NEC slashes overseas 5G outlook by 64% on open RAN gloom

Tareq Amin, the former boss of Rakuten Mobile, had glowing words about NEC and its emerging range of 5G products in early 2020. "It is built, manufactured and engineered in Japan at a significant cost reduction to what you see with global partners," he said, having selected NEC's radio units for his deployment of a new 5G network in Japan.

It was a great advert for a local vendor out to challenge the perceived kit oligopoly of Ericsson, Huawei and Nokia in 5G. Yet nearly four years later, 5G has not been as fruitful as NEC must have hoped. Its global 5G business made an operating loss of 31.1 billion Japanese yen (US$210 million) on sales of JPY87.2 billion ($590 million) in its last fiscal year (ending in March). Revenues were up 30%, but the loss was JPY10.5 billion ($72 million) bigger than a year before. That "significant cost reduction" Amin talked about on Rakuten's side has probably not helped.

NEC has now made aggressive cuts to its original sales targets. Previously, it had forecast 5G revenues outside Japan of JPY85.4 billion ($580 million) in the 2026 fiscal year (that is, the one ending in March 2026). But this figure was slashed to as little as JPY31 billion ($210 million) in a presentation NEC gave last week. The sharp downward revision says a lot about the state of the market and the difficulties faced by challengers.

Evidence of tough market conditions is to be found in the financial results of Ericsson and Nokia, the dominant Western vendors of 5G network products. For the recent third quarter, sales at Ericsson's mobile networks business fell 16% on a constant-currency basis, compared with the year-earlier period. Nokia's were down 19%.

Citing research from Dell'Oro, Ericsson said it expected the radio access network (RAN) market to shrink a frightening 37% this year in North America, where it generates a good chunk of its profits. Omdia, a sister company to Light Reading, currently thinks the global market will generate $40.2 billion in revenues. If realized, that would be 11% less than it made in 2022.

Some big telcos, especially in North America, have paused network rollout after an earlier build-up of stock as inflation remains high and interest rates climb. Over the first nine months, for instance, T-Mobile US invested about 25% less in capital expenditure than it did the year before.

Open RAN malaise

But NEC's difficulties have been compounded by the gloom that surrounds open RAN. The idea there is to make the interfaces between different parts of the RAN more interoperable so that different suppliers can be combined at the same mobile site. Today, all the products would typically come from one vendor. Telcos like the thought of more competition. Unfortunately, many had already signed 5G contracts before open RAN was sufficiently mature and have now extensively deployed equipment. They are not about to rip that out at great expense unless forced.

Operators are still not convinced open RAN measures up, either. The "virtualization" or "cloudification" that accompanies openness, for most telcos, means relying more heavily on general-purpose equipment. The gains in cloud economics might not compensate for the drawbacks in performance and energy efficiency of ditching customized silicon and appliances.

On top of that, open RAN's original fronthaul specification – the important interface between radios and computing products – is inadequate when it comes to massive MIMO, an advanced 5G technology. This, at least, was the assessment of numerous big stakeholders in the O-RAN Alliance, the specs group, including several telcos. Earlier this year, it prompted the creation of two optional workarounds. Neither looks ideal.

Perhaps even more problematic is the need for a systems integrator to glue these various parts together. In a traditional RAN, that effort would fall to an Ericsson or Nokia. To skeptics, transferring control to another third party does not sound like an improvement. But telcos that decide to do their own systems integration will have to invest in staff and expertise.

Slow-moving clients

Outside Japan, NEC has few big 5G deals to shout about. It has been identified as the supplier of radio units to 1&1, a German operator building a greenfield network. Yet 1&1's rollout is badly behind schedule. According to a recent report from Handelsblatt, it will have only 100 antennas in operation when it launches a 5G smartphone service on December 8.

Another big European client is Vodafone, which named NEC as a radio unit supplier when it announced plans to replace about 2,500 Huawei sites in the UK. NEC's name, however, was missing from the list of vendors in Vodafone's last update a few weeks ago. The operator insists it still plans to pair NEC's radios with Samsung's RAN software, but its immediate goal is effectively the rollout of single-vendor open RAN using Samsung's radios. The NEC omission hints at the difficulty of combining vendors.

In a presentation last week, NEC blamed the revision to its 5G outlook on "slower business progress in global 5G business due to delay of international open RAN market start up," saying that "structural reform [is] underway." Henceforth, it will focus on "profitable projects" as it tries to restore profitability. This fiscal year, it is guiding for sales of JPY88 billion ($600 million) and an operating loss of JPY10 billion ($68 million). By the next one, it is aiming for JPY96 billion ($650 million) in sales and a profit of JPY2 billion ($13.6 million).

But that will mean cost reductions on the hardware side and a shift to what NEC describes as "high value-added software sectors." This is unlikely to aid the development of more competitive 5G radios on which telcos such as Rakuten, 1&1 and Vodafone are counting. Nor is it just clients outside Japan that have made little progress on 5G. Rakuten's network comprised 60,318 4G basestations at the end of September but just 10,560 5G ones operating in midband spectrum.

James Crawshaw, a principal analyst with Omdia, notes the continuation of a worrying trend. "It seems very difficult culturally for some Japanese companies to succeed internationally," he said. "If you look at NEC's target revenue outside Japan for their 5G business, it is tiny. Projects that they were involved in are just not profitable. They are not even profitable in Japan. They say they are aiming to get back to profitability domestically next year."

Crawshaw doubts if $210 million in international revenues in its 2026 fiscal year would give NEC enough scale to compete against the big kit vendors. But question marks hang over its rivals, too. Mavenir, a US vendor, was downgraded by Moody's in August because of what the ratings agency said were "significantly lower revenue and EBITDA expectations over the next 12-18 months, due primarily to economic uncertainties, slower than expected radio deployments, and a significant delay by a major customer to deploy Mavenir's solution in a fixed wireless architecture."

Rakuten Symphony, the part of the Japanese group that sells telco products, has also struggled. Revenues fell 5% for the first nine months, compared with the year-earlier period, and at $232 million are tiny alongside the $18.4 billion that Ericsson made and the $18 billion earned by Nokia. It is not the year that open RAN hopefuls would have wanted.