Over the last few years the US, UK, Japan and Australia have all moved to ban companies from using Huawei network equipment, citing national security concerns. Consequently, these governments have shut off plans for Huawei to expand its 5G network. This has naturally left a large gap in the 5G market of these countries, which other companies are now looking to capitalize upon. In particular, the next two largest providers of 5G network equipment by market share, Ericsson and Nokia, are now looking to fill this gap in the market.
Since the announcement of bans on Huawei equipment, Ericsson and Nokia have been moving fast to secure 5G deals and expand market share. In the UK, Nokia won a 5G deal that will phase out Huawei’s EE network equipment, after the UK government’s ban which requires the complete removal of Huawei’s network equipment by 2027. In addition, the sales of Ericsson Networks (the division that offers 5G products) increased by 6% from the third quarter of 2019 to the third quarter of 2020. Despite these efforts, the market share of both Nokia and Ericsson has not yet changed significantly. Huawei, in the first quarter of 2020, had 28% of the global telecoms market share, dropping only 1% from 2019. In the meantime, Nokia has seen its market share drop 1% to 15%, closer to Ericsson’s 14%. The lack of significant growth in market share of Ericsson and Nokia highlights the fact that the impact of the sanctions may take longer than expected to significantly alter the sector, while also serving as a reminder that Huawei will remain a key player in 5G.
Furthermore, decoupling from Huawei could be a costly process that will involve infrastructure problems for Nokia and Ericsson. This is because a 5G network has to be built on top of existing 4G infrastructure, and therefore, non-Huawei 5G transmitters may not be compatible with Huawei 2G/3G/4G equipment. Replacing Huawei’s equipment will delay and disrupt 5G development, especially given that there are more than 1,500 networks built by Huawei globally. In addition to this infrastructure issue, Nokia and Ericsson may also face challenges in innovation and development as Huawei is taking Ericsson and Nokia to court. This comes as a result of Huawei holding more than 1,500 5G patents. Therefore, this potentially protracted legal case may stall the speed of innovation and have longer-term effects for Nokia and Ericsson if Huawei succeeds in barring them from certain markets.
The balance sheet of Huawei is also worth considering. Huawei met its projected revenue of 123 billion USD in 2019, and it planned to revise the target to 135 billion USD in April of last year. However, in May 2019, the United States blacklisted Huawei, meaning that US companies were restricted from doing business with the Chinese telecoms giant resulting in a 12 billion USD revenue shortfall for Huawei. These lower targets came to fruition in the third quarter results of 2020 when Huawei reported a slower revenue expansion – the growth rate of sales dropped from 27% in the third quarter of 2019 to 3.7% in the third quarter of 2020. However, Huawei does not seem too concerned, stating that its most lucrative market, East Asia, does not share the security concerns of the US and some of the Asia-Pacific countries. Nonetheless, Huawei is facing strong competition in this region too, with Ericsson reporting a 39% increase in net sales in North-East Asia, due to more 5G contracts in mainland China. Moreover, Nokia and Ericsson’s revenues growth is expected to continue, fueled by an expansion of 5G networks in the Asia-Pacific region. In addition, Huawei faces supply chain issues as its key suppliers stop trading with the company over fears of violating the US sanctions.
It is not uncommon for market development to be heavily influenced by political decisions, and the 5G race is no exception. Despite the serious challenges that Huawei faces it is unlikely that the telecoms equipment provider will drop out of the race easily, especially given the company’s strength in China. While Ericsson and Nokia’s growth in East-Asia and potential market opportunity in western countries does present increased competition for Huawei, the global market share of both competitors remains low when compared to Huawei. The victor of this 5G race will most likely be the company which is able to successfully walk the political tightrope between the US and China, which is only becoming more difficult as US-China relations worsen.
By Sam Yu
Sector Head: Felix Hooper