Sunny side up: Don't tell Latin America's telecom vendors that times are bad. They just won't hear of it. (Connection).

An uglier scenario would be hard to imagine-mass layoffs, eye-popping write-downs and a whiff of scandal as shaky financing deals literally tear apart some of the darlings of the global telecom equipment biz. Wireless leader Ericsson saw sales in Latin America fall by 50% in the third quarter. AT&T spin-off Lucent creaks through a multibillion restructuring even as it warned of a 35% quarterly decline in global revenue. Even hardware giant Cisco, the sector's bellwether, reported a 38% slide in the first fiscal quarter of 2002.

Add a sudden worldwide economic downturn and bearish capital markets and the outlook turns nightmarish. Yet Latin America's telecom vendors are having a hard time figuring out where all the negativity is coming from. "When they say things are ripe, that's when they fall apart. When they say things are at their worst, that's when they are starting to get better," says Pearse Flynn, CEO of Ericsson spin-off Damovo, a telecom gear provider with US$270 million in Latin America revenues.

That's because Latin America's biggest companies are gearing up to compete on a global level. Their capital spending plans will include heavy-duty budgeting for new technologies designed to keep their customers connected and competitive. IDC Latin America now forecasts at least 15% compound annual growth for the telecom equipment business through 2003, even if 2002 is slower than originally expected in some countries.

Is there enough business for everyone? "I would say not only yes but definitely yes." says Felipe Rezk, a senior analyst at IDC Latin America. "The market is growing." Barring the unforeseen collapse of a big player due to poor financial decisions, all of the major equipment companies should be around after the global economic slump peters out. The hottest markets will be technologies based on Internet protocol, known as IP, and cost-saving corporate telephony over the Internet, called voiceover-IP, Rezk says.

Undersea cable and satellite companies like Telefonica have invested heavily to create an overwhelming supply of broadband capacity. The trick now is to get that capacity off the beach and into town. That's where most of the equipment vendors are focusing--the vaunted services market, where a combination of hardware, software and consulting prowess can mean a fat bottom line as Latin America's traditional powerhouses wire up for a global showdown.

"Long term, I'm very bullish on the Latin America market," says Keith Goodwin, vice president of the Americas division for Cisco Systems, the market leader in switching. "Internet penetration today is estimated to be 20-25% across the region. That's expected to triple to 75 million users, but that's only 15% penetration while other areas [in the world] have 40%."

Cisco got to the top in part by relying on the big telcos to sell gear for it, a tactic called channel marketing. Selling through partners accounts for 95% to 98% of Cisco's sales in the region, Goodwin says. Similarly, Lucent will rely on 30 major accounts to sell business that comprises 80% to 90% of the Latin American market. Those accounts include the usual suspects: Telmex, Telefonica, Verizon and BellSouth.

Equipment providers' increased emphasis on channel strategy seeks to reduce their risk in the region. "If you look at he last three years, every day we were dealing with new companies. What's going to happen to those companies? They're all going to be bought by big companies," says Tomas Nores, Lucent's vice president for optical networking in Latin America and the Caribbean.

Alcatel's chief operating officer or Latin America, Alfredo Redondo, redicts final revenue growth for Alcatel in Latin America at 20% in 2001, in part because its clients budgeted for capital spending and carried through despite the global slowdown. "We have renegotiated or postponed some payments but nothing significant," Redondo says.

Redondo figures each percentage point of GDP growth fuels 3% to 4% growth in telecom. With the 2002 regional growth forecast at 1.5%, Latin America won't see a free-for-all like that of the late '90s, but neither will it be the end of the road for companies that stay the course.

Avaya, the Lucent spin-off with clients like Ford Credit, Caterpillar, American Express and telecom Alestra in Mexico, sees growth not solely within big clients but in small and medium-sized companies, segments which Inge Sengelmann, Latin America spokeswoman for the company, estimates account for 90% of the region's market. "The challenge we have to overcome is that companies are reluctant to take on expenses," says Sengelmann. Avaya reported 14% fiscal year growth in 2001 in the region, although the company overall posted a revenue drop. Surprisingly, Avaya saw 16% growth in the troubled Southern Cone, despite the agonizing, three-year recession in Argentina.

Dethroned. Francisco Navarro, head of markets and sales for Latin America and the Caribbean for telecom systems provider Equant, says the "domino effect" of the market collapse is not quite over, though. "There are companies that wont be around in a few months," he says. "The smallest companies are already history but medium-sized companies in Latin America, those with revenues of $50 million to $200 million, are in danger." Nevertheless, he forecasts 20% growth for the region in 2002.

What happened to Latin America's telecoms? Too much cash and not enough realism about demand, plus poor management, says Navarro, a 20-year telecom veteran who managed Colombian telecoms before joining Sprint International, later Global One, then moving to Equant.

A lot of the furious deal-making was being done, Navarro says, to please the former analyst kings of Wall Street, whose recommendations in turn fueled stock price rises that kept shareholders happy and quiet--until the bust. "I don't see how you build up a data center in Buenos Aires of 10,000 square feet at a cost of $120 million. People were looking at the needs of a city like New York and just transferring the model," says Navarro. "You have to be sure your markets will support you in the long term." Navarro sees spending by Latin America's multinationals at 2% to 3% of revenues, depending on the degree of their globalization drive.

Rafael Fernandez, 3Com's vice president for Latin America, says he's looking forward to leaner times. The Mexico peso crisis in the mid-90s and later political turmoil in Peru shook up business in those countries, but 3Com took advantage of the pressure to build markets as never before, he says. "We saw our competitors leaving the country and we stayed. It worked. Our intention in Argentina is to take this crisis as an opportunity." Fernandez says. "In the end, the market will be stronger, [although] it's not easy to sell that to the corporate office."

For optical switch maker Ciena, growth in tech spending in the region is a matter of following the time-honored 80-20 rule: Eighty percent of spending is done by 20% of the companies. Among those, notes M. Arely Castellon, Ciena vice president and general manager for Latin America, are power companies buying up cheap telecom assets to extend telecommunication systems along the same routes as their electricity and gas lines. "When you have rights of way, you have power," says Castellon.

Despite Mexico ties to the fumbling U.S. economy, telephone sector growth there is a given, says Raul Lucido de la Parra, strategic planning and marketing vice president for Ericsson of Mexico. He estimates Mexican cellular rising to 39 million lines by 2006 from 22 million n lines at the end of 2001. Fixed line growth should increase to around 25 million lines from 13.5 million lines. "This means a virtual doubling of the market here in Mexico, and installing the phones means you have to install the switches," he says. Nevertheless, Ericsson forecasts its telecom infrastructure business to be essentially flat through 2002.

There's probably no cure for optimism among the sales staff. Without it, they'd be lost in the typhoon of bad news. For now in Latin America, however, optimism seems right on the money.