Huawei is being turfed out of international telecom markets, the industry is poised for a big 5G upgrade and the only serious alternatives to the Chinese behemoth are Ericsson and Nokia. (See Huawei Hits Out at DoJ Amid Global Backlash.)
It sounds like a no brainer for investors, and shares in both Nordic firms have rallied in anticipation. Since December 6, when Huawei Technologies Co. Ltd. CFO Meng Wanzhou was first arrested on fraud charges in Canada, Ericsson's share price has gained 4.7% in Stockholm. Nokia was this week trading at a 12-month high and has risen 16.3% since Meng's arrest.
Yet some urge caution. Markets have long factored in Huawei's exclusion from the large US market, where Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK) are now gobbling up 5G deals. In some other regions, operators may crawl rather than sprint toward 5G. That could include China if the US bans component sales to Huawei. (See Ericsson Lands $3.5B 5G Deal With T-Mobile Weeks After Nokia Did Same and Nokia Reels In $3.5B 5G Deal With T-Mobile US.)
Some of the biggest European telcos, including Germany's Deutsche Telekom AG (NYSE: DT) and the UK's Vodafone Group plc (NYSE: VOD), also look intent on fighting government efforts to ban Huawei. It is no wonder. Swapping one equipment vendor for another is a hassle, especially if the incoming supplier is not as good. (See Huawei Controversy Pits Spooks Against CSPs.)
The notion that Huawei has a 5G lead over its European competitors has certainly gained ground. Neil McRae, the chief architect of BT Group plc (NYSE: BT; London: BTA), must have picked up new friends at Huawei (and upset executives at Ericsson and Nokia) when he said it was the "only true 5G vendor" during a conference in November. And Huawei's R&D budget vastly exceeds those of its smaller rivals. (See BT's McRae: Huawei Is 'the Only True 5G Supplier Right Now'.)
But this lead is undoubtedly overstated. If one takes McRae at his word, then US carriers such as AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ) and T-Mobile US Inc. are currently investing in second-rate technology. Indeed, the irony about Huawei's supposed 5G lead is that the Huawei-free US market is seen by many commentators to be ahead of the 5G peloton.
What really unnerves telcos elsewhere is the prospect of losing a valuable supplier that has fueled competition in an increasingly uncompetitive market. Once big players in the industry, Alcatel-Lucent, Nortel and Siemens have either fallen by the wayside or been swallowed up in consolidation. The recovery of ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) is still in doubt. Samsung Electronics Co. Ltd. (Korea: SEC) looks focused on a handful of markets and opportunities. An Ericsson-Nokia duopoly is a threat. (See Amid the rubble of L'Aquila, ZTE tries to rebuild.)
The costs of replacing Huawei could be significant. But the cost of dealing with only two Nordic vendors could be much greater in the long run, especially for telcos in ultra-competitive European markets. In response, telcos are likely to push even harder for "disaggregation." In a truly open network, a service provider should be able to use Ericsson's signal-processing gear in conjunction with any third party's radios -- something that has not previously been possible. (See Ericsson Weighs ORAN Alliance Membership.)
Then there is the risk that China responds to moves against Huawei by shutting the door on Ericsson and Nokia. A complete ban would instantly wipe out 11% of Nokia's revenues, based on last year's figures, and also batter Ericsson, which made 12% of its sales in North East Asia last year and describes China as one of its two biggest national markets (the other being the US). But Chinese authorities may be reluctant to restrict vendor choice for Chinese telcos, especially if US measures have already weakened Huawei. (See Nokia Sitting Pretty After Week of Turmoil for Huawei, Ericsson and Nokia at Risk of China Ban – Analyst.)
The global economic outlook is a further concern for Ericsson and Nokia. Chinese growth has slowed markedly and there are jitters in other regions. In Europe, a "no deal Brexit" -- whereby the UK crashes out of the European Union without a new trade agreement in place -- would trigger a nasty recession in the UK and be a drag on Europe, according to most economists. European telcos may be in even less hurry to build 5G networks if recession-hit customers are tightening their belts.
Last week, Ericsson's fourth-quarter results pointed to an uptick in spending, and Nokia is likely to report a similarly strong end to the year on Thursday. But Ericsson CEO Börje Ekholm talked of uncertainty and investment challenges when quizzed about the impact of moves against Huawei. Investors in the Nordic firms would be well advised to exercise the same degree of caution. (See Ericsson Hails First Annual Sales Growth Since 2013 as 5G Comes Calling.)
— Iain Morris, International Editor, Light Reading