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Ericsson and Nokia are nearer to the endgame in China

Börje Ekholm does poker face with masterful Swedish inscrutability, but the Ericsson boss could have treated himself to a telling smile in 2020 when his company reportedly scooped more than $1 billion worth of 5G contracts in China. There may have been some bonus schadenfreude at the misfortunes of Finnish rival Nokia, denied any winnings by a 5G hand then stacked with bum technology cards.

The tables turned during round two last year when Nokia enjoyed a mini revival and Ericsson was punished for its government's decision to ban Huawei and ZTE, two Chinese vendors, from Sweden's 5G market. Yet both Nordic vendors are on a downward Chinese spiral.

Ericsson's sales to Chinese customers tumbled from 18.7 billion Swedish kronor (US$1.7 billion) in 2020 to about SEK10.1 billion ($900 million) last year as it complained about a loss of market share. Nokia made €1.5 billion ($1.5 billion) in revenues from Chinese business last year, up from less than €1.4 billion ($1.4 billion) in 2020. But sales have fallen from nearly €2.7 billion ($2.7 billion) in 2016, when Nokia completed its €15.6 billion ($15.4 billion) takeover of Alcatel-Lucent. And the prognosis is gloomy.

Both companies are feeling the impact of the technology war being fought by China and the West, one that is likely to result in dual ecosystems for the products the Nordic vendors make and sell. The latest US salvo involves tougher restrictions on the sale of chips and semiconductor technologies to China. While the emphasis this time is on factory equipment, much of which is provided by US companies or has US origins, experts think there is more to come.

"I would not be surprised to see the scope of limitations in terms of chip sales into China being expanded as has happened in capital equipment," said Richard Windsor, an analyst with Radio Free Mobile who previously worked for Nomura Securities, in a blog. "Anyone who sells silicon chips, equipment or software for making chips to China needs to be thinking about contingency plans."

This would include both Nordic vendors. A massive chunk of Ericsson's R&D spending – which last year came to more than SEK42 billion ($3.8 billion) – goes into Ericsson Silicon, an in-house division that makes chips for radio units and baseband computing. Nokia designs the same types of chips in partnership with US semiconductor manufacturers including Broadcom, Intel and Marvell.

Pekka Lundmark, Nokia's CEO, believes the direct impact of the latest US sanctions on his company is small. But he is still weighing the knock-on effects. "There could be a longer-term indirect impact that could affect the competitiveness of different players," he told Light Reading. "It is too early to get into details as to what those effects would be." Over at Ericsson, Fredrik Jejdling, the head of the networks business that accounts for more than 70% of sales, sounds equally unsure about the ramifications of the latest rules.

The death of globalization

But the technology conflict is not just about semiconductor embargoes and the blacklisting of specific companies. There have even been signs countries may ban access to components made in a certain country, or insist products sold within national borders are also manufactured inside them, according to Dexter Thillien, an analyst with the Economist Intelligence Unit. "Fragmentation is here to stay," he said at Network X, a show held in Amsterdam last week. "We are not going back to a globalized world."

Ericsson started building dual ecosystems when the US first began to clamp down on ZTE, which stood accused of selling US componentry to Iran. "We need to be proactive in the way we build resiliency in our supply chain, end to end," said Jejdling. "That doesn't take away the importance of China, but it is also a realization of the geopolitical environment we are in." Ericsson's moves include setting up a highly automated facility in Lewisville, Texas, to make all the equipment it sells to US customers.

Nokia has also been drawing attention to the "resilience" of its supply chain. Its last annual report included a breakdown of manufacturing by location (29% of it is in China, it said). But the incentive for both Nordic vendors to keep using China as the workshop of the world is weaker than ever.

Besides the decline they have seen in China sales, and Western nervousness about procuring equipment made in China, automation and the emergence of a growing Chinese middle class have eroded China's cost advantage. China's zero-COVID policy, which means putting entire cities into lockdown at the merest hint of the virus, is a further deterrent.

Ericsson still employs thousands of people in North East Asia, but the number fell by 853 last year, to 13,091, after hundreds of sales and delivery jobs were cut in China. Those layoffs were prompted by its loss of market share and subsequent decision to combine three separate customer units – one for each of China's three big operators – into a single unit for mainland China.

The drop at Nokia has been much sharper. In 2016, bolstered by its Alcatel-Lucent takeover, the Finnish company had 18,929 employees in China, according to that year's annual report. Last year, there were 12,244 remaining. Yes, the numbers have also fallen in other markets as Nokia has slashed jobs globally to restore profits. But China's share of the total is down as well – from 18.4% of roles in 2016 to only 13.9% last year.

Neither one of the Nordic vendors has had the same sales exposure to China that Huawei has had to the West. As Huawei is unceremoniously evicted from European networks and parts of the Asia-Pacific, Ericsson and Nokia perhaps have more to gain in revenues at its expense than they have to lose from the decline of their Chinese interests. But they would still rue being excluded from the world's biggest 5G market.

"It's an important market for us from the perspective of capabilities and competencies," said Jejdling. "We learned a lot from the 5G standalone evolution because there is a lot of development on top we see in China." Just as China is losing access to the West's expertise, so the West could be losing access to China's.