As we analyzed in last week’s Wireless Watch, the initial response to the COVID-19 crisis sends mixed signals in terms of short to medium term impact on the mobile industry.
On the one hand, 3GPP standardization processes have been slowed, so there will be some delays to the next two waves of 5G standards. And vendors are warning about the effect on their 2020 financial performance, with Huawei being the most gloomy, given that the pandemic is an additional pressure to join the list of challenges the Chinese market leader faces because of geopolitical and trade tensions between the USA and China.
On the other hand, operators are experiencing short term usage rises – though mainly on fixed lines rather than mobile, as most people are home-based. Although some MNOs, such as T-Mobile USA, are being granted temporary access to additional spectrum as an emergency measure, in most countries with good fixed-line infrastructure, the mobile broadband networks should not be overwhelmed. MNOs may, though, benefit in the longer run from a potentially permanent shift towards more online working and communicating.
Also on the positive side for the industry’s resilience, the vendors are balancing their short term financial caution with the belief that they must offset the current uncertainty by making themselves ready to take advantage of any uptick in 5G and other connectivity investments – which may come as a direct result of usage changes during the crisis, or when conditions normalize and operators start to think further ahead than supporting home workers, and begin to develop broader-reaching services.
Huawei, for all its gloom, is boosting its 2020 R&D budget to $20bn, and – along with ZTE – is benefiting from China’s instinctive response to COVID-19, that the way to stimulate the economy into a measure of recovery is to invest in infrastructure. This time-honored reaction to recession and crisis will benefit 5G this time around, with the Chinese government and operators significantly accelerating their roll-out plans.
This may not benefit western vendors though. China Mobile has awarded a far higher percentage of its current tranche of 5G contracts to homegrown vendors than it usually does, reflecting the way that the world is splitting into two technology zones on geopolitical grounds.
China Mobile’s latest round of 5G equipment awards was worth RMB37.1bn ($5.2bn), covering phase two of its roll-out, which involves about 230,000 base stations of varying sizes, to be deployed in 28 provinces.
The operator said it had awarded Huawei the deal to supply and build 133,000 base stations at a price of RMB21.4bn ($3bn) and ZTE to deliver 66,700 units for RMB10.7bn ($1.5bn).
Although the Chinese vendors tend to get the largest shares of their home operators’ network contracts, in 4G and the first wave of 5G, there were still significant awards to Ericsson and Nokia. However, this time around, and probably reflecting the geopolitical situation, Ericsson won deals worth only RMB4.2bn ($700,000) and Nokia failed to win any. A smaller Chinese vendor, CICT, won deals worth RMB965m ($136m). In percentage terms, that means Huawei snapped up 57.3% of the total award, ZTE 28.7%, Ericsson 11.5% and CICT 2.6%. Last year, Ericsson and Nokia sold about $1.6bn each in China, with Nokia securing a far-reaching contract with China Unicom, among other deals.
Whether the pandemic effect changes the macro-picture of geopolitical stand-off to any extent remains to be seen, but for now, but in all major economies, if infrastructure investment and 5G build-out become part of the recovery plan, vendors could see acceleration in the 5G-driven uptick in their revenues. However, even Huawei’s rotating CEO, Eric Xu, speaking on the recent results call, was cautious about how far China’s pattern would be repeated elsewhere. “5G deployment in Europe will certainly be delayed to when the pandemic is brought under control,” he said, by contrast with his home country where, “after the pandemic was brought under control, China has accelerated its 5G deployments”.
That will not be significantly affected, in our opinion, by a delay of a few months in the standards-setting process. Releases 16 and 17 have been pushed back by three months, a change of heart a few weeks after the standards body said it would be able to meet its original deadlines. One cycle of meetings has been lost because of the cancellation of face-to-face sessions, but the meetings scheduled for June will now be held remotely.
This means Release 16 should be completed one year from now, rather than the end of 2020. The first standards will be agreed at the June meetings, but additional work on RAN performance will then take place in the second half of the year, mainly affecting companies making or deploying ultra-low latency critical communications (URLLC) equipment.
Release 17 will now be scheduled for the end of 2021. Among its key areas of focus are advances in MIMO, RAN slicing, and convergence of wireline and wireless.
But most operators are not close to deploying all the capabilities of the current Release 15 yet, especially in terms of Standalone 5G networks with a 5G core. The main additions in Releases 16 and 17 relate to non-broadband applications that require advanced characteristics; as well as to additional spectrum options including extended sharing and unlicensed bands.
All these are important enhancements, but most will be tackled in software, so operators can speed up their build-outs of 5G base stations and then upgrade them later – they do not need to wait for R16 and R17 to avoid being left with an outdated network later. And most MNOs are not planning to address ultra-low latency IoT use cases, or shared spectrum deployment, for at least a couple of years, if not longer, because the business cases remain only partially thought-out.
The biggest blow could potentially be to alternative deployers which want to stake an early claim to the enterprise and private 5G markets, where these capabilities will be foundational – but even in that case, most early movers, such as industrial service providers and neutral hosts, are formulating their proposition first on mature private LTE platforms, and 4G spectrum like CBRS’s shared layer, before moving to 5G.
As for Huawei, the company’s founder and chairman, Ren Zhengfei, told The Wall Street Journal that it will spend an additional $5.8bn on R&D this year, bringing its already industry-leading total to $20bn, and increasing its anticipated spending in this area by 40% compared to year-ago guidance.
In terms of Huawei’s outlook, it is perhaps more concerned by the continuing uncertainty caused by the trade wars, and the US sanctions, than by COVID-19. Although Huawei has lowered its 2020 outlook because of the pandemic, Ren claimed it did not hit production too significantly during China’s lockdown, and will create some increased demand because of changes in telecoms network usage worldwide.
Part of the increase in R&D spending will be to make Huawei more self-sufficient if it is barred from buying components from the USA or elsewhere. At a conference last month, the firm’s US chief strategy officer, Andy Purdy, claimed to SDxCentral: “Huawei is going to be more successful in two or three years than we would have been if we hadn’t been forced to break from buying from American companies. The American companies are going to be hurt as a result.”
However, Huawei warned that it expects 2020 to be the worst year in its history. It has already blamed US sanctions for a $10bn sales drop at its consumer business (mainly handsets) last year.
Although 2019 sales rose by 19% despite the trade wars, to RMB858.8bn ($121bn), net profit grew by just 5.6%, to RMB62.7bn ($8.8bn), compared to 25% the year before.
Xu told investors and press: “We certainly had to invest more in R&D to fix the holes. All of a sudden a large number of suppliers could not continue supplying and we had to rebuild the supply chain. Survival turned out to be the first priority.”
“The consumer business outside China was growing fast before May 16 and was declining fast after May 16 and only started to bounce back in the fourth quarter,” he added, estimating the shortfall at $10bn, even though consumer revenues still grew by 34%, to RMB467.3bn ($65.8bn), and made up more than 54% of total sales.
But Xu expects the effect of sanctions, and of operators being too nervous to choose Huawei for 5G, will really bite from this year as 5G roll-outs scale up. “It is going to be the most difficult year for Huawei,” he said.
He warned that, if the USA follows through with its threat to deny Huawei access to components, “the Chinese government will not stand by and watch Huawei get slaughtered on the chopping board and they may also take some counter-measures. This type of destructive ripple effect on the global industry would be astonishing.”
Over at Ericsson, CEO Börje Ekholm warned at the company’s annual general meeting of the challenges posed by COVID-19, even though the insisted the company had a sufficiently strong balance sheet to cope. “We assume and plan for the fact that we will be affected,” he said, hinting at undefined “necessary measures” that may need to be introduced. But he reassured investors by pointing to the best “underlying cashflow” for 10 years, at SEK17.7bn ($1.8bn) for 2019.