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to including orders in backlog, customers must have approved credit status. However, from time to time, some customers may become unable
to pay for or finance their purchases in which case the order is removed from our backlog.
Product standards, certification and regulations
Our products are subject to equipment standards, registration and certification in Canada, the United States, the European Union and other
countries. We design and manufacture our products to satisfy a variety of regulatory requirements and protocols established to, for instance,
avoid interference among users of radio frequencies and to permit interconnection of equipment. For example, our equipment must satisfy the
United States Federal Communications Commission’s, or FCC, emissions testing requirements, and must be certified to safety, electrical noise
and communications standards compliance. Different regulations and regulatory processes exist in each country.
In order for our products to be used in some jurisdictions, regulatory approval and, in some cases, specific country compliance testing and re-
testing may be required. The delays inherent in this regulatory approval process may force us to reschedule, postpone or cancel introduction of
products or new capabilities in certain geographic areas, and may result in reductions in our sales. The failure to comply with current or future
regulations or changes in the interpretation of existing regulations in a particular country could result in the suspension or cessation of sales in
that country or require us to incur substantial costs to modify our products to comply with the regulations of that country. To support our
compliance efforts, we work with consultants and testing laboratories as necessary to ensure that our products comply with the requirements of
Industry Canada in Canada, the FCC in the United States and the European Telecommunications Standards Institute in Western Europe, as well
as with the various regulations of other countries. For additional information, see “Environmental Matters.”
The operations of our service provider customers are subject to extensive country-specific telecommunications regulations. In the United
States, on February 20, 2003, the FCC announced a decision in its triennial review proceeding of the agency’s rules regarding unbundled
network elements. The text of the FCC’s order and reasons for the decision were released on August 21, 2003. The FCC decision, subsequent
j
udicial review of the decision and the FCC’s reconsideration of its decision and subsequent adoption on December 15, 2004 of new
unbundling rules in response to the remand by the U.S. Court of Appeals for the D.C. Circuit are affecting, and may continue to affect, the
decisions of certain of our United States-based service provider customers regarding investment in their telecommunications infrastructure.
These unbundled network elements rules and/or material changes in other country-specific telecommunications regulations at any time or from
time to time may affect capital spending by service providers in the United States and/or around the world, and this may in turn affect the
United States and/or global markets for networking solutions.
Sources and availability of materials
Since 1999, our manufacturing and supply chain strategy has evolved and has resulted in the gradual transformation of our traditional
manufacturing model, in which our products were primarily manufactured and assembled in-house, to primarily an outsourced model which
relies on electronic manufacturing services, or EMS, suppliers. By the end of 2003, most of our manufacturing activities had been divested to
leading EMS suppliers. We have continued to pursue an outsourced manufacturing model and in January 2004 announced our intention to
divest substantially all of our remaining manufacturing activities. On June 29, 2004, we announced that we had reached an agreement with
Flextronics to divest substantially all of Nortel Networks remaining manufacturing operations, located in Canada and Brazil, with the
anticipation that Flextronics will also acquire similar operations in France and Northern Ireland, subject to the completion of the required
information and consultation processes. For recent developments in the evolution of our supply chain strategy, see “Developments in 2003 and
2004” in the MD&A section of this report.
We believe that the use of an outsourced manufacturing model has enabled us to benefit from leading manufacturing technologies, leverage
existing resources from around the world, lower our cost of sales, adjust to fluctuations in market demand and decrease our investment in plant,
equipment and inventories. We continue to retain in-house all strategic management and overall control responsibilities associated with our
various supply chains, including all customer interfaces, customer service, order management, quality assurance, product cost-management,
new product introduction, and network solutions integration, testing and fulfillment.
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