OREANDA-NEWS. Fitch Ratings says the proposed merger between Nokia and Alcatel Lucent is unlikely to significantly ease price competition in the sector, particularly in the near term, as other major vendors will use the time it takes for the deal to complete to try and strengthen their own position. In some markets, such as the US, competition should ease in the longer term, but in others the picture is less clear.

The industry is dominated by Ericsson (BBB+/Stable), Huawei (not rated) and Nokia (BB/Positive) that together are estimated to account for 75% of mobile equipment sales, with Ericsson and Huawei leading the pack. A combination of Nokia and Alcatel Lucent would form a company with sales similar to Ericsson and, we believe, become a strong number two in mobile infrastructure.

In some industries, such as the telecom service provider market, in-market consolidation is typically benign or positive from a competition perspective. But in a global industry such as telecom equipment, we believe a vendor with the scale and presence to match the market leaders could introduce further competitive intensity in what has always been a price sensitive market.

This is likely to be seen as much in the development of new technologies, network applications, managed services and network integration as it is in pricing. The smaller vendors are most at risk, while the existing industry leaders are likely to use the time the merger will take to clear regulatory hurdles, and a further period of integration, to strengthen their own market positions.

We believe pricing in the equipment market has been supported by the selective approach Nokia has taken over the past couple of years in exiting unprofitable business - both on a regional and customer basis. This has had a material impact on profitability, with Nokia's network division delivering industry leading results.

Ericsson's long-running strategy of replacing early 3G equipment with new future-generation compatible base stations at weak margins was largely completed in the second half of 2013. The financial effects of these swap outs coming to an end, combined with the focus and discipline of Nokia, and an easing in pressure from Chinese vendors, appeared to have created a better price environment for the industry.

The key to the Nokia Alcatel Lucent merger appears to be largely about scale and market position - suggesting that the selective approach to customer relationships might not have been seen as the best approach to growing the business sustainably over the longer term. Direct competition with Ericsson and Huawei will increase; how the current market leaders react remains to be seen. The one market where competition is likely to ease in the longer term is the US, where the Chinese haven't made inroads and where large telecom network upgrades will be provided by the newly merged company and Ericsson.

Strategically the Alcatel Lucent merger makes sense for Nokia, despite execution risks and we have placed Nokia's 'BB' rating on Positive Outlook. Benefits are likely to be felt in the medium term and include enhanced market position, broader customer reach, the ability to spread R&D investment over a larger revenue base, and cost reduction.