As expected, domestic vendors Huawei and ZTE were awarded the largest contracts in China Broadcasting Network (CBN) and China Mobile's recent joint 5G infrastructure tenders. Together with compatriot Datang, the trio accounted for 94.1% of the 480,397 base stations under tender with the remaining 6% or 28,822 base stations shared between foreign vendors Ericsson and Nokia (Exhibit 1). Rival operators Chinese Telecom and China Unicom are expected to announce the results of their second 5G tenders in the coming days.

CBN & China Mobile Tender

CBN is the fourth largest operator in China and has partnered with China Mobile to build and operate a 5G network using old analogue TV spectrum in the 700 MHz band. The network is being designed to primarily deliver video streaming services to CBN’s existing cable TV customer base.

Overall, Ericsson was awarded a 2% share of CBN/China Mobile's three tenders, a not an unexpected result. Clearly, retaliatory measures against Ericsson were inevitable following the Swedish government’s decision to ban Huawei and ZTE from the Swedish 5G market in December 2020. Neighbouring Finland also passed similar legislation but did not specifically mention Huawei or ZTE by name. In the ensuing months, Ericsson has been lowering expectations in China, including warning that it may not be awarded any market share in the current round of tenders. While exclusion cannot yet be ruled out in the China Telecom and China Unicom tenders, it is equally possible that Ericsson could end up with a similar 2% share.

Exhibit 1: Individual Tender Results (left) and Overall Market Share (Right)

Impact on Ericsson's Earnings

The geopolitical fallout between China and Sweden has also impacted Ericsson’s present 5G contracts in China. In 2019, the company won an 11% share of China Mobile's first 5G tender. At its second quarter earnings call last week, Ericsson reported a SEK 2.5 billion ($287 million) reduction in revenues in China, a 60% drop Year-on-Year (YoY), due to “lower volumes from delayed 5G deployments.” However, Ericsson claims that this is revenue that has effectively been lost and will not be recouped at a later date.

While China impacted revenues at Ericsson’s Network business, it had a disproportionate knock-on effect on its Digital Services business, where revenues dropped 8% YoY due primarily to lower sales in mainland China. In addition, it was forced to write-off around SEK 300 billion ($34 million) of pre-commercial inventory in China. In contrast, Digital Services showed strong double-digit growth in Europe and North America. However, lower revenues from China coupled with increased R&D investment during the quarter had a negative impact on margins and will now probably push out profitability of Digital Services to 2023.

Nokia Returns to China's 5G Market

In contrast to Ericsson, Nokia has reasons to celebrate as it is now back in the Chinese 5G RAN market. With a more cost-competitive 5G portfolio compared to 2019, Nokia was awarded a 4% share of the CBN/China Telecom tenders. Although small, it could yet rise in subsequent awards by China Telecom and China Unicom and is an important morale boosting win as the company strives to re-claim global market share.

More importantly, Nokia again has a presence in the Chinese RAN market, a key market for all vendors. Not only is China a volume market, it is also a leader in 5G technology development. It is therefore imperative that vendors have a market presence there. Perhaps a consolation for Ericsson is that it may have avoided the worst scenario - i.e. complete exclusion from the Chinese market.

Ericsson thriving outside China

Despite the setback in China, Ericsson is firing on all cylinders outside China. Revenues at its Networks business unit increased 11% on a constant currency basis, reflecting strong market activity in other regions of the world. Strong growth was reported in Europe as well as in North America, its biggest market, driven by increasing demand for C-band infrastructure. It also won its largest ever contract, a five-year $8 billion contract with Verizon. Ericsson continues to increase its market share, both in markets where it competes against Chinese vendors as well as in markets where they are absent. Counterpoint Research believes that this is largely driven by the steady and continuous improvement in gross margin at the Networks business over the past four years, up from 23% in Q2 2017 to an impressive 47.9% in the most recent quarter.

Geopolitics driving 6G?

Overall, Ericsson's reduced market presence in China is more than compensated financially by market share gains in other parts of the world, where Chinese vendors are excluded. However, continued geopolitical tensions between China and much of the western world is already starting to have serious implications on the future development of the telecoms industry, particularly with respect to 6G. In recent years, the telecoms industry has benefited from single global 4G/5G standards. Now, a return to the multi-standard days of 3G cannot be excluded.

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