(Editor’s note: This is the first of a two-part series on the state of the telecommunications industry.)The telecommunications crash of 2001 left a smoking crater in the Triangle’s economy as thousands of workers lost their jobs when networking manufacturers began cutting back to offset huge financial losses.

Nortel Networks laid off 2,500 workers but expects to maintain its 5,000 local employees for the immediate future. The company watched 2001 revenues plummet 37 percent to $17.5 billion last year.

Cisco Systems let go of 400 local workers, bringing the total to 2,800, after experiencing a sharp decline in sales of its networking equipment. At least its sales and earnings have stabilized in the last two quarters,

Lucent Technologies, which had plans to hire more than 1,000 employees by 2000 and was heavily recruited by the state legislators, eventually pulled out of its Centennial Campus facilities altogether and now employs just 200 workers at its offices in Cary.

Ericsson trimmed 120 of its 1,550 workers from its Triangle facilities where it produced mobile phones. The Swedish company posted a 35 percent fourth quarter loss from the $8.73 billion it reaped during fourth quarter 2000.

JDS Uniphase laid off 35 employees, or 25 percent of its work force, at its Cronos Integrated Microsystems division in Research Triangle Park. Meanwhile, Tekelec scrapped plans to expand its Morrisville facility and increase its local workforce from 600 employees to 1,300 by the end of 2001 after experiencing a sharp downturn in the second quarter.

And Alcatel cut 750 of its 1,450 workers, shutting down its manufacturing plant on Wake Forest Road, after sales of networking equipment stagnated following the demise of the competitive local exchange carriers, or so-called CLECs.

“It was just a bad year for everyone across the board,” says Joe Gagan, an analyst with Boston-based research firm The Yankee Group. “Not one company was unaffected by the downturn.”

The CLECs were the networking equipment manufacturers’ largest customers. After the Telecommunications Act of 1996 forced the Baby Bells to open their lines to competing companies, hundreds of local service providers blossomed across the U.S. Investors poured billions into the telecom sector believing that competition would flourish and startups would eventually yield high returns.

But a majority of the CLECs went belly up after spending millions building out their own networks in an attempt to rival the regional Bells and cable television companies. (The latter were expected to have a huge impact on the industry because cable conglomerates already had networks that reached into a majority of homes across the U.S. with television services. But that prediction has yet to come to fruition.) That left a huge inventory glut for the manufacturers who were already churning out next generation technology and equipment but couldn’t move their older products off the shelves.

A year of status quo?

Now, telecom observers say that they believe the worst is over. But it will be a bumpy road to recovery.

“As we enter 2002, many will a sigh of relief that 2001 is over,” says David Neil, vice president of research for Stamford, Conn.-based Gartner, Inc., an analyst firm. “For the networking industry in particular, it was a very tough year. Nearly every vendor of note in the network service provider and network equipment markets had lower revenue, and some vendors suffered spectacularly large losses.”

Neil says that for most networking companies 2002 will be a year of status quo with no companies making any major changes to their facilities as they look for ways to reduce their costs. But at least one local equipment manufacturer is eyeing opportunities abroad.

Paul Miller, vice president of packet telephony for Tekelec, says that Asian companies are beginning to build out networks, especially in China, and that equipment manufacturers stand to generate new revenue streams from that booming market.

“A lot of those projects are being funded by (Asian) governments,” Miller says. “If there is a recession over there it won’t have as drastic an effect as it did in the U.S.”

Other observers say there is an opportunity for domestic growth on the wireless side. Many wireless service providers are still growing as demand for their products continues to rise.

“Their networks are beginning to strain under the traffic,” Miller says. “They really peace-mealed them together as the grew, so now they’re finding themselves in some pretty difficult situations.”

Signs of hope

And there are other signs that the sector’s outlook is improving. Cisco spokesman Joe Freddoso says the company is moving twice as much inventory as it was during the height of the downturn last spring, and that customer bill pays are averaging 24 days. Typically, equipment manufacturers wait more than two months to receive payment from their customers, he says.

“We’re taking a cautiously optimistic view of the marketplace, but those are some positive signs over the last couple of quarters,” Freddoso says. “For our fiscal fourth quarter 2001 through first quarter 2002 we saw a 4 percent increase in revenue. That’s our first sequential growth in over a year.”

But negative signs pointing to the smaller networking equipment manufacturers, like Redback Networks and JDS Uniphase. Niel Ransom, Chief Technology Officers for Alcatel’s worldwide operations, says the industry has dramatically changed during the past two years due to capital market drying up and customer skepticism.

“Customers are more reluctant to use equipment from a startup in critical portions of their network because they’re no sure they’re going to be around in a few years,” Ransom says. “That become a little bit of a self-fulfilling prophecy.”

Tuesday: A detailed look at the troubled CLEC sector.