The 5G-centric stand-off between the USA and China continues to have major implications for Huawei and the whole mobile equipment industry.
Ericsson said it is writing down the value of its Chinese inventory by about SEK1 billion ($105m) in the second quarter of 2020. Although the Swedish vendor did secure some deals in the most recent round of 5G awards by the three Chinese operators – unlike Nokia – the write-down suggests it had to give them a very good price in order to stay in their supply chain.
The deals were struck against the context of the USA encouraging allied governments to bar Huawei equipment from 5G networks, and although this policy has had mixed success, it has redoubled the determination of the Chinese administration to be as self-sufficient as possible in core technologies. That could see pressure being applied to the largely state-owned telcos to buy most of their kit from local vendors (which had usually secured the biggest share of major contracts anyway).
The unexpected write-down points to a significant adjustment in pricing in China, which may be a reason why Nokia was excluded this time around, rather than its well-publicized teething problems with its 5G radio chipsets. Ericsson said that the initially high development costs of early 5G Standalone products were to blame, but the impact would be reduced as the products mature. However, it seems likely that, if that were the only factor, it would have been more easily anticipated and planned for.
“In the Q1 2020 earnings report we communicated that an increasing share of strategic contracts was expected to weigh negatively on profitability in the second quarter 2020 primarily driven by temporary negative gross margin in China,” said Ericsson’s statement. “In addition, the second quarter will be impacted by a cost of around SEK 1bn related to asset write-downs of pre-commercial product inventory for the Chinese market.”
The company insisted that, while Chinese 5G deployments would dilute gross margin in the short term, “it is expected to contribute positively to gross and operating income from the second half of 2020 and in line with the business plan be profitable over time”.
Ericsson has repeatedly emphasized that, despite geopolitical tensions, increasing market share in China remains strategically important and achievable. It is supplying RAN equipment for the latest round of deployments by China Unicom, and both RAN and core equipment for China Mobile and China Telecom. But local reports indicated that Ericsson gained only about 10% of the total, with Huawei and ZTE accounting for 85% of the contract value. Nokia is supplying core and IMS gear to Unicom but missed out on the most recent RAN awards.
The three telcos have accelerated roll-out of 5G in response to the pandemic crisis, and will be among the first operators to deploy a 5G core with 5G Standalone networks.
Huawei may be certain of major wins in the largest 5G market in the world, but those will not fully compensate for the barriers being erected against it elsewhere. A key battleground is currently the UK, where the government is reported to be reviewing a decision to allow Huawei to supply up to 35% of 5G RAN equipment, though nothing in the core. It may now decide to exclude Huawei completely from future sales and even demand that operators rip out currently installed kit.
These reports have prompted a major public relations exercise from Huawei, plus protests from the UK operators which currently use the Chinese vendor for some of their 4G and 5G networks (BT/EE, Vodafone and Three, though not O2).
Vodafone UK’s CTO, Scott Petty, said: “The UK’s leadership in 5G will be lost if mobile operators are forced to spend time and money replacing existing equipment…. We are not tied to one supplier, but it is important to understand the extent of what is at stake here.”
Huawei VP Victor Zhang, told the Financial Times newspaper that the company was not controlled by the Chinese state and had invested heavily in the UK for 20 years. He implored the government not to overestimate the security risks, nor underestimate the economic fall-out of removing Huawei’s equipment from 5G and fiber broadband networks, at a time when the UK economy must also cope with Covid-19 and Brexit.
“Huawei grew up in the UK. We’ve been here for 20 years and were integral in building the 3G and 4G networks we all use every day,” Zhang said. “As a private company, 100% owned by employees, our priority has been to help mobile and broadband companies build a better-connected UK. Britain needs the best possible technologies, more choice, innovation and more suppliers, all of which means more secure and more resilient networks.”
BT/EE is in the process of replacing Huawei with Ericsson in the mobile core and is estimated to use Huawei RAN equipment in two-thirds of its sites, with Nokia providing the rest. Three UK chose Huawei as its sole 5G vendor, having used Nokia in 3G and Samsung in 4G (it still has Nokia in the core). Vodafone is a major Huawei customer across Europe, though to a lesser extent in the UK than some other countries. It is estimated that about one-third of its sites are based on Huawei equipment, with 56% from Ericsson and the rest from Nokia (but Nokia is being phased out in favor of Ericsson). Its core mainly comes from Cisco.
O2 is the only operator to have no Huawei equipment and uses a mixture of Nokia and Ericsson. Vodafone and O2 have a RAN sharing deal under which they each build and manage access networks in half of the country.
The US State Department hit back against Huawei’s claims, accusing the Chinese government of “bullying” the UK with the threat of retaliatory action against UK businesses, if Huawei is excluded from 5G. It claimed that China had issued threats against UK banking giant HSBC, which has its roots in Hong Kong, and to break commitments on nuclear power plants. “The United States stands with the United Kingdom against the Chinese Communist Party’s coercive bullying tactics. We stand ready to help our British friends build critical infrastructure,” tweeted the department.
Meanwhile, politicians and vendors in the USA continue to propose ways to build an American 5G equipment industry again, leveraging open RAN technologies. So far, state funding proposals have been laughably small – a suggested $1bn fund to support open RAN start-ups, for instance, when the major OEMs spend many billions of dollars apiece on R&D. But a new proposal, by Senators John Cornyn of Texas and Mark Warner of Virginia, would earmark a far more meaningful sum, $25bn, not for 5G specifically but to boost the US semiconductor industry in key technologies including 5G, AI and others.
The CHIPS (Creating Helpful Incentives to Produce Semiconductors) for America Act seems to be a direct response to the Made in China 2025 strategy, which also aims to pump large sums in to making China self-sufficient, and a world leader, in semiconductor technology, intellectual property and manufacturing processes.
Cornyn said: “This legislation would help stimulate advanced semiconductor manufacturing capabilities domestically, secure the supply chain, and ensure US maintains our lead in design while creating jobs, lowering our reliance on other countries for advanced chip fabrication, and strengthening national security.”
Warner added: “Unfortunately, our complacency has allowed our competitors – including adversaries – to catch up. This bill reinvests in this national priority.”
Of course, in this respect, China is on the back foot compared to the USA, home of Intel, Qualcomm and others, and this is one factor behind the USA’s determination to lure TSMC of Taiwan, the world’s largest chip manufacturer, to build a fab on US soil and to choose US customers like Apple and Qualcomm, over Huawei.
Of course, in this respect, China is on the back foot compared to the USA, home of Intel, Qualcomm and others, and this is one factor behind the USA’s determination to lure TSMC of Taiwan, the world’s largest chip manufacturer, to build a fab on US soil and to choose US customers like Apple and Qualcomm, over Huawei.
TSMC was reported, two weeks ago, to have cut ties with Huawei, its second largest customer after Apple, under US pressure, but it now appears that it is still considering the situation. Its chairman, Mark Liu, hopes to obtain a US licence to enable it to work with Huawei without losing access to US markets, but he insisted to investors that if Huawei had to be sacrificed, it could be replaced “in a very short time”.
In 5G networks, the position is reversed and China has the strength, while the USA has no major RAN vendor (though it has powerful companies in other parts of the 5G value chain such as processors, routers and cloud core platforms). The
The RAN weakness is a situation which US agencies and vendors want to change, and they are increasingly hijacking the O-RAN platform to do so.
Even in the UK, there are reported to be official investigations into ways that the country’s 5G-related technological capabilities could be boosted. The UK has lost most of its major players of the past in telecoms equipment, such as Marconi and Plessey, and its flagship processor designer, ARM, was allowed to be acquired by Japan’s Softbank. It has several start-ups and smaller vendors but it is challenging for these to gain scale without being acquired.
UK politicians sitting on the House of Commons Science and Technology Committee are examining what led to the absence of a major domestic supplier, and how this affects national resilience.
“Officials are trying to get people from the industry to form a working group. There are vestiges of the telecoms manufacturing industry in the UK,” one source told Capacity magazine. They are looking at a 20% share of the £75bn infrastructure market for building 5G in the UK, and then ahead to building a “globally competent 6G business”.