Ericsson in China: Dangerous Liaisons?

Iain Morris

Risky business
Another danger is that spending in China does not recover as quickly as the industry would like. Although China's operators have made huge investments in 4G networks, rollout activity has slowed down now that services are widely available. Having collectively spent 356.2 billion Chinese yuan ($53.5 billion) in 2016, China's three big national telcos expect capital expenditure to fall to RMB310 billion ($46.6 billion) this year. If operators are already deploying much of the hardware that will support 5G, as Ericsson suggests, then a spending boost following 5G standardization seems improbable.

Ericsson's messaging on this front has been somewhat mixed. On the one hand, it expects total sales in the market for radio access network equipment to shrink just 2% in 2018 and stabilize in 2019, following a decline of 8% this year. Yet it has also said that 5G will be introduced slowly, and that it will not spur much investment by telcos unless their revenues also grow, reversing the sales decline of the last few years. (See Ericsson CFO: Automation Is Helping Us Cut Jobs.)

Its outlook also looks optimistic next to that of Nokia. Reporting earnings last week, the Finnish company warned investors that its mainstream networks market is set for a likely sales decline of between 2% and 5% next year. Unlike Ericsson, Nokia has a major presence in the fixed-line and IP-based equipment sectors. But it blamed tough conditions in mobile, including price-based competition in China, for its despondency. The update wiped more than 17% off Nokia's share price on October 26. It sent Ericsson's share price down 4.4% on the same day.

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These sales concerns do not mean that a push for market share is mistaken. And if a hardware assault today positions Ericsson for software expansion in the future, its margins could benefit. But as rivals inevitably respond to Ericsson's onslaught, conditions will only get tougher. Protectionism is a further worry. As spending gets squeezed, China's state-backed operators may come under pressure to give an even bigger share of deals to Huawei and ZTE, the country's homegrown technology champions.

Investors are not panicking. Indeed, after Ericsson revealed signs of progress at its networks business in the recent third quarter -- including a slight increase in sales after currency and other factors were stripped out -- its share price received a rare boost in Stockholm. At SEK51.70 ($6.17) on October 26, it was trading about 3.4% lower than at the start of the year, when Ekholm took charge. (See Ericsson Sees Networks Progress Despite Mounting Losses.)

With his background in finance and management consultancy, Ekholm described himself as a telecom "rookie" at this year's Mobile World Congress. If he can overcome the doubts, and find success in the world's biggest telecom market, he will have outperformed some of the industry's most grizzled veterans.

Iain Morris, News Editor, Light Reading

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10/31/2017 | 11:13:41 PM
Re: Bets
That certainly seems to be the case. Will there be enough pie for all?

5G is grabbing a lot of headlines lately. Does this mean it's more than hype or more of the same?
10/31/2017 | 3:36:39 PM
It's all a bet on 5G. Nokia is doing this same thing. 

5G is going to be huge. But I think there might be too many organizations trying to get a piece of this pie.