Telecom operators globally are expected to cut spending on their networks this year, hitting equipment makers that were only just beginning to recover from intense price wars and the last economic downturn. Even optimistic observers see only slight growth of between 3 and 4% in the market for telecom network equipment overall, and most expect a steep fall in mobile investments.
European operators are likely to be more cautious as recession looms and consumers are less willing to splash out on high-end smartphones, while carriers in China and the United States slow their frenetic pace of mobile investments.
The shift will pressure long-struggling telecom equipment vendors like Alcatel-Lucent  (Paris) and Nokia Siemens Networks  (Espoo, Finland), which are more vulnerable than Ericsson (Stockholm, Sweden) or low-cost Chinese player Huawei (Shenzhen, P.R.C.).
Some smaller equipment vendors such as Juniper Networks Inc  (Sunnyvale, Calif., USA) and Acme Packet Inc  (Bedford, Mass., USA) have already issued profit warnings in recent weeks, blaming slower spending at big U.S. carriers like Verizon Communications Inc (New York) and AT&T (Dallas, Texas, USA).
Alcatel-Lucent also had to scale back its margin and cash flow targets for 2011, and Nokia Siemens Networks announced mass layoffs and restructuring.
Behind the warnings is an economic slowdown that began in the second half of last year and has already begun weighing on telecom gear makers' shares.
"While it won't be as bad as 2009 when operators drastically cut their spending, we expect only very weak growth this year and continued pressure on prices," says Cedric Pointier, a portfolio manager at Natixis Asset Management (Paris), which holds Alcatel-Lucent, Nokia and Ericsson shares in its funds. "In tough economic times, telecom operators choose between seeking growth and protecting cash flows, and they usually just adjust their capital expenditures to maintain cash flow."
Telecom network investments tend to follow economic cycles, as operators hold back spending when their customers become more price conscious. In recent years, however, underlying demand for new equipment has grown as networks strain under a rising data load brought on by Internet-connected smartphones and tablets.
Operators, especially in the United States, have invested heavily in mobile networks to keep up, increasing spending by around 10% last year, but this year analysts expect many to be more prudent.
"Wireless is very weak and will be for the first half," says Earl Lum, chief of research firm EJL Wireless  (Salem, N.H., USA).
Investment bank Nomura (London) predicts that operators' capital expenditures on mobile networks will shrink 1 percent this year, while fixed drops 5 percent.
This is a marked slowdown from last year when operators, led by the United States and Asia, upped their capex on mobile by 7% and on fixed by 4%, according to Nomura.
Credit Suisse (Zurich, Switzerland) expects wireless network investments to grow only 1% in 2012, following 10% growth in 2011.
"Although we retain our view that capacity utilization on mobile networks continues to remain high, which will drive long-term revenue growth, any potential recovery is unlikely before 2013," says Credit Suisse analysts.
Some analysts say the slowdown, especially in China, could spark another price battle globally, hurting margins at Alcatel-Lucent, Nokia Siemens and Ericsson.
"I expect to see aggressive pricing by the Chinese firms to make up the shortfall in their home market," says EJL's Lum.
From 2007 to 2009, the industry was gripped by a price war as China's Huawei and ZTE (Shenzhen, P.R.C.) slashed prices to gain a foothold in overseas markets, just as Alcatel-Lucent and NSN were distracted by complicated mergers and rivals capitalized to take share.
Analysts will be watching to see how the Chinese position themselves in bidding for modernization projects at European carriers. In such projects, operators rip out old wireless gear and replace it with new kit. Nokia Siemens could be particularly vulnerable to such projects since its large footprint in European 3G  networks could be attacked by Chinese players or even Ericsson.
Investors will get a sense of what's ahead in late January, when major operators and gear makers give 2012 forecasts.
(Additional reporting by Simon Johnson in Stockholm)