At the turn of the year, the most prominent of the battlegrounds over Huawei’s role in 5G was Sweden – not, of course, because this is one of the largest markets for 5G equipment contracts, but because it is the home of Ericsson.
The Swedish government has made it a condition of the upcoming 5G spectrum auction (in the 3.5 GHz and 2.3 GHz bands) that winners must not deploy Huawei or ZTE equipment. In a rare show of unity, both Huawei and Ericsson have protested against the decision.
Ericsson already has the home advantage when bidding for major deals in its homeland, so will benefit little from sanctions against its arch-rival – but stands to lose a lot more if that leads to retaliation in China, and restrictions on operators’ freedom to choose Ericsson products. In the last round of 5G RAN awards, despite geopolitical tensions with western markets, China’s operators still gave some hefty contracts to Ericsson (though dwarfed by the deals that went to local providers, these built on the Swedish firm’s success in selling 5G-ready equipment into China in the run-up to the start of 5G deployment).
Like European counterparts, Chinese MNOs will be unwilling to lose the economies of rolling out 5G-ready gear a few years ago, if they are forced to rip and replace by government policy. But they could also find themselves, like operators in the UK, Australia and some other markets, with very little choice if that is the final official requirement.
Hence why Ericsson would rather face competition from Huawei in its home market than be squeezed out of future contracts in its rival’s far larger home base.
Huawei managed to delay the Swedish auction when it appealed against the anti-Chinese conditions of winning, in the Swedish courts, in November. Sweden’s regulator successfully quashed that appeal and the auction should now start on January 19. Huawei continues to seek other avenues of appeal, claiming the ban was imposed without giving it a chance to respond or to work with authorities on a solution.
Meanwhile, Ericsson’s CEO Börje Ekholm reportedly lobbied a Swedish minister to reverse the ban. According to the Dagens Nyheter newspaper, he even suggested Ericsson might leave Sweden if Huawei were barred, rather than lose its chance to sell in China, which accounts for 8% of its sales.
During the company’s third quarter earnings call, Ekholm was asked by analysts whether he thought there was risk to Ericsson’s Chinese 5G business if the Beijing government decided to retaliate against European vendors. He responded that countries have to make their own individual decisions about the geopolitical situation and national security but added: “We focus on doing what we can and what we can impact. And what we really can impact is actually the competitiveness of our portfolio.”
Chinese operators “will continue to build out on the spectrum bands that we have awarded contracts now,” he added. “But of course, over time, they will award other spectrum bands as well with contracts. And we’ll have to compete there to seek to win there as well, and we will do so.”
Ericsson has targeted China’s huge 5G build-outs aggressively since launching its 5G-ready Ericsson Radio Systems (ERS) there in 2017. It was reported to be pricing its systems very keenly, and even as loss-leaders, in order to win market share in China, and Ekholm hinted at this willingness to take an early-stage profitability hit when he said the Chinese 5G business had “now reached the volume level where it is profitable and will continue to be so in the fourth quarter”.
Ericsson’s share of the Chinese mobile infrastructure market only about 12%, but its sales to Chinese operators leapt by 44% year-on-year in its third quarter, to about SEK5.75bn ($700m), with China accounting for 10% of total revenues, up from 7% a year earlier. It is the only market delivering significant growth for the vendor.
Executives said China had turned profitable a few months after Ericsson won a $593m 5G contract with China Mobile, as well as 5G deals with China Telecom and China Unicom, earlier this year. Ericsson has invested large sums in buying 5G share in China, a gamble which led to a $108.5m inventory writedown related to pre-commercial 5G equipment provided as part of the bid to win Chinese contracts. The popularity of Ericsson’s 5G-ready equipment in China, and its willingness to offer keen pricing, have both been credited with its increase in sales to the country, despite the geopolitical tensions surrounding Huawei.
“It’s very important for us, strategically important for us to be in China, and that’s because it’s a global powerhouse for innovation and technological change, and driven by many great entrepreneurs,” Ekholm said on the earnings call.
Ericsson will be keeping a sharp eye on China’s Export Control Law, which came into effect on December 1 and could impact companies doing business in China or with Chinese companies.