ZTE shines in LTE, as Huawei and Ericsson reduce headcount

With Ericsson, Nokia and even Huawei feeling the chill of the slowdown in mobile network capex investment, ZTE is doing rather better, and delivered a rise of almost 30% in its first half net profits, thanks to gains both in carrier networks and devices.

This seemed to buck the trend elsewhere, which saw Ericsson and Huawei announcing job cuts in the same week. This does spark speculation that ZTE and Samsung, the also-rans of mobile infrastructure, could pick up market share in the run-up to 5G. Both have invested heavily in 5G R&D and made a name for themselves in some specific, but central technologies – ZTE in Massive MIMO, for instance, and Samsung in millimeter wave.

Both these companies have less legacy business to defend, but they also have smaller customer bases and other resources to tap into, in order to make the tough transition to being software-driven and fully digital. However, they also – along with Huawei – have major device businesses to boost cashflow and revenues.

At least ZTE seems to be going in the right direction. It reported net income up 29.8% year-on-year for the first half of 2017, to CNY2.29bn ($340m). Revenues were up 13.1% over the same period, CNY54bn ($8.1bn). In the year-ago period, the increases were only 9% and 4% respectively.

ZTE has benefited from the lifting of US trade sanctions after it agreed to pay a fine of $900m to settle the dispute. That eliminated profits for fiscal 2016, but in 2017, its carrier networks business has been growing by double-digit percentages, in contrast with declines at Ericsson and Nokia and slowdown at Huawei. ZTE’s carrier network revenues rose 12.6% over the first six months, to CNY32.4bn ($4.9bn), mainly down to 4G system products, fixed line and bearer systems in China, said the firm, as well as wireless systems in Europe.

It was not all good news. The company remains over-reliant on its home market, whose growth is slowing and whose 5G capex timing is uncertain (see lead item). And in the
enterprise and public sector unit, first half revenues fell by 18.3%, to CNY3.8bn ($570m).

ZTE’s fastest growing division was consumer devices business, which reported a 24% year-on-year increase in sales, to CNY17.9bn ($2.7bn). This was lower than Huawei’s increase in device revenues in the same period, which was up 36.2% to CNY105.4bn ($15.8bn). Both sets of figures show the value of having a handset business in a time of pressure on infrastructure sales, though this is a market which Ericsson have both exited.

Both Ericsson and Huawei were reported to be planning new job cuts. Some reports said Huawei was going to halve its US workforce, but the Chinese firm said it would make cuts, but only about 20 positions, or 2%.

“These normal resourcing changes reflect the need to maintain a sustainable and profitable infrastructure business in the US for the long term, while we continue to recruit in line with the needs of our overall US business,” Huawei told FierceWireless. “Our commitment to customers is the highest priority, and we remain committed to serving and supporting all existing infrastructure and other customers. Our R&D, supply chain management and consumer business group operations in the US are unaffected by these changes.”

Huawei remains severely constrained in its ability to sell into infrastructure contracts in the US, but it does have business with smaller carriers, and sells its devices in the country.

Ericsson was said to be planning to axe up to 25,000 staff, according to Swedish newspaper Svenska Dagbladet. That would be about 23% of the vendor’s workforce (as of the end of June it had 109,127 staff, down by about 7,000 from a year earlier. CEO Börje Ekholm has intensified ongoing cost reduction efforts and set a target to slash annual operating costs by SKr10bn ($1.23bn) by mid-2018.

According to the sources cited by Svenska Dagbladet, the company’s R&D operations in Sweden would be unaffected, but the managed services unit, which employs about 30,000 staff, and several in-country operations across Europe, would be the main targets. The reported figure could also include the loss of staff as a result of the planned sale of the media business.

Ericsson said in a statement that it has not yet communicated its reduction plans or which units would be affected. It said: “Ericsson has previously communicated that a key component in the company’s focused business strategy is to reduce costs and increase efficiency. In connection with the Q2 report 2017, Ericsson communicated that the company, in light of the current market outlook, will accelerate the planned actions to ensure that the target of doubling the 2016 operating margin beyond 2018 can be met. Actions will be taken primarily in service delivery and common costs, but do not include R&D. The plan is to implement cost savings with an annual run rate effect of at least SKr10bn by mid-2018, of which approximately half will be related to common costs. Ericsson has not communicated which specific units or countries that could be affected. It is too early to talk about specific measures or exclude any country.”