Ericsson and Nokia continue to benefit from the absence of their Chinese rivals in many markets. Nokia recently surprised the market with better-than-expected 1Q 20201 financials while Ericsson continues to extend its 5G footprint in the US and other markets and expects this to continue throughout 2021.  However, dark clouds loom in China as Chinese operators prepare for the next 5G auction.

Both vendors are participating in the forthcoming auction, which will predominantly focus on rural markets. However, there are some strong signals emanating from China that suggest that the Chinese government may place a retaliatory ban against Ericsson following similar decisions to band Huawei and ZTE in Sweden.

Legislation passed in Sweden and Finland

In December 2020, the Swedish government banned Chinese vendors Huawei and ZTE from the Swedish market. An appeal to the Swedish High Court was also dismissed a few weeks later. Finland has also passed similar legislation. However unlike its neighbour, Finland did not cite any vendors by name or country of origin. Instead, the government decreed that it would ban the use of telecom network equipment “when it has serious grounds for suspecting that the use of the equipment endangers national security or national defence.”

These developments immediately increased the possibility of a retaliatory ban from the Chinese authorities despite protestations by Ericsson to the Swedish government about the impact of the ban on its business in China. In a bond prospectus issued on Monday, Ericsson admitted that “the risk that it would be allocated significantly lower market share than currently had increased.”

China, a Critical Market for Vendors

In 2020, Chinese MNOs bought around 700,000 5G base stations. China is therefore a key and potentially huge market for both Ericsson and Nokia. Not only is it a volume market, it is also a leader in 5G technology development. It is therefore imperative that both vendors have a market presence from an economy of scale perspective but also because it helps them develop and fine-tune their 5G roadmaps.

Ericsson's sales to China rose 17% to $2.2 billion last year, accounting for 8% of its total revenues. Nevertheless, China is not one of Ericsson's Top-5 country markets and the vendor reported flat revenues there during its recent quarter. Hence a failure to gain market share at the forthcoming auction would not have a dramatic impact on Ericsson's finances in the short term. In contrast, Nokia does not have any 5G RAN presence in China although it still supports its 4G LTE networks.

Chinese MNOs disadvantaged

This is not an ideal situation for Chinese MNOs either as it would make them entirely reliant on domestic suppliers. Although Huawei is believed to have a stockpile of US components, this inventory will inevitably run out soon. 5G hardware, particularly massive MIMO radio antennas require the latest technologies. For example, Ericsson and Nokia use 7-nm process node for both the radio and baseband which at the moment can only be sourced from TSMC and Samsung. It is unlikely that Huawei will be able to develop alternatives to complete its 5G roll-out as well as supply its international customers and will have to resort to less advanced chipsets resulting in larger radios and baseband equipment with inferior performance.

Possible Scenarios and Outcomes

There are some interesting market dynamics as well as political considerations at play here. Clearly a lot will depend on the precise requirements of Chinese MNOs. Without a detailed insight into these requirements, Counterpoint Research can only speculate about how things could play out. Possible scenarios and outcomes include the following:

• China could decide not to award any new contracts to Ericsson (or Nokia). With Huawei suffering chip shortages due to US-China geopolitics, it is likely that compatriot ZTE (which is not subjected to the same restrictions) may benefit and be awarded an increased market share at Huawei’s expense. However, ZTE lacks the scale of its three main rivals and its ability to source US components could be abruptly curtailed by the US government at any time.
• Alternatively, China could punish Ericsson but reward Nokia. With a more cost-effective 5G portfolio compared to 2019, Nokia is in a better position in 2021. Counterpoint Research understands that Nokia's 700 MHz products were developed in China. In addition, Finland did not specifically ban Huawei or ZTE by name, which may in some way play to its advantage.
• As the focus of this auction is on rural markets, there is likely to be less demand for mMIMO products.  A third option therefore could be that China awards both Ericsson and Nokia small contracts to meet the most critical requirements (for example, mMIMO, if required), possibly with a higher market share to Nokia, in tandem with ZTE - or some other combination.

Will needs prevail over politics? Highly unlikely!

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