Huawei Dwarfs Ericsson, Nokia on R&D Spend in 2017

Results from the Chinese equipment giant show how difficult it will be for Ericsson and Nokia to mount an effective challenge.

Iain Morris, International Editor

April 3, 2018

7 Min Read
Huawei Dwarfs Ericsson, Nokia on R&D Spend in 2017

Huawei’s recently published results for 2017 show the scale of the challenge for Ericsson and Nokia, with the Chinese vendor investing more than two and a half times as much in research and development (R&D) as each of its major Western rivals.

Having promised earlier this year to invest between $10 billion and $20 billion annually in R&D, Huawei Technologies Co. Ltd. revealed at the end of March that R&D expenses rose to $13.8 billion in 2017 from about $11.8 billion the year before. (See Huawei Commits Up to $20B for Annual R&D, Fleshes Out AI Pitch.)

Despite broader cost cutting at Ericsson AB (Nasdaq: ERIC), the Swedish kit vendor also made a sharp 18.4% increase to R&D spending last year, but this boosted the figure to just $4.5 billion, a mere fraction of the investments Huawei is making.

Nokia Corp. (NYSE: NOK) spent the higher sum of $5.2 billion across its entire business after making a very slight reduction to R&D spending between 2016 and 2017.

Following several rounds of consolidation, and the emergence of the Chinese as a serious force in the telecom industry, the three giant equipment makers now dominate today’s global market for network products and services.

Figure 1:

Yet each company faces its own challenges in early 2017 as well as a slump in customer spending: After several years of heavy investment in 4G and fiber-optic networks, some of the world’s biggest operators have recently been able to cut expenditure on network deployment.

Sales at Huawei’s carrier business group, which accounts for about half of its overall revenues, edged up just 2.5% in 2017, to around 298 billion Chinese yuan ($47.4 billion), after growing nearly 24% in 2016.

Thanks to a much stronger performance at its enterprise and device-selling consumer business, Huawei was able to report a 16% rise in overall sales, to about RMB604 billion ($96 billion), while its net profit was up 28%, to roughly RMB47 billion ($7.5 billion).

But the company’s non-carrier business appears to be under growing threat from protectionist measures in the US, where government authorities say they are worried that equipment from Chinese companies like Huawei and ZTE poses a risk to national security.

Major US operators have already been warned off buying gear and services from the Chinese vendors. Earlier this year, a smartphone deal between AT&T Inc. (NYSE: T) and Huawei fell apart under pressure from US authorities, according to mainstream press reports. Best Buy, Huawei’s biggest retail outlet in the US, is now planning to stop selling phones and other devices from the Chinese vendor, say reports. (See Best Buy to Drop Huawei in Another Blow to US Ambitions – Report.)

That move comes after President Donald Trump unveiled plans to impose tariffs on Chinese imports worth about $60 billion each year. (See Trade Warmonger Trump May Slap Tariffs on Chinese Tech – Reuters.)

The US concerns stem partly from fear that China is now poised to race ahead of the US in technology areas like 5G and artificial intelligence (AI), both of which could become integral to products and services across numerous industries.

Huawei has indicated that it will spend about $800 million this year on 5G, a next-generation mobile technology that promises faster connection speeds and reduced “latency,” the delay that occurs when sending signals over data networks. (See Huawei's $800M 5G Budget Piles Pressure on Ericsson, Nokia.)

It is also ramping up investments in AI. The Chinese vendor is due to unveil an AI-enabled compute platform called Atlas this year and has also developed a system called Wireless Intelligence for automating processes in 5G radio networks.

“Over the next 10 years, Huawei will continue to increase investment in technological innovation, investing more than $10 billion back into R&D every year,” said Ken Hu, Huawei’s rotating chairman, in a statement accompanying the recent results. “As we look to 2018, emerging technologies like the Internet of Things, cloud computing, artificial intelligence and 5G will soon see large-scale application.”

Next page: 5G hopes

5G hopes
Huawei, Ericsson and Nokia are all hoping that a new cycle of spending on 5G networks will provide a sales boost in the coming years, but analysts have downplayed expectations that operators will race to build out 5G networks.

Telcos including Vodafone Group plc (NYSE: VOD) and NTT DoCoMo Inc. (NYSE: DCM) have also said they do not expect capital expenditure to rise as a percentage of sales with the rollout of 5G networks. Unless sales increase dramatically, bucking the trend of the last few years, the implication is that most operators will take around seven years to build out nationwide 5G networks, says Bengt Nordström, the CEO of the Northstream consulting business. (See NTT DoCoMo: Capex to Fall With 5G Rollout.)

Rising interest in the use of software, virtualization and open source technologies could also put pressure on traditional equipment suppliers. Some of the world’s biggest operators believe virtualization could help to slash spending on 5G radio access networks and are even trying to support the development of a market for “white box” radio units. (See Is vRAN Still Too Hot to Handle?)

Unlike the traditional “black box,” in which hardware and software are closely integrated, a white box is a lower-cost device that can run software from any number of companies. US telco giant AT&T last week shook the industry when it announced plans to use 60,000 white boxes, in conjunction with an open source operating system called DANOS, in its mobile network over the next few years. (See Cisco Bows to Carrier Demand for Software Outside the Box, DANOS Fuels AT&T's White Box Binge and AT&T Preps White Box Routers for 5G.)

In the meantime, the current downturn in the mobile networks sector has taken a particularly heavy toll on Ericsson, which lacks the fixed-line capabilities of its rivals or a handset business like Huawei’s.

The Swedish company reported its fifth consecutive quarter of operating losses earlier this year and watched sales fall 9.6% in 2017, to 201.3 billion Swedish krona ($24 billion). It is trying to restore profitability by carving out a leadership position in 5G and offloading non-core assets, such as its media and cloud hardware assets. (See Ericsson Stuck in Loss-Making Rut, Offloads Majority Stake in Media Unit.)

Nokia, meanwhile, looks in danger of lagging both Huawei and Ericsson in the 5G sector and lost an important radio access network contract with Deutsche Telekom AG (NYSE: DT) in late 2016, when it was replaced in the German operator’s domestic network by Ericsson. (See DT Ditches Nokia From Its German Radio Access Network.)

Yet buoyed by its licensing division and breadth of networks expertise, it suffered only a 3% dip in revenues in 2017, to about €23.2 billion ($28.6 billion). (See Nokia Outperforms Ericsson in Mobile but Sees Margin Pressure.)

Much like Huawei, Ericsson has been emphasizing the importance of AI to future mobile infrastructure, arguing the complexity of 5G networks will force operators to invest in more automated systems. Its forthcoming “machine intelligence” products can make rapid changes to network settings based on the system’s understanding of customer requirements. (See Humans Beware: Ericsson Readies Machines to Run the Network.)

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But a looming battle over AI could put the traditional vendors in competition with US technology giants such as IBM Corp. (NYSE: IBM) and Google, as well as the operators themselves. (See Robot Wars: Telecom's Looming AI Tussle.)

IBM, for instance, says it is providing its high-profile Watson technology for use in network operations, while operators are recruiting data scientists and investing in their own AI tools. Elisa’s, Finland’s biggest mobile operator, now claims to operate a “zero-person” network operations centre and is turning its attention to AI to augment its capabilities. It has even begun selling its expertise and technology tools to other service providers. (See The Zero-Person Network Operations Center Is Here (in Finland) and Finland's Elisa is selling its automation smarts to other telcos.)

While Huawei’s R&D spending dwarfs that of Ericsson and Nokia, the Chinese company still lags some of the biggest technology players in the US on this measure. Alphabet, Google’s parent company, spent about $16.6 billion on R&D in 2017, while Microsoft Corp. (Nasdaq: MSFT) spent $13 billion.

— Iain Morris, News 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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