Nortel's influence has waned but still potent in corporate and academic circles

Analysis

Nortel Networks Corp's decision to seek creditor protection last week has sent shockwaves through the high-tech community, especially in Ottawa where the company has served as a potent anchor to a telecom cluster whose decline will almost certainly accelerate. While its ultimate fate may not be known for months or even years, the impact on the telecom giant's many clients, collaborators and academic partners may become evident much sooner.

The slow, painful decline of Nortel has taken the company from a thriving behemoth employing more than 94,500 people at the turn of the century and a market value of more than $366 billion to less than 32,500 people and a stock that's virtually worthless. In Ottawa, Nortel's vaunted R&D engine has shrunk from a high of nearly 15,000 to 4,600 today as the company axed whole areas of technology development and sent other jobs offshore to China.

Late last year, Nortel decentralized its R&D operations and eliminated another 1,300 positions including that of chief technology officer in a bid to save cash — the 15th round of cuts in eight years under four CEOs (R$, November 13/08).

R&D spending also continues to fall from a high of nearly $6 billion in 2001 to $1.85 billion in 2007 (see chart). For 2008, the company has reported three quarters of earnings and spent $1.24 billion on R&D, down marginally from the first nine months of 2007.

Nortel's decision to seek creditor protection was not accompanied by any information of its strategy going forward, But its president and CEO, Mike Zafirovski, says the intention is not to break up the company but to emerge a stronger entity.

The importance of the company's survival to Canada's high-tech and telecom industries cannot be underestimated. In the past 10 years, Nortel has spent $35.4 billion on R&D — $46.3 billion. It has ranked as Canada's number one corporate R&D spender for decades stretching back to its days as Northern Telecom and Bell-Northern Research, the R&D arm of Bell Canada.

unused tax credits

Since the collapse of the telecom bubble, Nortel has rarely posted a profit, racking up a series of deficits that make it impossible to claim its scientific research and experimental development (SR&ED tax credits. Large companies receive a 20% non-refundable tax credit that can only be used to reduce tax payable. That means Nortel is sitting on approximately $1.5 billion in unused SR&ED tax credits, significantly altering the scenario for a sale of all or parts of the company.

If the company is broken up and sold off division by division, it's unclear how the unused tax credits would be apportioned. What appears clear, however, it that the mountain of tax credits favors Canadian companies if the company is to be sold off. For a firm to gain access to the tax credits, they must be profitable and operate in Canada.

Nortel's influence extends far beyond its own walls throughout the regional high tech community and other telecom clusters such as Raleigh NC or Richardson TX. Hundreds of Ottawa-area high-tech firms count themselves as Nortel spin-offs either though the technology they use or the personnel that received their crucial real-world education at Nortel. Just some of the companies started by ex-Nortel employees include JDS and Tundra Semiconductor.

Academic influence

Perhaps as important as Nortel's influence in the corporate realm is the company's interaction with the academic community. Many thousands of Canadian and foreign university graduates found fulfilling careers at Nortel over the years. And Nortel has given back, funding research chairs, sending researchers into schools and supporting programs in computer science and engineering. Its efforts have resulted in technological breakthroughs that put the company on the global map — a true beacon and symbol for for Canadian ingenuity and creativity.

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