Ericsson says China divestment is not linked to local 5G setbacks

China has been a less welcoming environment for Ericsson in recent months. After Sweden's government blocked 5G operators from using Chinese vendors last year, Ericsson's share of 5G business with China's state-controlled service providers fell dramatically in what CEO Börje Ekholm felt was a retaliation by government officials.

Now the Swedish firm is parting with research-and-development assets in China, and the divestment has been linked clearly to its contractual misfortunes by the South China Morning Post, which first reported the move last week. It is a perception Ericsson is eager to dispel.

The divestment concerns product development activities in Nanjing, said to employ about 650 people. Ericsson has confirmed these are being transferred to a local partner called TietoEVRY, which has a longstanding relationship with Ericsson. But it denies that transfer has anything to do with a loss of 5G market share.

Ericsson CEO Börje Ekholm on China: "We are going to fight as hard as hell to get back."

Rather it is about cutting back on investments in older technologies. The Nanjing facility was heavily focused on research into and development of 2G, 3G and 4G. Ericsson's current priorities are 5G, cloud RAN and other emerging technologies, a spokesperson told Light Reading.

"All affected employees will be offered an employment with TietoEVRY, effective November 1, 2021," said Ericsson in a detailed statement about the plans. "All other activities, including manufacturing, in Nanjing will remain and are not affected by this change."

"We are continuously committed to our customers and partners in mainland China and remain committed to 5G development for this market and globally," it continued. "Mainland China has always been and remains a very important market for us."

Reversal of fortune

Sweden is among several European countries that have either restricted or banned Huawei and ZTE, Chinese firms that compete against Ericsson. That decision reflects growing geopolitical tension between China and the West, as well as concern that Chinese telecom products could include malware allowing Chinese officials to snoop on other countries or even cripple their networks.

Huawei denies the charges, pointing out that no evidence of "backdoors" has ever been found. But critics say the risk is too great when all Chinese companies are ultimately answerable to the country's rulers.

Despite distancing himself from his own government's policy, Ekholm watched Ericsson's share of 5G contracts with China Mobile fall from about 11% last year, during phase one of the country's rollout, to just 2% in this year's phase two awards. When Ericsson reported results for the second fiscal quarter, they already showed a 60% year-on-year drop in Chinese revenues, a fall of about $390 million.

During an interview with Light Reading last month, Ekholm said he was determined to reverse his fortunes in the world's biggest market for mobile network equipment. "I think if there is one thing that characterizes Ericsson it is resilience," he said. "We are not going to give up. We are going to fight as hard as hell to get back."

Such aims would make any divestment of critical R&D facilities look counterintuitive. Nor will the loss of 650 employees make a huge difference to Ericsson's presence in northeast Asia, where it employed nearly 14,000 people last year – roughly 14% of the total.

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It has continued to increase overall spending on research and development under Ekholm's leadership, investing about 39.7 billion Swedish kronor ($4.6 billion) in R&D last year, 26% more than it spent in 2016, before Ekholm took charge. That increase has come as Ericsson has sold assets it no longer considers core to its business.

Ericsson has flagged various concerns about China in recent financial statements. Besides warning investors that its market share could suffer, Ericsson said in its last annual report that a Chinese equivalent of the US Entity List – a trade blacklist – could "impact the ability to operate in China or use China in global value chains." It went on to say that one potential impact could include "restrictions in use of R&D resources."

The Swedish vendor has worked on diversifying its supply chain and base of operations in the last few years. One notable move has been the opening of a new and highly automated facility in Lewisville, Texas, which Ericsson says can address all the needs of the US market with only about 100 employees.

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