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

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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