Nokia’s Revival: Is the Finnish Vendor Already Benefiting from Huawei’s Absence?

Nokia is one of the pioneers of the mobile industry but it has been struggling in recent years. The company’s mobile access division still dwarfs its other business units and it has yet to fully reap the benefits of the 2016 acquisition of Alcatel-Lucent. Clearly, the process of transforming Nokia from a mobile-only infrastructure provider into a broader based end-to-end communications infrastructure player has taken longer than expected.

Leveraging Long-term Trends

Nevertheless, Nokia is well-positioned to benefit from the 5G investment spending cycle of communication service providers (CSPs) and enterprises. It will also be buoyed by other macro trends such as COVID-19 related bandwidth demands (both in mobile and fixed networks) as well as the trend towards converged and multi-use networks. While all vendors should benefit from Huawei’s absence, particularly in Europe and the US, Nokia should benefit more as it is an end-to-end supplier like Huawei.

Short-term Risks

However, there are some execution risks in the short term. Profits at Nokia remain thin and margins may be under pressure during the next few months. Also, it is imperative that the ReefShark FPGA-to-SoC transition is kept on track and is not impacted by supply-chain or other factors. This is crucial as it will enable Nokia to better compete on price against its rivals. With Huawei banned from several markets, Nokia must demonstrate that it can increase its RAN market share over the next few months and years in the face of stronger competition from Samsung Networks and open RAN new entrants.

Non-RAN Growth Opportunities

As well as benefiting from the 5G RAN opportunity, Nokia is also focused on diversification away from its core MNO customer base. Backed by the world renowned Bell Labs, the company has significant competitive strengths in technology, including in-house silicon expertise. In particular, its FP-4, PSE-3 and Quillion chipsets offer a significant USP and enable differentiation compared to rivals. This provides Nokia with some strong product offerings, particularly in its fixed products portfolio. Counterpoint Research believes that the company holds market leading positions in fixed access, IP routing and optical networking as well as in software solutions and private networks.

As a result, major growth opportunities exist in the DCI switch market (particularly with web scalers), 5G optical transport market as well as with fixed CSPs (cable, DSL, whole-home Wi-Fi, FWA, etc.) and enterprise customers (via its private network solutions). This should enable Nokia to win contracts in new market segments and with non-traditional customers.

Is Nokia’s Turnaround on Track?

Counterpoint Research believes that Nokia is broadly on track to revive its 5G RAN business in the short term. “Although the loss of the Verizon contract in the US was clearly disappointing, the company has won several RAN contracts since then, including a major contract to replace Huawei at BT,” said Gareth Owen, Associate Research Director at Counterpoint Research. “Perhaps just as important – and a pointer to the future – is the fact that Nokia has won several strategic non-RAN contracts from high-profile players during the past few months. These include Apple, Baidu, Tencent, Dish Networks and most recently Equinix. I expect these type of contract wins to accelerate over the next year or so,” he added.

However, with the transition to cloud RAN and the introduction of open RAN, the mobile industry ecosystem will witness unprecedented changes over the next 5-10 years with many new entrants, including small software players and long-established IT leviathans. To survive in this new world, incumbents such as Nokia must urgently address this challenge and adapt accordingly. The company’s efforts to lead in the open RAN space are clearly an example of this.

Recommendations for Nokia

With a strategic review already underway, there will be changes at Nokia in 2021 as new CEO Pekka Lundmark implements his vision to reposition the company for the future. Counterpoint Research believes that Nokia needs to urgently increase R&D investment, especially in 5G, including sorting out any 5G product performance and quality issues. “Outside its main Networks division, the company should increase focus and investment in its Software and Enterprise divisions to benefit from two major trends – the migration to cloud-native software and the Industry 4.0 automation revolution. This should include acquisitions,” said Peter Richardson, Vice President of Research at Counterpoint Research. “In addition, Nokia should focus strongly on developing new 5G service-based businesses based on emerging technologies such as network slicing and edge computing in partnership with key CSP and enterprise partners,” he added.

However, funding this investment will not be easy. Nokia will need to dispose of some assets, perhaps its Technologies division, as well as consider other funding and strategic options.

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