfolio comprises high-capacity SONET and DWDM systems designed for the long-haul sector, and, most recently, an optical fibre product for the local access network designed for the enterprise and residential broadband access market.

Approximately one year ago Hitachi Ltd announced the creation of a new telecommunications group - Hitachi Communications Technology (HCT). The HCT group consolidates a number of Hitachi Ltd's disparate telecommunications interests, including ancillary companies and internal divisions. Hitachi Telecom USA is organisationally an entity of Hitachi America, a division of Hitachi Ltd, and not formally a part of HCT.

Mr. Foote commented that, at an operational level, Hitachi Telecom works very closely with HCT, to the extent of joint development projects and business planning. He noted that sales activities are carried out separately across the two groups, due to Hitachi Telecom's exclusive focus on North America. Hitachi Telecom also works closely with an import-export division of Hitachi Ltd - IX (International Import-Export).

Hitachi Telecom USA

Hitachi Telecom comprises two main business groups: customer premise equipment (CPE) and optical systems. Mr. Foote stated that the company has been active in the North American market since 1973 with its CPE products, currently supporting an installed base of between 5,000 and 6,000 systems.

The majority of these systems are installed with customers within the hospitality sector. Mr. Foote explained that Hitachi Telecom's CPE products include specialised software tailored to this sector of the market, plus standard capabilities such as VoIP and data over telephony - the company claims the leading position in the hospitality market sector.

The optical division

The optical systems group has been offering products in the North American market for approximately ten years, although it was pointed out that Hitachi Ltd has been active in the field of optical components for over twenty years through a majority owned subsidiary, now known as OpNext.

The initial products were ATM systems incorporating high-speed optical interfaces. The company then developed a SONET system targeted for application in the core public network. The first SONET product to be launched was a 10 Gbit/s multiplexer, this was later followed by the DWDM product line. Mr. Foote noted that the ATM product line, albeit in an evolved form, is still available in the North American market, although it is not sold 'aggressively'; it was noted that this product line continues to achieve significant sales in Asia.

Major customers for the SONET product include Global Crossing, both in its own right and through its acquisition of Rochester Tel/ Frontier, and Norlight Telecommunications. Customers of the original ATM system include Sprint and Time Warner plus a number of universities. It was noted that this equipment continues to operate in the networks of both of these companies.

Commenting on the product portfolio offered by Hitachi Telecom to the North American market, Mr. Foote said that this represents only a selection of the products sold by Hitachi's telecommunications businesses worldwide. He explained that a number of criteria are used to assess the viability of specific products in the North American market, for example, forecast growth opportunity in the product sector, rating of the product against competitor's offerings, and assessment of the level of resources necessary to enter the sector. Mr. Foote added:

"There have been cases where a product successful in regions outside North America has been rejected as the business case did not add up for this market; equally, there have been instances where an opportunity was assessed to exist in North America for a product not already in the company's portfolio - some of these opportunities have been followed up, others not."

In a marketing sense, it was noted that Hitachi Telecom has been 'very quiet' recently. Mr. Foote remarked that he did not consider this an abnormal state of affairs, since this is principally the corporate style of Hitachi, which tends not to be excessively vocal in PR terms. He added that Hitachi Telecom's position - dependent upon the specific product under consideration - as a second or third tier player in terms of installed base within the North America market reinforces this approach, despite its successes with tier-one customers:

"Apart from big sales successes and deployments for a major customer, or exceptional technological innovations, the company does not generally make a lot of noise."

Summarising Hitachi Telecom's ambitions in the North American market, Mr. Foote said that a rapid progression to the position of major player in the communications equipment space is not an objective: "Hitachi Telecom does not have any wild idea of becoming another Nortel Networks or Lucent over the next couple of years".

Japanese parent

The close ties of Hitachi Telecom to the parent in Japan, and the associated 'Japanese' image of the company, are today considered to be an advantage, although Mr. Foote acknowledged that two to three years ago this same image would likely have been perceived negatively within the industry.

In the present market environment the financial backing and stability inferred by having roots in Japan are viewed as a valuable asset for the company. Mr. Foote commented that carriers currently have concerns regarding the stability and long-term intentions of even the major equipment vendors, particularly with respect to individual product lines and technologies.

Living with the downturn

Hitachi Telecom feels it avoided the pitfall of overstretching through rapid expansion during the market boom, followed by substantial cutbacks in staff after the crash. As the company entered the downturn with a relatively small base there has been no need for large cuts in operations. Mr. Foote said that the question of long-term intentions is one that customers often ask in the present market conditions:

"The only response that I can give is to emphasis that Hitachi Telecom has been active in the North American market for thirty years, through a succession of highs and lows, and that there is no indication that the current situation will be treated differently. There are many customers from both the CPE and public network sectors that can attest to the company's continued service and support. The bottom line is that Hitachi as a company does not feel it a legitimate strategy to leave the customer holding the bag!"

Why North America?

Describing Hitachi's reasons for entering the North American market, Mr. Foote said that foremost was the simple fact that it promised to be the largest telecommunications market worldwide, although he added that beyond this the reasons vary in detail from product to product.

In addition North America was seen to be leading the way in telecommunications worldwide, therefore, for Hitachi to compete at some level in this market would very effectively prepare the company for competition in other regions. At a product level, success in Japan may have been considered transferable to the North American market, with the incentive of boosting revenue from an existing product.

Partnering, occasionally

Hitachi Telecom has formed relationships with a number of companies, although these have generally been short-term, implemented to fulfil a very specific purpose. Mr. Foote explained that many of the relationships developed with third-party companies have related to interoperability.

As an illustration he cited the partnership with Charlottes Web Networks, a vendor of high-capacity core routers, formed to fulfil a need for a very high-speed Internet backbone network that required the integration of core routers, transport network, WDM and SONET network elements. Other companies that Hitachi Telecom has worked with include TeraBurst Networks and Tellium. Mr. Foote added that partnerships typically relate to a single product family.

It was noted that, while Hitachi worldwide offers a range of router products, positioned for high-end edge network to low-end core network applications, Hitachi Telecom does not supply these. However, Mr. Foote said that the Hitachi Internetworking division, based in California, does supply such systems on a selective basis to the North American market. He added that there is a partnership with 3Com for the distribution of these products in markets worldwide.

Hitachi has formed OEM agreements and joint development projects with outside companies on occasion, where these were assessed to be beneficial to the company. The reverse scenario - where Hitachi supplies products for distribution by other vendors - was stated to have been followed on some occasions. Mr. Foote said that within telecom these have entailed the supply of component and sub-system technology via OpNext.

Commenting on Hitachi Telecom's relationship with OpNext, Mr. Foote said there is no obligation to purchase components from this company - a majority owned subsidiary of Hitachi Ltd, spun-off to enable it to more effectively compete in the external market for components and sub-systems.

Outlining Hitachi Telecom's philosophy, Mr. Foote remarked that the emphasis is on equipment interoperability through the development of standards-based products in tandem with a policy of facilitating customer's selection of best-of-breed products - whether supplied by Hitachi or another vendor. He emphasised that customers are not locked-in to installing Hitachi products to the exclusion of all else if they once purchase a piece of equipment from Hitachi Telecom.

Acquisition policy

It was noted that Hitachi, at least within the U.S., has been conspicuously absent from the acquisitions game. Mr. Foote commented that, while this policy represents another facet of Hitachi's inherently conservative nature, the company does operate a venture capital arm - Hitachi Venture Capital - based in California, that concentrates on investment in seed technologies. He added that technologies subsequently showing commercial promise might then be brought into the Hitachi group, via such means as the acquiring of intellectual property rights. Mr. Foote pointed out that, although in North America the company has not engaged in the acquisition of companies, in Japan this strategy has been employed where it was considered appropriate.

SONET and long-haul DWDM

As noted previously, Hitachi Telecom entered the optical equipment market, subsequent to developing optical interfaces for its ATM systems, with a 10 Gbit/s SONET multiplexer. Mr. Foote explained that, as a new player in the optical sector, the company opted to get one step ahead of the established vendors by developing an advanced product - launching the 10Gbit/s system at a time when the industry was focused on 2.5 Gbit/s. At the time, only Nortel Networks was offering a 10 Gbit/s product.

He noted that very early on, Hitachi Telecom was attracting interest from major carriers, including MCI, which trialled the product; Rochester Tel, as mentioned earlier, was a customer prior to its acquisition by Global Crossing, who then also became a customer. Mr. Foote stated that Global Crossing's 10 Gbit/s SONET backbone network is running on mainly Hitachi equipment, mostly deployed during 2000 and 2001 - "therefore Hitachi received payment!"

Following the SONET product, the company developed a DWDM system, again opting for a 10 Gbit/s product. Mr. Foote commented that CIENA and Nortel Networks first developed 2.5 Gbit/s products, which had the facility to be upgraded or adapted to 10 Gbit/s capacity. He remarked that Hitachi's product handles all low-speed traffic - for example that received via OC-12, OC-48 and Gigabit Ethernet interfaces - by multiplexing it up to 10 Gbit/s. A notable differentiator for the product is claimed with its ability to deliver 10 Gbit/s even over older fibre types. Mr. Foote added:

"Hitachi devoted substantial resources to developing 10 Gbit/s systems, as the capability was assessed to be a key selling point in the market. Regarding the DWDM system's ability to operate effectively over older fibre, this feature was important in winning contracts with Global Crossing and Norlight Telecommunications - both of which were operating networks incorporating older fibre types."

Hitachi Telecom has research and development facilities in the U.S., the exact activities of these units varying by product line. Mr. Foote said that with the ATM system, hardware and operating system software were developed in Japan, while the physical 'box', backplane, wiring and power supply and network management system were developed in the U.S. The SONET multiplexer was designed and developed almost entirely in Japan, with the exception of the NMS, which was co-developed in Japan and the U.S.

For the DWDM product, Mr. Foote noted, the NMS and software running the system were developed in the U.S., with Japan developing the backplane, hardware and 'box'.

Mr. Foote went on to explain that the DWDM system design differs to that from other vendors in that it utilises transponders as the client interfaces. These components are situated in separate, designated, shelves within the cabinet. This design allows the client interface element of the system to be sold as a stand-alone product in its own right, with the inclusion of multiplexing transponders for handling Ethernet and low-speed SONET traffic where required. This element of the product may be used as a front-end to DWDM systems from other vendors. Mr. Foote noted that approximately half - or several hundred - of Hitachi's DWDM system deployments in North America are operating in this role.

Up to ultra long-haul

Hitachi Telecom sees the future of the long-haul equipment market to be in extended long-haul (ELH) and ultra long-haul (ULH) systems, and what it defines as 'express' routes. High-capacity express routes are regarded as a potentially significant growth sector, enabling carriers to reduce the price-per-bit of data and delivering improved operational efficiency.

Regarding the ULH product, Mr. Foote stated that the capability is an extension to the existing long-haul product platform, enabling through the use of different line cards, the provision of a long-haul, ELH or ULH system. He added that this design is unique to Hitachi, and is considered an important differentiator in the market.

Down to the access network

Hitachi Telecom is presently looking at addressing areas of the market that are now showing growth, or that it anticipates will show an early recovery. The access market has been identified as an area of interest, thus the company has recently launched a fibre access product, aimed at the business and residential broadband services market.

Mr. Foote believes this market is expected to show growth over the next three to four years, while the long-haul sector remains flat. It was noted that, eventually, take-up of broadband access services - whether via DSL, cable modem, wireless or fibre - would feed back to drive demand for capacity in the backbone network, although this is not anticipated to occur within the next few years, "and it could be much longer".

Mr. Foote commented that in the U.S., three of the large RBOCs have recently announced plans to ramp up their fibre to the home/business projects; also, at a local, smaller scale, there are numerous projects for the deployment of fibre in the access network initiated by independent telcos, utility companies and municipal governments. He noted that during 2002 approximately 150,000 homes or businesses were passed by fibre in the U.S., with forecasts of another 150,000 to 200,000 during 2003, although acknowledging that this is a sector set to display slow growth over a long period - probably in the order of decades rather than years.

The main driver behind Hitachi Telecom's decision to address the access market, according to Mr. Foote, is the development of the market in Asia, principally Japan. It was noted that in Japan, NTT has shipped around 200,000 fibre access lines over the past nine months. Much of this business has been won by Hitachi, which as a result, claims to be the leading supplier of PON (Passive Optical Network) access equipment globally, and the first manufacturer to produce fibre access equipment in volume.

Mr. Foote pointed out that NTT is witnessing significant end-user interest in the potential applications of fibre access in Japan, where the service is currently used primarily for high-speed data applications and where it is now displacing DSL service due to competitive pricing. He acknowledged that residential users in particular are not concerned which technology is powering a service, merely what services can be received and the pricing. Mr. Foote remarked that the success of Hitachi's fibre access product in Japan came as a surprise to staff in North America, particularly with the nascent state of the U.S. market.

Describing impediments to the development of the market for fibre access in the U.S., Mr. Foote stated three main factors: first, fibre is not today commonly in the ground near to homes; second, the cost of the electronics, and the disparity between this and the internal price targets set by the carriers to trigger wide-scale deployment; third, regulatory conditions, specifically the law on unbundling of access lines. He added, with regards to the latter factor, that a full written declaration of the law on unbundling is currently in train prior to official publication (now published by the FCC - ed).

As noted above, in the U.S. there are numerous small-scale projects at varying stages of completion for the deployment of fibre in the access network. Mr. Foote said that each of these typically passes around 20,000 properties, and will usually aim for a take-up rate of 50% over three years.

Hitachi Telecom is aiming to build a presence in this market, although Mr. Foote stated that the company views this as a long-term opportunity; the establishing of a foothold early on is considered vital to successfully tapping the market in the long-term. The main source of competition at present is believed to derive from small start-up companies, which Mr. Foote noted are generally required by carriers to make provision for performance bonds against their failure; Hitachi, as a major company, is not required to offer such guarantees. The main opportunity is seen to be the enterprise - rather than the residential - sector. Mr. Foote defined the main issue with the enterprise sector as one of how services are delivered:

"There are a number of options for the deployment of broadband access service over fibre - via SONET or WDM full wavelengths of capacity are available, but this will be overkill for most businesses and impractical due to the associated high cost. There is a lot of demand for services offering bandwidth somewhere between T-1 and 2.5 Gbit/s, many businesses currently subscribing to a T-1 connection would upgrade to 10 Mbit/s or 100 Mbit/s service if it were available at a realistic cost."

It was noted that the CLECs and some of the unregulated RBOCs are beginning to offer high-speed Ethernet service to the enterprise sector. This market is seen as a promising opportunity, where a broadband connection can deliver multiple services, including voice.

From a service and support perspective, Hitachi Telecom will need to address certain issues associated with moving into a new market sector - from high-end long-haul systems in a market with few customers to access systems for many dispersed customers. Mr. Foote said that PON systems require specialised knowledge as they differ from high-end systems in splitting multiple signals over a common fibre. However, he remarked that the main differences would be on the sales side, deriving from the numerous small and scattered customers.

Mr. Foote was unable to provide company sales figures for the optical systems division or Hitachi Telecom as a whole, although he stated that estimates published by RHK are "reasonably accurate". Commenting on Hitachi Telecom's market share within the optical equipment space he said that, while "not happy" with the present position, realistically, he would "never be satisfied" no matter what the numbers. Prior to the downturn, Mr. Foote remarked, Hitachi Telecom was comfortable with its position in the long-haul market, ranking number three or four dependent upon the breakdown of the component market sectors.

Describing the market over the past two years, Mr. Foote said that conditions have been extremely tough, particularly within the high-end SONET and long-haul WDM systems space, adding:

"In these sectors sales have basically consisted of additional line-cards and software upgrades - i.e. no actual systems. To exaggerate the point, it would almost be true to say that if I had brought in one hundred dollars for system sales over the past year Hitachi would be number one in the market."

Competition

Commenting on the competitive landscape in the long-haul market today, Mr. Foote noted that a significant number of companies, especially start-ups, have disappeared from the scene, including Ceyba and OptiMight Communications. Even so, competition still remains in the form of CIENA - the number one player in the market, plus survivors from the ranks of the smaller companies, notably Xtera Communications and Corvis. Mr. Foote added that when the market does recover, if there is a substantial upturn, other major companies could be expected to either return or move into the sector, for example Lucent and Cisco Systems.

Alcatel was one major player in the optical equipment space that was not cited as a competitor by Mr. Foote, who said the company had simply not been encountered when addressing potential customers for long-haul DWDM systems, despite Alcatel's dominance in the submarine sector. He pointed out that Hitachi has a ULH system, but does not compete in the submarine market, although it does supply components and cable to vendors of submarine systems. He added that, at the time Hitachi developed its long-haul DWDM product the market for submarine systems was assessed to be set to decline, therefore the decision was made to stay out of the sector.

Hitachi Telecom believes that the key to maintaining its position in the long-haul market is staying ahead of the pack technologically, in combination with competitive system pricing and performance. Mr. Foote emphasised that the company has earned a very good reputation with customers in the long-haul system market, in terms of both outright product performance and the quality of its service and support functions, adding that products typically exceed stated performance specifications when deployed in live networks.

Expansion

Considering Hitachi Telecom's position in the optical systems market, Mr. Foote acknowledged that expanding the customer base would be an exacting task, particularly with a return to a market aligned to pre-boom days. The market is expected to consist of a very limited number of customers, each with its own 'traditional', entrenched supplier - to grow market share Hitachi Telecom would need to displace one or more of these vendors. Mr. Foote believes there are a number of opportunities for Hitachi Telecom to achieve this aim, arising from such factors as the different 'flavours' of DWDM, the market for high-end 10 Gbit/s SONET multiplexer systems, and development of the next generation of switch, whether a broadband cross-connect or an all-optical device.

It is believed that a number of technologies will be required in the backbone network and that not all of the major vendors will be able to focus on every aspect. The future market is not envisaged by Mr. Foote as being sufficient to support more than two or three vendors in any one sector and in this environment Hitachi Telecom is confident that it can specialise to become a strong player in certain specific areas. Mr. Foote reiterated that the company has a history of successfully supporting very large public networks operated by major, tier-one carriers.

Threats

A threat to Hitachi Telecom in its core long-haul market is that products will need to pass through several generations of development before producing revenue in a 'recovered market', although this scenario applies equally to each competitor in the sector. At the present time CIENA, Nortel Networks, Lucent and Hitachi Telecom possess roughly comparable products in terms of technology and performance.

Mr. Foote said that although there are now start-up companies developing innovative concepts for the design of long-haul DWDM systems, if the market fails to recover for another two years these companies will not survive. A greater danger is seen to arise from those start-ups now commencing development of innovative technologies, if any of these succeed in launching commercial products coinciding with a market upturn - expected in two to three year's time. Such a scenario could result in major disruption to the established order if the vendors concerned have neglected to continue developing their own products.

Mr. Foote commented that, for Hitachi Telecom and its competitors, whether large vendors or start-ups, the crucial factor is timing:

"Hitachi Telecom needs to predict a market upturn perhaps one year ahead, and also be aware of - and assess the threat posed by - competing products that will be available at that time. At this point it will commence tidying up products, and also decide on the necessity of developing or buying in new technology and components to remain competitive in the market."