Nokia signs Chinese 5G deals, success will rely on non-MNO customers too

The current wave of US-Chinese trade wars may push the latter’s government to try to keep 5G contracts for homegrown suppliers, especially if western administrations continue to exclude Huawei and ZTE from network deals. However, operators in all regions are keen to avoid any reduction of their current, already restricted vendor choices as they start to issue significant tenders. So, the three Chinese carriers have been stressing their partnerships with all the major OEMs, and Nokia currently looks to be the biggest beneficiary.

Of course, other vendors are probably lining up new deals too, which have not yet been made public, but so far the Finnish firm is scoring strong points in the very early stages of the 5G contracts race – which, this time around, is not just about RANs and cores, but the digital platforms that will support a new 5G service model.

So Nokia has announced frame agreements with the three Chinese MNOs, collectively worth €2bn ($2.3bn); but perhaps more interestingly in terms of its long term growth strategy, it has also recently unveiled a string of alliances with Chinese companies to deploy 5G and cloud services in vertical industries. This month, it was talking about private industrial networks, based around edge compute, with China Unicom; but in July, its partner was Internet giant Tencent, which is looking to use 5G to expand into new consumer and enterprise services (and is also an investor in Unicom).

The lines are blurring between conventional and new-look service providers in China. This is no longer a split between network builders and over-the-top or MVNO providers – both new and old operators are investing in actual infrastructure, and harnessing virtualized architectures to create connected digital platforms that will support many industries and use cases. There is significant sharing of infrastructure to reduce cost – the three MNOs have a joint venture in which they are pooling many towers and other assets; several Internet and industrial companies have taken stakes in Unicom to improve its financial ability to roll out 5G, in return for a say in shaping how that network is prioritized.

China is leading this shift towards a fully digital, software-driven services platform in which the old telco and OTT roles blur and break down. In the USA, and other major hi-tech economies, old regulatory and market structures will make this a slower, more painful process. But the vendors will need to be ready for it, wherever and whenever 5G-driven digitalization starts to become real. By the very early evidence of recent Chinese alliances, Nokia is looking well positioned, with a mixture of conventional contracts – still vital, since physical network equipment will remain at the heart of its revenues and cashflow for years to come – and new-style engagements.

On the conventional side, Nokia has agreed a one-year deal with each of the three MNOs, worth a total of $2.3bn. It will supply China Mobile with RAN, core and passive optical equipment, as well as IP routing, optical transport, software-defined networking (SDN) tools and network management services.  It is not clear whether this is the same €1bn ($1.17bn), one-year framework agreement which it announced with Mobile in July, to supply mobile network equipment plus fixed broadband, IP routing, optical transport, customer experience management and OSS.

The China Telecom agreement does not seem to be 5G-specific as it includes 4G coverage expansion combined with 5G hotspot build-out and “5G cooperation”. China Unicom will also take a mixture of technologies, most of them not specifically 5G. They include edge compute infrastructure, virtualized IMS, SDN, network AI (artificial intelligence), IP routing and optical transport, and on the access side, 4G and fixed networks.

This will be just a drop in the ocean of total 5G spending in China. Investment bank Jefferies, for instance, believes the three MNOs will spend $180bn from 2019 to 2028 on 5G, which would be a 48% increase in what they invested, over a similar time period, in 4G ($117bn).

The Chinese government is even more aggressive in its forecasts. Last year, the China Academy of Information and Communications Technology, the research arm of the Ministry of Industry and IT (MIIT), predicted that the operators would spend RMB2.8 trilllion ($411bn) between 2020 and 2030, hitting a peak of RMB313bn in 2023.

But China Mobile has been cautious about the pace of investment, pointing out that many of these dollars will not go on 5G specifically, but on broader platform technology such as cloud infrastructure for virtualized RAN and edge compute. The operator has said that it will spread 5G investment over a far longer period than 4G (which was very compressed in China, because operators needed to act quickly to make up for a late and inadequate 3G roll-out).

For the vendors, a steady drip of 5G contracts over the coming decade would be highly welcome, even if China does not produce the 5G capex boom that it did when its operators deployed 3G around 2009 and LTE around 2013. After all, the value of Nokia’s new deals equates to almost 80% of its total revenues in China last year, which were €2.5bn ($2.9bn) – and that amounted to 12% of total revenues from network products and services.

These early 5G contracts are also valuable to boost confidence in the vendor’s offerings, and in the 5G market in general, at this early stage. A few months ago, Nokia announced a €3.5bn ($4bn) 5G networks deal with T-Mobile USA, and it is also a supplier – along with Ericsson and Samsung – to Verizon and AT&T.

It will also be a relief to investors in both Nokia and Ericsson that the east-west trade tensions – including speculation that Germany, and even the UK, might restrict purchases from Chinese firms – are not keeping them out of Chinese operators’ supply chains. They have, in fact, taken lower shares of mobile network contracts in recent years, as Huawei, in particular, has become increasingly advanced in its own technology. In LTE, non-Chinese vendors are estimated to have secured about 40% of Chinese RAN and packet core equipment deals by value; down from about half in W-CDMA and CDMA2000 (China Mobile’s homegrown TD-SCDMA 3G technology was, however, dominated by local suppliers).

But like any MNOs, the three Chinese players want the widest choice of vendors, to maximize their access to innovations and to ensure price competition.

This will become even more important as they start to introduce new, virtualized architectures and to hunt for new sources of revenue and profit growth. In the transition to 5G, open, cost-effective platforms will be more important than ever, to keep costs down and try to preserve margins in a competitive landscape; and also to make it easier for operators to deliver services to many industries with varying network requirements.

In the quest for enterprise, industrial and IoT business – on which 5G’s success will have to rest in the medium and longer term – operators will also be aware of the rising need to compete with Internet or industrial companies which might have been partners, or over-the-top irritants, before, but in 5G, may be deploying their own cloud or even network infrastructure.

This is why we have seen Nokia forming alliances both with the Chinese operators and with Tencent in areas of cloud and edge services and the IoT – because all of these will be future customers, and the Finnish firm, even more than its competitors, is hedging its bets with offerings that can support any kind of service provider.

So, in the summer, Nokia announced a new collaboration with China Mobile, focused on helping the giant telco pursue vertical market opportunities. The memorandum of understanding was for R&D and testing of AI/machine learning technologies, which can be used to enhance network optimization and radio resource management, and so support many different industries with varying and demanding connectivity requirements.

This month, it added an interesting new project with China Unicom to support a private cellular network, complete with a virtualized edge compute platform, for carmaker BMW’s plant in Shenyang, China (see separate item).

But Nokia has been the most aggressive OEM targeting the vertical market opportunity, and being open to supporting industrial and IoT players’ network requirements directly, rather than via an MNO deal. For instance, its hosted Cloud Packet Core and its multi-RAT Wingz IoT platform (which embraces unlicensed spectrum technologies) can clearly support enterprises directly, as well as through a cellular operator. And that strategic direction was on show in July when it was also getting closer to Tencent.

Nokia and Tencent will initially work on R&D in 5G-enabled applications and services across a wide range of vertical markets, including finance, transport , entertainment, energy, manufacturing and telematics. They will establish a jointly run lab in China’s hi-tech center, Shenzhen, which will support end-to-end testing of these 5G use cases over a Nokia core and RAN, and a range of third party terminals and other equipment.

Tencent’s mobile and online business is primarily consumer-driven, including the ubiquitous WeChat messaging service, plus games, social networking, content, shopping and other offerings, but it is eyeing an expansion into more business-to-business activities. For instance, its well-used online payments and transaction processing systems could be extended to support B2B markets.

Zeng Yu, a VP of Tencent, said the partnership would help it “fulfil the growing demands of a digital economy driven by 5G”; while Nokia’s president of mobile networks, Marc Rouanne, said it would enable applications and services with the “high reliability and availability to support ever-growing and changing customer demands”.

For Nokia, there is an opportunity to forge early and close ties with a company that surely aims to be a driving force behind 5G in China, in services and even in infrastructure investment. Last year, Tencent was one of 14 strategic investors which collectively bought a 35% stake in China Unicom, to save the MNO from its growing financial problems and to assert their own views of how it should deploy its 5G networks.

Another interesting aspect of the Tencent collaboration is that it could lead to Nokia moving into the company’s inner circle as it pursues a Facebook-style approach to reducing the cost of cloud and telecoms infrastructure deployment. This will be primarily focused on Tencent’s own cloud compute infrastructure at first, but the company, like its US counterpart, will also seek to drive new cost efficiencies and open platforms into the networks, to accelerate expansion of connectivity and services.

Tencent is a platinum member of Facebook’s Open Compute Project (OCP), though not yet of the Telecom Infra Project (TIP). However, it has been throwing its weight behind the kind of open technologies which will underpin TIP’s efforts to shake up the telco networks supply chain and break down its garden walls.

For instance, the Chinese firm, along with Alibaba, is an investor in Barefoot Networks, one of the prominent developers of switch-chips for white box switches, and a test partner with AT&T; and it has also joined the Google-inspired Stratum open source project, which also includes Barefoot and China Unicom. Stratum is an Open Networking Foundation initiative which will use the P4 programming language and open interfaces to manage large networks for operators and data centers. The group aims to release open source code early next year for multiple networking platforms. ONF has P4 code for access networks in field trials but says software for the mobile core is 1-2 years behind that stage. The end goal is that P4 should help enable a fully open network, based on commodity hardware including COTS servers and white box switches, from central core to distributed edge cloud.

These approaches are undoubtedly a threat to Nokia’s traditional model and margins, since they are looking to eliminate the proprietary technologies and accompanying high prices of the telecoms network world and slash the profitability of base stations, packet cores, switches and routers. But, to compensate for falling growth and margins in network equipment, Nokia will aim to move up the stack and assert power and profits in new strategic areas, such as the orchestrators and programmable cores which will support network slicing. Nokia will provide the tools for its operator customers to run the slicing engine and support hundreds of services and industries with diverse connectivity needs; but it can also provide the slice management directly for enterprises itself; or can sell its platform to a webscale firm (such as Tencent) which might want to take on that orchestration role.

It is certainly targeting some of its equipment at new Internet and webscale sectors. It was explicit about this when it unveiled the FP4 chip which will underpin its 7950 ‘petabit router’, at the start of this year. CEO Rajeev Suri said last year: “We are making good progress in expanding our business to new customers, including large Internet companies where growth is strong, and expect that a coming IP product refresh will strengthen our competitive position.”

And if Suri needed to send any clearer signals that Nokia does not intend to tie its fortunes entirely to telcos, in a world where many other vertical industries aim to use 5G, he said the unthinkable on a recent earnings call, lamenting that the fixed networking division was “too heavily weighted towards communication service providers”.