Nokia’s recovery plan, released last Thursday, starkly reveals the difficulties the Finnish company faces in continuing to maintain a privileged position in the highly competitive and relatively stagnant global telecommunications network market. Nokia will undertake a severe restructuring of the company, laying off up to 10,000 employees, which is much more drastic than its Swedish neighbor Ericsson did more than three years ago. The problem Nokia faces is not only one of cost adjustment and an increase in the operating margin, which it will probably achieve, but the leadership position that Huawei enjoys is insulting and goes further. Courtesy of the new 5G networks.
Ericsson and Nokia are two companies of a similar size and activity. Approximately 70% of the business is done with the sale of telecommunications network equipment to the main operators, especially in Europe and the United States. The turnover of each of them is of the order of 17,000 million euros per year, to which it is possible to add 15% to 20% in digital services to the same operators and companies, a promising activity with good growth, and to income from patents, software and complementary activities.
Ericsson’s net sales last year were SEK 232.39 billion (€ 23 billion), an increase of 2% but with SEK 17.623 billion in net profit compared to a meager SEK 1.84 billion in 2019 and losses of 6.276. million kronor in 2018. Ericsson’s 2017 restructuring has therefore managed to correct course, reducing costs and recovering profits, as seen in the annual report.
Nokia expects a “significant profitability improvement” this year, with net sales of € 21.8 billion, € 1.2 billion more than in 2020, and an operating margin of 7-10%, compared to 4% last year.
Nokia’s net sales were 21,852 million euros last year, compared to 23,315 million the previous year and 22,563 million in 2018. The company managed to improve the operating margin, from 2.1% in 2019 to 4% in 2020 , but with losses of 2,513 million euros in 2020 compared to a very modest profit of 18 million in 2019 and losses of 549 million in 2018, as recorded in its annual report.
For this year 2021, Nokia expects a “significant improvement in profitability”, as Pekka Lundmark, the recently appointed CEO, said at Capital Markets Day on March 18. Nokia expects net sales in 2021 to be 21.8 billion euros, 1.2 billion more than in 2020, and a comparable operating margin of 7% to 10%, compared to the indicated 4%. By 2023, the intention is to “grow faster than the market”, with a margin of 10 to 13%.
Huawei has yet to publish its annual results, but provisional figures published by Global Times, an English-language newspaper controlled by the Chinese government, indicate that in 2020 it had a turnover of 136.7 billion dollars, 11.2% more than the previous year, and the profit was 9.9 billion dollars, 10.4% more. Huawei has managed to increase revenues and profits by double digits, despite the significant drop in smartphone sales, especially in the fourth quarter, and the sanctions imposed by the United States, which have caused TSMC not to sell any chip since September. Assuming that network activity represented 60% of total revenue in 2020, which will be confirmed when the annual report is presented, it would mean an annual turnover of at least $ 60 billion, more than double the sum of total net sales. Ericsson and Nokia together.
The disaster that is expected for Huawei’s smartphone activity during this year 2021, increased by the sale of all the assets of its second Honor brand of smartphones, precisely to try to circumvent the US blockade, will not influence the tremendous competitive position that Huawei maintains in its activity of telecommunications networks. Network equipment does not require such sophisticated and miniaturized chips as in smartphones and, in addition, Huawei manufactures most of its network components, making this activity more immune to external blocking.
The consultancy Dell’Oro estimates that Huawei achieved a 32% share of the global telecommunications equipment market in 2020, valued at between 90,000 and 95,000 million dollars, compared to a 16% share of both Ericsson and Nokia. The fourth largest supplier in the world is another Chinese company, ZTE, with a share close to 10% and, like Huawei, with an upward trend. Cisco stayed at 5%, down, while Ciena retained about 3%, very close to Samsung, with a tendency to increase as well, according to the Dell’Oro graph.
Stagnant networks and services on the rise
The expectations of the global telecommunications network equipment market are for an average annual growth of 1% between 2020 and 2023, as stated by Pekka Lundmark on March 18 at Capital Markets Day and reflected in the graph below. Nokia predicts that the network market for operators will be stagnant at € 91 billion in the coming years, while that for companies and cloud services will grow by 8% until 2023, from € 20 billion in 2020 to 25,000 million in 2023.
Evolution of the global market for telecommunications equipment
Source: Nokia (Capital Markets Day, March 18, 2021)
By regions, the Asian market is expected to grow more than the European and American markets, especially the Chinese market and during this 2021. This makes the prospects for growth in turnover and profits much more favorable for Huawei and its compatriot ZTE than for Ericsson. and Nokia. The Chinese market has long been the most important, but with the arrival of 5G and the tremendous momentum of new mobile technology sponsored by the Chinese authorities, it is even more so. Besides, the norm in China is to use SA 5G, with fully 5G networks, and not with the 4G / 5G hybrid of NSA 5G in most other countries.
Nokia is now skeptical of the advantages of Open RAN, because it considers that there are many challenges to solve and achieve spectrum efficiency and the energy and cost savings that operators want
The CEO of Nokia assured that “we are still at the beginning of the 5G cycle”, as seen in the graph below, which shows the growth that 5G mobile networks and services will have until 2030, together with the decrease in parallel to 4G, with its crossing just this year. It should be noted that the 4G + 5G network and services market moves around 25,000 – 30,000 million euros per year, depending on the period, with the important exception that China is excluded from the graph. Perhaps this is because Nokia has no hope of selling network equipment in China in the next few years and no longer cares for this crucial market.
Source: Nokia (Capital Markets Day, March 18, 2021)
Ericsson does expect to sell equipment for years to come. For this reason, its CEO, Börje Ekholm, despaired a few weeks ago when he saw that the telecommunications regulator of his country banned Huawei of participating in the competition to supply equipment in Sweden. His fear is that China will do the same and go back to Ericsson in retaliation. At the end of last year, Ericsson obtained, with great effort, 18% of an important network supply contract to China Mobile for the next few years, while Nokia no longer participated because it considered that the amount of the contract being handled was very low and out of reach.
Grow above the market, without China
Ericsson’s forecasts for the next few years, like Nokia, is “to grow above the market”, with the expectation that the world market will increase, as Nokia also estimates, by 1%, according to Ekholm in the presentation of the annual results. 2020. Also, like Nokia, Ericsson plans to increase the operating margin and place the EBITA margin in the next few years at around 15 to 18% of sales, excluding restructuring costs. As the market will hardly grow, if it does so in value, Nokia and Ericsson will have no choice but to cut costs to increase the profit margin. A highly complex situation, because at the same time they will have to increase investments in research and development to remain competitive.
The situation for both companies is really complex, because they lack the financial muscle and enough market share to compete globally with a colossus like Huawei. If the European market is completely closed to the two main suppliers and the United States continues, as is foreseeable, closed tight, both Ericsson and Nokia will have access to a maximum of 30% of the world market for 5G networks, although they will not be alone either, Because they will have to compete with companies such as Samsung or the Japanese NTT DoCoMo and Fujitsu, among others, which are equally ambitious and in need of 5G contracts.
In the event that Europe relaxes its position regarding the possibility of Chinese companies entering the 5G network market, it is likely that Nokia and Ericsson would lose business opportunities in Europe but perhaps others would open up in the rest of the world market, because They have the experience and knowledge to compete with other companies of greater size and financial muscle. In any case, the outlook that is presented is complicated, although in current times it is nothing new, whatever the market.
The analysis has so far been limited to operators, because it has traditionally been by far the largest market. But when 5G enterprise applications are massively deployed, as is already beginning to happen in China, there will be many business opportunities to directly offer telecommunications equipment and services to non-carrier and user companies. As there will also be a lot of market linked to services provided from the cloud with its own equipment. That is when the decisive phase of deployment of enterprise 5G will take place, which has already started in China.
Interest in Open RAN wanes
It is interesting to note that Nokia has been interested at the beginning of this week in being skeptical of the future of the Open RAN initiative, promoted in recent weeks by several operators, mainly European, to unbundle the link networks (RAN) and that they are not controlled , from start to finish, by a single supplier, as is the current practice.
Tommi Uitto, Nokia’s head of networking, the company’s key division, has arranged interviews with leading digital media specializing in telecommunications, such as Light Reading, Fierce Wireless, RCR Wireless, Mobile World Live and others. Its main message is that the Open RAN initiative still has many challenges to overcome in order to achieve the desired installation flexibility and independence from the manufacturer and, in its opinion, achieve sufficient spectral efficiency and the considerable energy savings required in the networks. of the next few years. For operators, increasing the efficiency of networks is essential to reduce costs.
The apparent change in Nokia’s position with respect to Nokia’s Open RAN is significant, because not many months ago, with the previous leadership, it advocated installing open and virtualized network elements. Now, according to Uitto’s statements, Nokia continues to be interested in offering flexibility of operation and installation to operators, through initiatives such as Open RAN, but considers that it is better and much more efficient in terms of optimal use of available resources to have a single provider from end to end of the network.
With this, Nokia aligns itself with what Ericsson has always said, that it will collaborate in the development of Open RAN and, when this solution is mature and viable, will offer its own solution to operators, together with its traditional offering, so that they can choose what suits them best. Huawei, on the other hand, has not bothered to participate in the Open RAN initiative and be part of it. Which can be a serious problem, because Huawei has a multitude of patents that are part of the specifications approved by the 3GPP and can be used as long as the corresponding rights are paid. The Open RAN specifications extend those approved by 3GPP, but could not be used if Huawei does not give its explicit consent, as it is not part of the Open RAN Initiative, according to several experts.
Patents enter the international board
The issue of patents is an issue that for the moment has not created controversy, largely because it was a matter that the three major providers of link networks (Huawei, Ericsson and Nokia) monopolized and possible disputes between them were resolved. But last week Guo Fulin, Huawei’s president of international affairs, told the Financial Times that the company had 100,000 active patents at the end of 2020, up from 85,000 a year earlier.
A large proportion of these patents refer to telecommunications equipment, and in particular 5G technology, the manager told the newspaper. It also has patents in sensitive areas for the United States such as artificial intelligence or electronic surveillance. The company has published a document entitled “Respect and protection of intellectual property, the foundation of innovation.”
Huawei is also the company that presents the most patents to the World Intellectual Property Organization (WIPO), dependent on the United Nations. In 2020, Huawei submitted 5,464 patents to the WIPO cooperation treaty, compared to 3,093 for Samsung. Other companies with many patents are Mitsubishi, LG Electronics, and Qualcomm. According to Francis Curry, former WIPO director, two-thirds of the patents filed with WIPO are from Asian companies. “Huawei launches the patent war,” headlined Le Monde commentator Philippe Escande on March 18 in the French evening newspaper.
Jason Ding, director of Huawei’s intellectual property department, announced at a briefing that he will apply a “reasonable rate” of royalties for each of the 5G smartphones that use his proprietary technology, about $ 2.50 per device. Just over a month ago, Huawei sued Samsung because it believes that it does not pay its patents on network equipment adequately and has filed a lawsuit in a United States court.
Ericsson also sued Samsung for patent misappropriation a few months ago. Therefore, “traditional” network providers do not seem willing to allow other companies that do not have a broad portfolio of patents in telecommunications networks to take away, without adequate, fair and reasonable compensation (FRAND, in abbreviated terminology legal) a part of this coveted, but tremendously controversial, which is the market for 5G networks.