Sales numbers are falling at a steeper rate for Samsung's network business than they are for Ericsson and Nokia.
There was a shortage of telecom treats and a topline frightener in the financial results Samsung published on Halloween. For several years, the South Korean electronics giant has been courted by telcos as a rival to Ericsson and Nokia, the Nordic kit makers, in countries where security watchdogs have the heebie-jeebies about Huawei and ZTE, Chinese vendors accused of having sinister links to their government. But Samsung's small networks business has recently looked as dynamic as a Walking Dead extra.
The group does not explicitly separate financial metrics for its network subsidiary, but sales can be deduced by subtracting the breakout line for smartphones and other gadgets from the mobile total, which also includes networks. Two years ago, that calculation produced a sales figure of 1.29 trillion South Korean won (US$940 million) for the third quarter. This year, Samsung managed less than half that amount. Its revenue haul of just KRW540 billion ($390 million) is also 28% less than it reported for the same period last year.
This, of course, forms part of a horror story for the whole sector. Telcos in North America have spent several quarters digesting stock they bought after the pandemic rather than buying new products. Elsewhere, many operators seem to have lost their appetite for investing in 5G. Networks have withstood a bombardment of gigabytes. Consumer migration from 4G to 5G has not brought a substantial increase in revenues. 5G in factories and the "Internet of Things" remains a talking point. All that has left the vendor storefronts gathering cobwebs.
Nevertheless, Samsung's performance in terms of percentage sales declines is much worse than either Ericsson's or Nokia's. At its mobile networks business group, Ericsson reported a year-over-year sales drop of just 4% for the recent third quarter, to 40 billion Swedish kronor ($3.7 billion). Nokia, hurt by the loss of a contract with AT&T last year, suffered a 19% decline at its equivalent unit, to €1.75 billion ($1.9 billion).
A percentage-based comparison is not entirely fair. Of the three companies, Samsung has the smallest network business by far, meaning the year-over-year comparisons show up as much bigger changes. A slowdown in spending by a single large customer can make a huge difference to Samsung's results. Ericsson and Nokia are not nearly as exposed.
No Indian summer
Yet Samsung has clearly had a few big commercial setbacks, not all of which are linked to the industry's malaise. In India, it was the sole vendor of 4G radio access network (RAN) technology to Reliance Jio, now the country's biggest telco boasting a nationwide footprint of 532,000 4G basestations. Despite this arrangement, Jio seemed to prefer Ericsson and Nokia in 5G. Both Nordic vendors publicized deals with the Indian operator in late 2022, when Samsung's "network solutions" newsroom remained unusually shtum about follow-on 5G work.
Since the final quarter of 2022, when those deals were struck with the Nordic vendors, Samsung's network revenues have been on a downward slope. This is not what anyone would expect to see if Samsung had played a big role in 5G deployment by an operator accounting for an outsized share of its business. Sales booked under "South East Asia, Oceania and India" by Ericsson rose 24% between that quarter and the first quarter of 2023. Nokia's India sales were up 50% over the same period. Overall network sales at Samsung, by contrast, fell a third.
(Source: Samsung, Light Reading)
The South Korean vendor has been similarly quiet about deals with India's other telcos, too, despite press reports indicating it had won contracts with Bharti Airtel, the second-biggest operator, and Vodafone Idea, the number three. According to an industry source, however, its share of the 4G and 5G work recently handed out by Vodafone Idea is just 11%. Samsung's contract also involves the replacement of Huawei's equipment, and swap-outs are typically not very profitable, said that source.
Unfortunately, the speedy rollout of 5G by telcos in India, the last of the giant markets to launch the technology, has left Samsung with hardly anywhere else to plant its flag. Like others in the maturing 5G sector, it can only advance meaningfully if it replaces an incumbent 5G vendor in any telco's network. Samsung previously did this with Verizon, which substituted it for Nokia as a RAN supplier in 2020. Outside India, it has more recently had success in Canada, where Telus is using it to replace Huawei.
The Huawei problem
But few telcos are willing to swap vendors at exorbitant cost unless governments force them to do it. Verizon made a switch at the dawn of 5G, when Nokia had product problems it has subsequently addressed. AT&T is also removing Nokia because it wants to have a single provider of RAN management software across the whole network. But that more recent swap means changing to Ericsson, which already occupied two-thirds of the AT&T footprint. As a challenger, Samsung has no equivalent opportunity.
Operators in "Five Eyes" countries – a club for spies from Australia, Canada, the UK, the US and New Zealand – did face government orders to remove Huawei and ZTE. Several other countries in Europe and Asia have been similarly strict. But most have not. Germany's government this year said it would allow operators to keep using Huawei provided they replace part of its management system, which accounts for a minuscule share of RAN expenditure, according to an authoritative source.
What's more, the main beneficiaries of the backlash against Huawei have been Ericsson and Nokia. In the UK, for example, the Nordic vendors have won deals with BT, Three and Vodafone at Huawei's expense. Samsung's UK role is limited to replacing Huawei at 2,500 Vodafone sites in mainly rural areas. Progress has slowed to a crawl while Vodafone awaits a regulatory decision on its planned merger with Three. There are rumors that only 100 sites have been swapped so far. Worldwide, Samsung's share of the RAN market fell from 7.6% in 2022 to 6.1% last year, while the combined share of Huawei, Ericsson and Nokia rose 0.2 percentage points, to 75.1%, according to Omdia, a Light Reading sister company.
Better times may lie ahead. Samsung is known to have responded to a Vodafone tender supposedly covering 170,000 basestations (the figure included in Vodafone's last annual report) across Europe and Africa. It is evidently liked by the UK-headquartered telco, which is also using Samsung to replace Huawei in Romania. The arrival of a new US president early next year could precipitate a clampdown on Chinese vendors, bringing further opportunities for Samsung.
There are also signs the North American inventory correction is over and that telcos in other markets are starting to reinvest. Unlike smaller RAN challengers, Samsung has the financial protection offered by a huge parent company, able to absorb losses and fund research. But matching Ericsson and Nokia on research and development would mean spending about $2.5 billion annually on the RAN business – just $200 million less than Samsung made in network sales last year. Without improvements soon, company bosses may be wondering why they should bother.
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