Lucent cans four executives in China

The company has removed the president, chief operating officer, a marketing executive and a finance manager there, after becoming aware of "internal control deficiencies in foreign operations involving the Foreign Corrupt Practices Act", according to a document filed with the U.S. Securities and Exchange Commission on Tuesday.

Lucent didn't provide details about the violations, but the federal law bars a U.S. company's foreign agent from making payments to foreign officials to obtain or retain business. It also requires the strict record keeping of transactions between companies.

The company said in the filing that it has reported the potential violations to the U.S. Department of Justice and the SEC and is cooperating with those agencies.

The "deficiencies in foreign operations" in China were discovered during an internal audit the company conducted in response to bribery claims made against its operations in Saudi Arabia. Last summer, the National Group for Communications & Computers, now known as Silki La Silki National Telecommunications, filed a lawsuit in the Southern District of New York, claiming that Lucent representatives bribed a state official in the late 1990s to win networking business with Saudi Telecom. The Justice Department and the SEC are also investigating those claims.

Lucent said it has examined operations in 23 other foreign countries and that so far, policies in regions other than China have been effective and appropriate. It also said it has taken actions, in addition to dismissing the four executives, to "prevent such incidents from recurring."

The company said the impending investigation should not have a material impact on its financial results. But it also said it's unsure if the investigation will impact future business in China.

Lucent declined to comment for this story.

Attractive market
With a population of nearly 1.3 billion, China is an important growth market for Lucent and many other telecommunications equipment suppliers. Despite years of hype, the market is still relatively untapped. Most homes in the country do not even have regular telephones, and yet, the country has the largest number of digital subscriber line users in the world.

The vast majority of the population doesn't yet own wireless handheld phones, even though its cell phone population is now the world's largest. What's more, deregulation of the telecommunications market there, along with China's entrance into the World Trade Organization, has also spurred hopes of a massive spending spree.

China already represents about 10 percent of Lucent's overall sales. In January 2004, the company announced $350 million in contracts with China Unicom and China Telecom to help build out their wireless networks.

But competition in China is stiff, as other large players, including Alcatel, Nortel Networks and Siemens, vie for business. Lucent must also compete against local companies such as Huawei Technologies, which sells most of its gear in China.

Analysts view the recent news as a negative for Lucent. Steven Levy, an equities analyst at investment bank Lehman Brothers, said in a note to investors that this news, coupled with financial reporting delays from Sonus and Nortel, have made investors skittish.

"We believe the potential open-endedness of this investigation may weigh on some investors," he said. "(But) we are optimistic that the reorganization and new policies implemented in Lucent's China operations should not materially disrupt business."