Is Nokia losing the 5G race?

The Finnish vendor's 5G-related difficulties and weak performance have unsettled investors, but Ericsson and Huawei also have questions to answer.

Iain Morris, International Editor

May 7, 2019

6 Min Read
Is Nokia losing the 5G race?

The first few months of 2019 have been as frosty as a Finnish winter for Nokia. When the company reported its 2018 results in January, CEO Rajeev Suri warned investors not to expect any 5G boom in 2019, blaming slow progress on rollout and standardization hurdles. The first quarter turned out to be worse than analysts were expecting, with sales down 2% in constant currency terms and the gross margin shriveling by seven percentage points, compared with the year-earlier period. Nokia's share price has fallen 21% since late January.

None of this was in the original script. At the start of 2018, Suri's message was that market conditions would "improve markedly" for 2019 and 2020, "driven by full-scale rollouts of 5G networks." Nokia was supposed to be in a stronger position than its rivals, too. It has a much broader product portfolio than Ericsson, which is largely focused on the radio access network (RAN), and does not face the same political hostility as Huawei, which is trying to persuade governments it is not a conduit for Chinese spying.

Yet the performance by these two rivals brings up awkward questions for Nokia. Ericsson's revenues rose 7% organically in the first quarter and its gross margin was four percentage points higher than a year earlier. Huawei's sales grew 39% over the same period. It has not broken out quarterly results by division, but recently told analysts to expect "double-digit" growth in network sales this year, after a 1.3% dip in 2018.

Figure 1: Rajeev Suri must convince investors Nokia is not lagging rivals in 5G. Rajeev Suri must convince investors Nokia is not lagging rivals in 5G.

If Nokia's malaise is down to standardization issues and weak spending by operators, then shouldn't Ericsson and Huawei be struggling as well? Any neutral observer comparing the three companies might conclude that Nokia is losing out. And a more granular study of financial results does little to dispel this notion. Sales at Ericsson's RAN-focused networks business rose 10% in the first quarter, on a constant currency basis, while Nokia's "mobile access" revenues fell 2% organically.

Negative publicity dogs the Finnish vendor, too. Its 5G shipments in South Korea are three months behind schedule, according to a local news site. In the UK, it is being phased out of the RAN by Vodafone, which prefers Ericsson and Huawei, and missed out on a 5G RAN deal with Three, which favored Huawei despite having used Nokia as a 3G vendor. In late 2017, Deutsche Telekom substituted Ericsson for Nokia as a RAN supplier in Germany.

One source who preferred to remain anonymous thinks Nokia has not timed its mobile upgrade cycle as well as Ericsson. The Finnish vendor has paid the price in some deals, he reckons. Speaking to analysts during Nokia's earnings call in late April, Suri acknowledged there were "short-term issues" regarding "radio roadmaps." Nokia found software defects and "instability" in consumer device chipsets when testing its 5G basestation software, he said.

Nearly 5G
But the Finnish vendor has denied it is losing market share and played down the significance of its software difficulties. In what seemed like a criticism of Ericsson, which has long touted the "software upgradability" of its RAN equipment, Suri told analysts during Nokia's earnings call that "software-only upgrades are meaningless, unless your hardware has the right capacity." He also suggested that chipset problems were a matter for the entire market, and not just Nokia.

Nokia has also yet to recognize some revenues because of internal accounting rules about software readiness. In Suri's own explanation: "Our revenue recognition policies and contractual terms require reasonable commercial availability and customer acceptance of our own system software before we can recognize revenue related to a new generation of mobile technology." These rules meant Nokia's first-quarter report did not include about €200 million ($224 million) in 5G revenues in North America. It expects to book those revenues later this year. At the company's networks business, an extra €200 million in the first quarter would have been the difference between sales growth of 10% and the 4% it reported.

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At least one analyst thinks Ericsson's results look stronger because of its involvement in Verizon's "non-standards-based fixed 5G project." Michael Genovese, an equity analyst with MKM Partners, who continues to favor Nokia over Ericsson, said in a research note that: "Nokia has won standards-based 5G business with Verizon that we think should positively inflect later in 2019."

Ericsson has also shown some willingness to compete aggressively on price to secure 5G market share. Warning that profit margins could suffer later this year, Ericsson CEO Börje Ekholm said: "It is no secret that we are taking contracts that can challenge profitability initially but are attractive in the longer term … It is a strategic imperative and we will continue to do that."

As for Huawei, the Chinese vendor's lack of transparency makes comparisons difficult. Responsible for sales growth in 2018, its enterprise and consumer divisions might have fueled the increase in first-quarter revenues, too. The impact of 5G competition on Huawei's profitability is unclear because the Chinese vendor does not disclose details of profit margins for its separate divisions.

What is known is that Huawei has been wrestling with the same kind of 5G standardization issues that are affecting Nokia. As recently as November, one major service provider relying on Huawei equipment was understood to be worried about incompatibility between basestation equipment and device chipsets. At the time, Huawei said it was trying to fix the problem through a software upgrade. Whether it has now done so remains unclear.

Nokia is evidently under some pressure to prove it is not falling behind its main 5G rivals. Any short-term panic is probably unwarranted. Suri made a good point when he told analysts that his company's software difficulties had to be understood "in the context of a technology cycle that will last well over the next decade and that is still in the process of maturing." But if results later this year do not finally show the marked improvement Suri has promised, the Finnish company's long winter could drag on.

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— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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