Managing complexity of base station evolution

Heikki Mäkilä Director, Business Development - Elcoteq SE

Base station – a headache?

Nowadays there are several million base stations installed to serve roughly two billion mobile or wireless users worldwide. Base stations are in many ways the headache of the major players involved with business based on mobile and fixed wireless networks. For network operators, it is a major investment and maintenance cost, and they need to make their future technology choices from an amazing assortment of evolving versions and standards. For original equipment manufacturers (OEMs), it is a low margin, volume product with significant cost reduction pressures, while at the same time it will be the essential part of the wireless broadband revolution requiring a huge R&D effort. For a base station designer, it is an endless list of contradictory requirements regarding performance, interoperability, cost, functionality, compatibility, environmental requirements and so on. For a wireline/cable operator it is a threat and an opportunity, depending on the secret mind of the end user that by now has not obeyed the 10-year old prediction that “next year” mobile data services will take off…  

However, every year hundreds of thousands of new base stations are installed to serve hundreds of millions of new users. New capacity and new coverage are needed. The investment cost per line, or user, is going down in both 2G/2.5G and 3G networks. The growth of global mobile subscriber numbers now becomes dependent on both the availability of ultra-low cost handsets and maintaining a very low cost mobile/wireless infrastructure. In emerging markets the challenge is how to fit the cost of service to the affordable average revenue per user (ARPU) and in developed markets the question is how to increase ARPU. A good example is the Bharat Shanchar Nigam Ltd (BSNL) tender case in India, where the cost of the network per GSM line is expected to be in the range of USD 70. New killer applications other than voice have not been invented yet. A positive approach to these challenges is that mobile/wireless broadband will inevitably become a mass market. The other possibility is that we are now at the end point of the wireless evolution, which would be hard to believe.

Enablers of the operators’ success

Regardless of all the challenges related to a base station, it is the number one enabler to mobile business now and in the future. Money can be made by both OEMs and network operators with the right technology choices, right timing, right business model, right suppliers, right implementation, or, in brief, right strategy. That’s easier to say than to do. However, many are trying, and it shows they also believe in the business opportunities. But what are the ingredients in the recipe of success after the strategy has been chosen? 

For the network operator, the key is to keep the capital expenditure and operational costs as low as possible when deploying and running the network with defined coverage and service levels. At the base station sites, the overall site costs become more and more significant as the base station equipment gets cheaper. Such costs include power supply, transmission, equipment premises, towers and the whole antenna system, security, etc. However, the base station design can influence these costs greatly, for example, by outdoor solutions, built in transmission, power consumption, reliability, ease of installation and set-up, RF performance, and equipment costs. Therefore, OEMs can significantly help the operators to reduce the total network costs. Another area of interest is the logistics related to the installation and maintenance of the base station equipment. Paying attention to the delivery process, such as minimizing the need for warehousing of new equipment and having an efficient repair process and management of spare parts, can pay off fast. Operators are relying on OEMs more and more in these issues, as well as network planning, implementation, operation and optimization. For some major OEMs, service business is already more than 30% of the overall revenues.

Here we can see a trend that outsourcing of activities that traditionally have been taken care of by the operators is increasing. It also means that the first tier OEMs have a big impact on the network business. Operators are no longer just companies whose main interest is technology and networks. Since the liberalization of the monopolistic environment, the market has become highly competitive and the focus is on business and customers.  To be successful, they need to have the best suppliers.

The role of OEMs

Large OEMs certainly have challenges nowadays to satisfy their clients and make them successful in the mobile network business. Base stations have become a commodity, and the purchasing criteria are more or less the price and delivery capabilities. Quality is, of course, always a basic requirement where compromises are not accepted. Therefore, much more is needed than the individual product. There needs to be a set of services supporting the product, a logistics solution, quick time to market, minimal usage of the OEM’s resources, the right production location close to the market, a good communication channel between R&D and manufacturing, future proof products,  as well as low product cost.

Currently, there is lots of activity in the industry to drive the R&D cost of the network elements down. As base stations are relatively complex and high volume products, it is one of the key areas to work with. One solution is standardization of the internal interfaces between the base station building blocks. Two forums have been established for this purpose: OBSAI and CPRI.  So far it may be early to say how big an impact this will have. Another move is very concrete, moving R&D from high cost locations to low cost. This has taken place mostly in India and China so far, but Eastern Europe is also used more and more. Geography is one part of cost reduction. Increased outsourcing of product design is another interesting option.

Increasing volumes is another source of efficiency and cost reduction. Development of product platforms is expensive, so the ones developed should be utilized in multiple markets. This also enables purchasing high global component volumes and thereby stronger purchasing power. The challenge is global supply chain and working capital management, especially as the demand of base stations is not even, but may have high fluctuation.

 EMS as a solution provider

Some two decades ago, electronics manufacturing services (EMS) emerged to help the OEMs focus on their core business, which used to be very engineering driven. Engineers sold technology to engineers. Initially, EMS business had been primarily printed circuit board (PCB) assembly and taking care of the peak capacity. Over time, EMS business has become a serious part of OEMs’ strategy in terms of global supply of electronics modules and plug-in units, systems integration, engineering support, sourcing, supply chain management and product maintenance services.

OEMs are also using 2^nd tier OEM solutions as part of their offering. For example, it is typical that OEMs use power supply units from external companies specialized in that technology. For the operator, it does not matter who designed or manufactured it. The mechanics’ solutions are typically outsourced as well. Should not the best in class player do those operations rather than a captive unit that doesn’t have as large a market in that area as the specialized individual company has? What about power amplifiers? Many OEMs use external suppliers for those, but not all. There are also other elements and modules that we could discuss.

The EMS industry has taken big steps in developing its service portfolio. From assembly, it has moved to lifecycle services of its customer’s products. OEMs could, in theory, buy all their product solutions from EMS companies and other OEMs, and utilize the EMS’s global resources for assembly and integration purposes. The OEM could focus solely on brand, product concepts, customers and services, if they wished to do so. OEMs are in a situation where orchestration of the supply chain – including component suppliers and service providers – could become the killer capability. The one who can do it best is likely to win. When doing this, some new cost saving opportunities will emerge. For example, sourcing is closely related to product design. The more design that is done by suppliers, the less the OEM needs those resources. Other analogous functions can be identified as well.

A big step for an OEM would be outsourcing the supply chain for integrated base stations and also giving responsibility for product maintenance to the EMS. From the OEM perspective, the tasks of the EMS could be early involvement with the module designs close to the OEM’s R&D locations, prototyping, test engineering, industrialization, production ramp-up globally, supply chain management, manufacturing, systems integration, configure-to-order, outbound logistics and after sales services for the equipment. In many cases it could mean some re-engineering of the existing supply chain, but on the other hand, it could help the OEM to enter emerging markets like BRIC (Brazil, Russia, India and China).

Conclusions

The mobile and wireless network business is a complex entity with many dimensions. Regardless of big challenges related to the current business environment, we could state that at the end, market is right. Many technologies, concepts and business models will be tested by the markets, and the best ones – from the commercial point of view – will win. There is no doubt that technology evolution will continue and mobile broadband will become successful. This means that some day we will see a killer application – or a killer cocktail of applications, services, gadgets and networks with acceptable pricing levels and schemes – that will attract the large audience, loading the base stations and enabling money making.

In this environment, Elcoteq SE, as a leading EMS provider for communications technology customers, aims to make its customers successful in building the next generations of broadband mobility globally in this very dynamic market. That is being done by managing and reducing complexity. One strategy for that is the platform approach – using consistent solutions for multiple products, customers and locations. This is used in areas like test platforms, processes and tools, and uniform set-up of the global manufacturing network. It enables efficient usage of the OEM’s and Elcoteq’s resources and investments. Reducing complexity is done also by turn-key deliveries of base stations and other network elements. This consists of managing the overall supply chain, assembly, integration, testing, configuration and deliveries of the network building blocks close to the end markets. Orchestration of the service and supplier network on behalf of the OEM is a unique opportunity for the OEM to reduce total cost of ownership and focus on its core business.

Heikki Mäkilä, M.Sc, is Director, Business Development in Business Area Communications Network Equipment at Elcoteq SE, Finland. Email heikki.makila@elcoteq.com