Huawei could perhaps not have wished for a better outcome. After years of dithering under European Union (EU) pressure, Germany’s government this week said the controversial Chinese vendor will be allowed to provide 5G radio access network (RAN) equipment for another five and a half years. What’s more, the ban that comes into force at the end of 2029 – on security grounds – will affect only the “critical functions of the 5G network management systems.” This might not even cover the entirety of an element management system (EMS), according to a source within Huawei. German networks could theoretically bristle with Chinese antennas well into the 2030s.
It would seem like further bad news for the ailing Nordic vendors, and Ericsson – to the evident surprise of some investors – still regards Huawei as a vigorous and competitive regional threat. “We are seeing sharply increased competition from Chinese vendors in Europe and Latin America,” said Börje Ekholm, the Swedish company’s CEO, on his call with analysts today about the latest set of quarterly results.
They make for unpleasant viewing. Sales fell 7%, compared with the same quarter last year, to 59.8 billion Swedish kronor (US$5.7 billion), and Ericsson’s net loss ballooned to SEK11.6 billion ($1.1 billion), from just SEK600 million ($56.8 million) a year before. That was triggered by a huge impairment charge of SEK11.4 billion ($1.1 billion) against Vonage, the US software company Ericsson acquired for $6.2 billion two years ago. But sales are down because operators worldwide have cut spending on 5G. Price-based competition from Chinese vendors, and regulators unwilling to be tough on them, are not what Ericsson needs.
Ekholm’s remarks provoked immediate concern within the analyst community about the risks of a new 5G price war. “We like to be managing our overall pricing and profitability and gross margin and so it will all depend on specific situations,” he said when asked how Ericsson would respond and if it is losing deals. “I am sure we’ll lose some, but we do it because it is right for the overall gross margin in the company. Don’t expect us to be the most aggressive in the market.”
The need for discipline
Recent data from Omdia, a Light Reading sister company, shows that Ericsson’s share of the global RAN market fell from 25.7% in 2022 to 24.3% last year, with Huawei’s share unchanged at 31.3%. Finland’s Nokia gained 1.7 percentage points to capture 19.5% of the market.
But Ekholm insisted on the need for “discipline” to protect Ericsson’s gross margin and ensure it can sustain high levels of research-and-development (R&D) spending. “We need to be able to deliver a healthy gross profit to be able to invest in technology leadership,” he said, while noting “it is always expensive to give up footprint. We need to manage both, and how it looks will depend on individual situations. Unless we get paid for our technology, why should we take a contract?”
Since taking over as CEO in 2017, Ekholm has prioritized R&D spending after it had been allowed to sink under predecessor Hans Vestberg, whose tenure was characterized by a loss of European market share to Huawei. Investments in this area rose 8% year-over-year for the recent second quarter, to SEK14.9 billion ($1.4 billion).
Recent Chinese aggression, as Ericsson’s boss described it, suggests a US campaign aimed at restricting Huawei’s access to high-end chips has not been successful. “The honest answer is they should comment on that,” he said when asked about Huawei’s ability to secure critical components. “But we see them quite aggressive in the market and it is ultimately a choice customers will have to make – how they think about network resilience.”
In 2020, the UK held American sanctions responsible for its decision to ban Huawei, which must be stripped out of the country’s mobile networks by the end of 2027. The move has brought opportunities for Ericsson, which landed a bigger deal with Vodafone and a new 5G contract with Three as a direct consequence. But relatively few other European countries have been as stringent.
“I think it is still a bit too early to have a view on what will happen in Europe,” said Ekholm in response to a question about Germany’s decision this week. “I saw the legislation announced and I think we’ll have to see how that impacts the market.”
Germany’s telcos, however, already appear to have largely removed Huawei’s products from the core network, the control center of the system. Under the rules announced this week, they will be able to keep using its 5G antennas and other components provided management software, and the server chips that host it are supplied by another company. But experts have raised doubts about the viability of the scheme. In traditional 5G networks, the interface between the EMS and the RAN is proprietary and would therefore need to be opened by Huawei to the other player.
Huawei’s official statement on the German legislation betrayed no sign of panic. “We will continue to cooperate with customers and partners in a constructive and open manner, promote the improvement and progress of cyber security, and promote the construction of mobile networks and digitalization in Germany,” it said by email. “We are assessing the relevant implications of the agreement in detail and reserve the right to comment.”
Omdia’s research, meanwhile, ranks Huawei ahead of Ericsson and Nokia on business performance but slightly behind Ericsson on portfolio breadth and competitiveness. Separate research by Dell’Oro puts Huawei in top spot for the “RAN revenue ranking by technology” last year.
“You are seeing a more competitive market, I think it is fair to say,” Ekholm told analysts. “I got the impression over the last few months that everyone thinks Chinese vendors have disappeared and that is not true.” He would presumably wish it were otherwise.
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