Tough Year Ahead for Nokia as Ericsson Extends Market Share

Ericsson and Nokia reported 4Q 2020 and full-year 2020 results recently. Ericsson reported healthy financials which shows that it is continuing to benefit from the ramp-up of 5G deployments across the world. Nokia reported declining revenues with expectations that 2021 will be a tough year as the vendor starts executing its new strategy.

Market Share Gains for Ericsson

Ericsson reported a significant increase in RAN hardware sales during the 4Q, an indication that it is extending its footprint. Strong growth was experienced in China, North America and in the Southeast Asia, Oceania and India region driven mainly by Australia, India and Japan. In Europe, however, the growth was purely from market share gains as the overall market was sluggish and is not growing at this time. Although revenues decreased in Africa and Latin America during the latest quarter, Ericsson expects to increase market share in both these markets over the coming months as well as in China.

The Swedish vendor now claims that it is seeing market share gains globally from all its competitors and not just in markets where Huawei and ZTE are absent. Ericsson expects this to continue at least through to mid-2021. Counterpoint Research believes that this is due to the competitiveness of its 5G product portfolio from a cost and product feature perspective and due to its future roadmap. In addition, its sustained investment in R&D continues to generate TCO  savings for its MNO customers.

Nokia Restructuring

In the the midst of restructuring, Nokia will struggle in 2021 with a further reduction in market share expected, a consequence of the vendor failing to convert all its 4G footprint into 5G. Not only is Nokia absent from the key Chinese RAN market, it is also struggling in North America due to lower volumes due to its reduced market share and price erosion, which is higher in North America than other parts of the world. In addition, the vendor expects significant currency headwinds during 2021.

On a more positive note, Counterpoint believes that Nokia has a very competitive mid-band RAN portfolio and there could be some upside following the completion of the C-band auctions in the US. In Europe, Nokia is gaining market share due to the absence of Chinese vendors.

Although revenues declined 6% in the quarter, the vendor reported improving margins, including in its critical Mobile Access division, which Counterpoint Research attributes to lower RAN product costs due partly to good progress in transitioning from FPGA-to-SoC chipsets.  At the end of 2020, the conversion rate stood at 45%, ahead of Nokia’s 37% target. Although this transition to SoCs will not be completed until the end of 2022, Counterpoint expects that Nokia will have caught up with its rivals in terms of other 5G product developments by the end of 2021.

Profits in Sight at Ericsson’s Digital Services

Ericsson’s Networks business is going from strength to strength. However, the financial performance of its non-RAN businesses are not quite so healthy in margin terms. Revenues at Ericsson’s Digital Services unit, its second largest business unit, continued to decrease during 4Q 2020 due to a sales decline in its legacy portfolio, partially offset by sales growth in its cloud infrastructure products.

Exhibit 1: Comparison of Ericsson and Nokia Full Year 2020 Revenues by Region (includes all businesses).

In recent months, Ericsson has been investing heavily in accelerating the development of its cloud-native portfolio and boasts more than 36 cloud-native core contracts plus 106 orchestration contracts to date. With improving margins and revenues from these new product lines expected to start rolling in during 2021, Counterpoint Research believes that Ericsson is finally on the path to achieving profitability in its Digital Services division.

Non-RAN Promising for Nokia

Revenues at Nokia’s non-RAN businesses were mostly flat during 2020. However, there are encouraging signs that 2021 will be a better year. Nokia’s non-RAN businesses, particularly the IP routing, fixed access and core network software technologies are held in high esteem by MNOs. For example, IP routing recorded its best quarter  on a constant currency basis since the acquisition by Alcatel-Lucent in 2013 with the FP-4 routing platform securing wins with big name customers. The Fixed Access recently launched its 25G PON solution and Nokia expects cost reductions during 2021 in its optical networks unit following the acquisition of Elenion Technologies. In addition, its Alcatel submarine cable business had a record order book of $1.7 billion at the end of 2020.

With lower product costs and new products coming on stream, coupled with the absence of Chinese rivals in several markets, Counterpoint Research believes that Nokia’s non RAN businesses will perform better during 2021 and offset the expected weak performance in the Mobile Access unit.

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