The Finns are finished in China's 5G radio market. After failing to land contracts with the country's big three mobile operators, Nokia today signaled a retreat from 5G radio in the world's largest mobile market and said it would focus on the sale of other network products to Chinese customers. "A return to 5G radio at some point in the future is not out of the question but our approach has consistently been prudent," said Rajeev Suri, Nokia's CEO, during a phone call with reporters.

The move is not unexpected. It comes after reports that Nokia missed out entirely on multi-billion-dollar 5G contracts with Mobile, Telecom and Unicom, which are this year expected to erect about half a million 5G basestations. The state-backed operators have always preferred domestic suppliers, including Huawei and ZTE, and Nokia last year grumbled that such favoritism was on the rise. With Huawei and ZTE severely curtailed in western markets, geopolitics could partly explain the trend.

But Nokia was also unable or unwilling to meet Chinese technical requirements. "We have steered our 5G R&D work in a way where we have optimized for global features, and features for more profitable markets, and maybe because of that we did not do some local customization needed for China," says Kristian Pullola, Nokia's chief financial officer, in a conversation with Light Reading.

Those remarks may feed into concern that Nokia is struggling to compete against rivals even as it works on a turnaround at its 5G business. Ericsson, notably, appears to have gained market share in China during the recent 5G contract awards, landing a deal with China Mobile reportedly worth nearly $600 million. "We are quite proud of what we have achieved," said Fredrik Jejdling, the head of Ericsson's networks business, during a recent interview with Light Reading. "It is a fairly steep technical qualification and quite a high number of functionalities and features that are required in China."

Nokia last year alerted investors to 5G product difficulties that have torn into margins and upset cost-saving targets. These were partly blamed on the hassle of integrating Alcatel-Lucent, the rival equipment vendor it bought in early 2016. Yet Nokia also made the mistake of choosing expensive programmable 5G components that have made its products less profitable than rivals' gear. Until the problem is fixed, competing on price looks risky.

But the Chinese 5G exit may have a significant impact on the size of Nokia's business. Last year, about 8% of Nokia's revenues came from China, whose spending on 5G rollout could dwarf that in other parts of the world as it plows billions of dollars into the new technology. Börje Ekholm, Ericsson's CEO, has previously estimated that China accounts for about 60% of the global 4G market, and he thinks the country could have similar importance in 5G. "I think it is fair to say this will have a revenue implication in China," says Pullola.

Nokia may struggle to make up for its 5G loss in other areas. While it does not break down Chinese sales by product category, mobile access is by far the largest contributor to global network sales, generating about €11.7 billion (US$12.7 billion) last year in revenue, or nearly two thirds of the total. In China, the lack of any 5G radio business could threaten what Suri described as Nokia's "large installed 4G base" – operators tend to use the same 4G and 5G supplier to avoid interoperability problems.

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On the plus side, Nokia does expect to land a contract for the 5G network core with China Unicom, which has yet to be announced. This, however, will make not an iota of difference to the network division, instead boosting sales at Nokia's parallel software unit. While a fast-growing part of the business, this remains relatively small, generating just 12% of total sales in the first quarter. To shore up networks, Nokia will hope for contract wins in IP, optical and fixed-line technologies, and with customers outside the telecom sector. "We are seeing strength with webscale players and our enterprise success is good and growing with railways and other state-owned enterprises," said Suri.

Unfortunately, even before the recent 5G contract awards, Nokia's China business looked in trouble. Revenue from the country fell 29% in the first quarter, to just €308 million ($335 million), compared with the year-earlier period – a decline that was mainly to blame for a 3% drop in group sales. In its latest earnings report, the Finnish vendor said networks had been hit by "an increase in competitive intensity, combined with our prudent approach toward deal-making" in China. Elsewhere, it blames a decline in fixed-access sales on shrinking Chinese demand for digital home products. Total fixed-access revenue dropped 18% in the quarter, to €350 million ($381 million).

The outbreak of COVID-19 is likely to have hurt business in the first quarter, and Nokia reckons group sales would have been €200 million ($217 million) higher without the supply chain disruption the virus caused. China now claims to have staged almost a full recovery, with factories and other facilities back up and running. As some kind of normality returns, Nokia will have to show its China business is not on a permanent slide.

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— Iain Morris, International Editor, Light Reading